GREAT REPORT ON HLIT......Harmonic Hits All The Right Notes
Instantly after Next Wave 100 Index component Harmonic Inc. (Nasdaq: HLIT) unveiled plans for a 2-for-1 split on September 13, its shares jumped 4 1/2 points to $140.
By any measure, not a bad move. Maybe a little anti-climatic, however.
Why?
The Sunnyvale, CA-based company, now a rising star in the white-hot digital and fiber optic arena, rocketed from a low of $8.56 to a high of $146.62 during the past 52 weeks.
On September 23, HLIT closed at $116.75--a gain of more than 1,200 percent from the year's low. In fact, HLIT is among the top performing stocks in 1999 on all U.S. markets.
That's enough to make investors start the millenium celebration early.
Communications Revolution
Riding a major wave, Harmonic Inc. designs, manufactures and markets digital and fiber optic systems that deliver video, voice and data services over cable, satellite and wireless networks.
Its products enable global communications companies like cable television and other network operators to provide a range of broadcast and interactive broadband services that include high-speed Internet access telephony and video on demand.
In January 1998, Harmonic acquired of New Media Communication Ltd., which later changed its name to Harmonic Data Systems Ltd. This has permitted the expansion of Harmonic's product line to include high-speed data delivery software and hardware.
Diverse Leadership
Harmonic, which was incorporated in 1988, and completed its IPO in May 1995, today boasts a seasoned and dynamic management team.
Chief Executive Anthony Ley, who served 25 years with Schlumberger Ltd. prior to joining Harmonic, heads the team. Ley?s tenure with the diversified giant included five years at its subsidiary Fairchild Semiconductor, where he was VP for research and Engineering until 1987.
When Schlumberger sold Fairchild to National, he consulted for the new company for one year before joining the two founders of Harmonic. He has been running the 293-employee company since November 1988.
Another key player is CFO Robin Dickson, who joined Harmonic in 1992 after stints with Deloitte Haskins & Sells in Belgium, Raychem Corp. and the privately held San Jose-based semicon company Vitelic.
Walking the Walk
This year has been an outstanding one for Harmonic. Sales soared 109% from $18.2 million in 2Q 1998 to $37.9 million in the second quarter of 1999.
For the six-month period, revenue jumped 98 percent from $34.4 million in the first six months of 1998 to $68.2 million in the corresponding period of 1999.
The substantial increases are attributable primarily to new products, including METRO Link DWDM systems and PWR Blazer Scaleable Nodes, which began volume shipment during the middle of 1998.
Some of the increases are also attributable to higher spending by domestic and international customers.
During the second quarter of 1999, domestic sales increased by 147 percent, principally due to increased shipments to AT&T.
AT&T represented 40 percent of net sales in 2Q 1999 compared to 9 percent of net sales in the second quarter of 1998.
International sales increased 56 percent during the second quarter of 1999, primarily due to higher shipments to Canada and Asia.
Sales to customers outside the U.S. in 1997, 1998 and the first half of 1999 represented 59 percent, 43 percent and 36 percent of net sales, respectively.
Harmonic expects that international sales will continue to represent a substantial portion of its net sales for the foreseeable future.
International sales represented 31 percent of net sales in the second quarter of 1999 compared to 42 percent in the second quarter of 1998.
Moreover, gross profit increased from $6.7 million (37 percent of net sales) in the second quarter of 1998 to $16.0 million (42 percent of net sales) in the second quarter of 1999.
For the six month periods, gross profit increased from $11.8 million (34 percent of net sales) in the first six months of 1998 to $28.4 million (42 percent of net sales) in the first six months of 1999.
Commitment to R&D
Harmonic Inc. increased its R&D expenditures from $3.2 million (18 percent of net sales) in the 2Q 1998 to $3.5 million (9 percent of net sales) in the second quarter of 1999.
For the six month periods, R&D expenses increased from $6.7 million (19 percent of net sales) in 1998 to $7.2 million (11 percent of net sales) in 1999.
These increases were partially offset by lower prototype material costs and higher amounts of grants earned in Israel?by Harmonic?s Israeli-based research facilities?which are netted against research and development expenses.
