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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: LindyBill who wrote (17007)	2/2/2000 2:43:00 PM
From: Eric Jacobson	Read Replies (1) \| Respond to of 54805

Re: HLIT TCI was the customer that reduced spending a year ago. The stock went from a split-adjusted $12 to $5 in a matter of months, so your concerns are legitimate. I think you've reached a logical conclusion that many people could reach - that dependence on a single customer is a problem. I'm not trying to convince anybody that HLIT should be part of a GG portfolio (as I said before, I think JDSU is the safer bet in this fiber-optic space) but I'll play devil's advocate for a second because, just as you've concentrated your portfolio in one or a few companies, there's two sides to this concentration issue. First is the issue of T's size. They've swallowed up TCI and are in the process of buying MediaOne. When they are finished, they will provide cable services to 70% of the US market. Since T is the 800-pound gorilla (small g) in the market, I would suggest that a vendor is in bigger trouble if T is not their largest customer than if they are. Second is the notion of creating a whole product for a niche market as outlined in Inside the Tornado. HLIT has invested a lot of time and energy to satisfy the needs of T, with the short-term result being that T represents a significant portion of overall revenues. In the long term, however, the hopeful result is to gain market share and create a generizable product that can be marketed to other customers and other niches. Imagine bowling pins falling over. So far, this plan has succeeded. Literally, one year ago, T was the only MetroLink DWDM customer, and now there are 17. They are following this same path with LightWire. Other customers in the space are looking to see what T, the market leader, is doing before they jump. Third, to really put the fear of God into you, T actually represented 50% of their revenues in 3Q99. This declined to 40% in the 4Q. Revenues attributable to T in actual dollars declined during this period that total revenues increased 20% sequentially. The point here is that HLIT's broadened customer base more than picked up the slack for T's spending reduction from one quarter to the next. A year ago, when they were a $200 million company, this wouldn't have been possible. All that being said, I agree the concentrated customer base is not a comfortable situation and many investors should pass for the reasons you've cited. It's not a gorilla, it's not likely to be a King, and it's probably a Prince that is subject to competition, innovation, and a concentrated customer base. For these reasons, it's much riskier than many of the G&Ks discussed here. However, I think HLIT's management is doing the best with the hand they've been dealt, and they're hanging onto the tail of a tiger with all their might. If they continue to grow, this will likely become less of an issue. If T significantly changes strategies or vendors, as you've suggested, it won't be pretty for HLIT shareholders. Eric