Harmonic Slides as AT & T Pulls Back


Shares of Harmonic Inc. slid sharply early last week after its CEO indicated that sales to its largest customer, AT & T Corp., would continue to decline.

Harmonic-which makes digital and fiber-optic systems for video, voice and data-suffered a 30 percent drop last Monday, from $57.44 per share to $38.75, after CEO Anthony Ley told analysts at last week's "CIBC Oppenheimer Corp. Investor Conference" that sales to AT & T would be lower for the year.

Despite that bad news, Ley insisted Harmonic was on track to meet analysts' earnings estimates for the year.

Though Harmonic was insisting its outlook was as good as before, if not better, several analysts downgraded it. The stock lost another 78 cents the following day.

AT & T has been a big help to Harmonic, buying multiplexer nodes for the high-profile "LightWire" trial under way in Salt Lake City.

LightWire is a new cable-system architecture that pushes fiber deep into the node, reducing the need for signal amplifiers and other components, while increasing throughput to customers.

AT & T accounted for more than 50 percent of Harmonic's sales in the third quarter of 1999. But it only made up about 28 percent of the vendor's sales in the first quarter of this year.

CIBC analyst James Jung-johann lowered his earnings estimate for Harmonic by two cents per share, citing "temporary softness from AT & T."

The AT & T disclosure came as Harmonic was clawing back from a precipitous drop last month after closing its acquisition of DiviCom Inc., which some analysts feared would be a drag on revenue growth.

Harmonic's stock fell 69 percent between May 15 and 23, when it closed at $39 per share. But the stock appeared to be making headway, rising to $57.44 June 9.

Josephthal & Co. Inc. analyst Lawrence Harris said the drop was based on two factors: DiviCom and a larger-than-expected decline in AT & T business.

"It appears as if AT & T is focusing on the 400,000 to 500,000 cable-telephony-subscriber target," Harris said. "Perhaps talent is being directed to cable-telephony installations rather than the installation of fiber optics."

Harris added that AT & T appears to be switching to a mini-node architecture for its fiber placement, as opposed to the multiplexer-node architecture offered by Harmonic.

Harmonic still sells a lot of dense-wave-division-multiplexing equipment and scalable nodes to AT & T, Harris said, and he expects the AT & T business to increase over time.

"By the second half of this year, you may begin to see a pickup in sales to AT & T," Harris said. "Fiber is going to be a more important part of the cable network. Harmonic is one of the leading players in providing the equipment. It's only a question of time before AT & T's focus moves to pushing fiber deeper into their networks."

Harris maintained his "buy" rating on the stock, but he downgraded his earnings estimate to 27 cents per share from 29 cents.

Harris said AT & T accounted for about $18 million of Harmonic's sales in the first quarter, less than his estimate of about $20 million. But he added that Harmonic has indicated that AT & T sales will account for less than $18 million in the second quarter, which ends in June.

"If you look at the long term, fiber will be a more important part of cable networks in the future, and Harmonic is a big player," he said. "With DiviCom, there is still potential for OpenCable-based headends in international markets, and to the extent that DiviCom is a major supplier of encoding equipment to DirecTV [Inc.] and Echostar [Communications Corp.], they've got a built-in diversification play."

Harris added, "The long-term [outlook] is optimistic, but there is a real and valid concern about the June quarter."