Harmonic Cuts Q3 Guidance, Stock Drops

Spending Impacted by Service Provider Consolidation
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Shares in Harmonic dropped more than 9% in morning trading Thursday after the video and broadband access tech supplier cut third quarter guidance due in part to spending reductions by customers in the U.S. and the EMEA region brought on by ongoing service provider consolidation.

Harmonic cut Q3 sales guidance to $81 million to $84 million, versus prior guidance of $92 million to $102 million.  Wall Street was expecting $99.2 million.

"We faced a more challenging spending environment than expected in the quarter, resulting in updated financial guidance," Patrick Harshman, Harmonic's CEO, said in a statement. "Several market factors continue to hamper near-term customer investment decisions; service provider consolidation, particularly within the U.S. and EMEA regions, and the pending release of our new cable edge architecture in mid-2016 amplified the effect.”

And there’s no relief in sight over the short-term. Harshman said Harmonic expects “these dynamics to extend into the fourth quarter of 2015,” but held that the company’s “value proposition is resonating strongly with both new and existing customers, our leadership position in the markets we address is intact, and we are confident in the strategic direction of the company."

Raymond James analyst Simon Leopold maintained his “underperform” rating on the stock. “[W]e believe that in addition to a challenging spending environment, Harmonic suffers during its transition from legacy technologies,” he wrote. “We believe Harmonic has an evolutionary strategy in place, but it will take time to bear fruit.”

He also believes that  sales are partly affected because Harmonic lost encoding deals to Ericsson at Comcast and Time Warner Cable in 2014.

He said Harmonic’s news could impact others in the sector, but believes that, among that group, “ARRIS is not immune but more resilient.”

Demand for CMTSs “remains healthy” and that operators are upgrading CPE, he added.

Harmonic is scheduled to announce Q3 results on October 27. Harmonic shares were down 62 cents (9.83%) to $5.69 each in late morning trading Thursday.