The decreases in research and development expenses as a percentage of net sales were principally attributable to increased net sales.
Harmonic anticipates that research and development expenses will continue to increase in absolute dollars, although they may vary as a percentage of net sales.
Currently, the company holds 12 issued United States patents and 9 issued foreign patents, and has a number of patent applications pending.
It maintains two research facilities in Israel with a total of approximately 60 employees. The personnel at these facilities represent a significant portion of its research and development operations.
Financial Strength
In April Harmonic Inc. completed a public offering for approximately $58.3 million. The company also received $4.0 million from exercise of a warrant.
As of July 2, 1999, cash and short-term investments totaled $57.7 million, while long-term investments were $16.1 million.
Cash from operations was approximately $2.3 million for the six months ended July 2, 1999 compared to $1.9 million for the six months ended July 3, 1998.
The increase is because the company recorded net income in the first six months of 1999 compared to a net loss in 1998.
Reliance on Cable TV
Cable television operators, directly or indirectly, account for almost all of Harmonic?s sales. The company expects these sales will be the main driver in the future.
The demand for Harmonic's products depends largely on the size and timing of capital spending by cable television operators for constructing, rebuilding or upgrading their systems.
These spending patterns are dependent on a variety of factors, including annual budget cycles, the status of federal, local and foreign government regulation of telecommunications and television broadcasting, overall demand for cable television services and the acceptance of new broadband services.
Competitive pressures, including the availability of alternative video delivery technologies such as satellite broadcasting also influence these spending patterns.
Potential Pitfall
The loss of AT&T or another key customer could adversely affect Harmonic. Historically, a significant majority of its sales have been to a small number of customers.
More recently, sales to AT&T has accounted for an increasingly significant portion of Harmonic?s net sales.
Sales to its ten largest customers in 1997 and 1998, and the first half of 1999 accounted for approximately 56 percent, 66 percent and 78 percent, respectively, of net sales.
In 2Q 1999 sales to AT&T represented approximately 40 percent of net sales compared to approximately 22 percent in the prior three-quarters.
In addition, in 1998 sales to a Chinese distributor represented approximately 11 percent of net sales; in the first half of 1999 sales to a Canadian distributor represented approximately 12 percent of net sales.
Almost all sales are made on a purchase order basis. That is, none of Harmonic's customers has entered into a long-term agreement to purchase its products.
Clearly, as a result, the loss of, or any reduction in orders from, a significant customer could harm the company's business.
Competitive Arena
Today Harmonic faces many larger and more established competitors.
The market for cable television transmission equipment is extremely competitive and has been characterized by rapid technological change.
Harmonic's current competitors include significantly larger corporations such as ADC Telecommunications, ANTEC (a company owned in part by AT&T), General Instrument, Philips and Scientific-Atlanta.
Additional competition could come from new entrants in the broadband communications equipment market, such as Lucent Technologies.
Most of these companies are substantially larger and have greater financial, technical, marketing and other resources, and are in a better position to withstand any significant reduction in capital spending by cable television operators.
In addition, many of its competitors have more long standing and established relationships with domestic and foreign cable television operators than Harmonic.
A further concern is that its competitors may bundle their products or incorporate functionality into existing products in a way that discourages users from purchasing Harmonic's products.
Street Coverage
In addition to its standing as a component of the Next Wave 100 small-cap technology benchmark, currently Harmonic is in the cross hairs of at least five major Wall Street brokerage houses.
Among the Street analysts who provide research coverage on Harmonic Inc. are those from CE Unterberg Towbin and Soundview Securities, who maintain strong buys.
UBS Securities, SG Cowen & Company and CIBC Oppenheimer have buy ratings today.
HLIT has a market value near $2.0 billion, with about 15 million shares outstanding, and a float of about 10.2 million shares.
At these levels, the P/E Ratio is in excess of 300, while it trades 13 times sales.
Investors have rewarded the company with a generous P/E ratio on the bet that the digital and fiber optic area will explode. Judging from the recent pyrotechnics in the telecom sector?they might be on to something.
posted 9/24/99
Contents |
