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To: Jim Oravetz who wrote (198)	10/9/2000 12:47:16 PM
From: Jim Oravetz	Read Replies (1) \| Respond to of 235

OT: Saturday Group: Harmonic Dissonance Editor-in-Chief: Jonathan Steinberg (10/7/00) Talk about Prince Charming reverting back into a frog-like state. In seven months shares of once high-flying fiber-optic manufacturer Harmonic Inc. (NASDAQ: HLIT) have fallen 93% from a high of $157.50, to their current level of $11.81. In the process, Harmonic's market capitalization has fallen from over $9 billion to just $677 million. Ouch! We'll grant you that the Nasdaq itself declined 29% during the same period and that Harmonic didn't exactly help its cause by issuing two successive earnings warnings, but it seems to us that this pummeling was a tad bit excessive. We're not saying that Harmonic's recent results have been anywhere close to decent. In fact, ugly could be a better word for them as evidenced by Wednesday's earnings warning. Harmonic said revenue for the third quarter would be about $71 million to $73 million, 16% to 18% below analysts' expectations of $87 million. The news regarding earnings was even worse. Harmonic said it expects to report a pro forma loss of $0.06 per share to $0.09 per share. Analysts were expecting pro forma earnings of $0.12 per share. Once again the main contributor to this shortfall was the company's Broadband Access Networks (BAN) division that is expected to generate between $43.5 million to $44.5 million in sales during the quarter, down 18% sequentially from $53.2 million and nearly $20 million lower than analyst estimates. Adding insult, the bone that CEO Anthony Levy threw to investors wasn't too tasty. He said "While we expect to also report a pro forma net loss in the fourth quarter of 2000, we anticipate increasing sales levels in the coming year." Sorry that we're a tad cynical, but the company has proved twice in a row that it has trouble anticipating sales in the current quarter, let alone six months away. Now, with that all being said, do we recommend that investors stay away from Harmonic? Not necessarily. The company's outlook does have a couple redeeming features. First of all (and this is tongue in cheek), how much worse can the performance get? Seriously. Expectations are so low at this point that any bit of positive news could have a serious impact on the stock. One area that might supply this upside is Harmonic's Convergent Systems (CS) division that supplies digital head end systems to a variety of broadband networks. This division is expected to show modest (4%) sequential revenue growth in the quarter, but more importantly it landed a number of major contract wins including one in which it would provide head end technology for BellSouth's (NYSE: BLS) digital satellite direct-to-home deployment. Revenue from these contracts could provide the upside that the company badly needs to regain investor confidence. Another consideration is that Harmonic has a strong research and development (R&D) team. In today's technology-driven age, intellectual capital carries a premium. Do the Ciscos (NASDAQ: CSCO) of the world acquire companies in order to generate incremental revenue growth? No. These companies buy others to obtain cutting edge technology and brain power. Harmonic certainly has both, including its revolutionary Nodecmts product that helps free up "space" along a cable operator's lines. Consider that just a few weeks ago ADC Telecom (NASDAQ: ADCT) paid $2.25 billion to acquire privately held Broadband Access Systems, a company that has yet to produce a node product. Harmonic shares look relatively (and we use that word in largest possible sense) cheap at these levels, trading at 38 times reduced fiscal 2001 earnings estimates of $0.31. It is interesting to note that even with the reduction in third quarter revenue estimates, the $71 million to $72 million number still represents growth of close to 37% (earnings are another story of course). A final consideration: Even with a lousy third quarter, Harmonic will likely sport an impressive balance sheet. As of June 30th, the company had no long-term debt and $440 million in cash and short-term investments, which equated to $9.17 per share. Bottom Line: After weighing the pros and cons, we believe that shares of Harmonic carry a good risk/reward ratio, especially since their precipitous decline makes it all the more likely that the company could become takeover bait. As we stated previously, expectations have become so low for the company that there is not likely much further downside. individualinvestor.com