Update: Harmonic Drops on Earnings Warning

Updated from 12:22 p.m. EDT

Shares of Harmonic (HLIT) plunged more than 40% Tuesday after the communications equipment provider warned that its second-quarter earnings would likely fall short of Wall Street estimates.

The Sunnyvale, Calif.-based company expects to report revenue of $74 million to $82 million for the second quarter ending June 30, with earnings of 12 to 16 cents a share. That's 5 cents more per share than a year earlier, but the results would still fall far short of the consensus estimate of 29 cents, according to analysts surveyed by First Call/Thomson.

Harmonic, which provides digital and fiber-optic systems for delivering audio and video services, attributed the shortfall on organizational problems related to its acquisition of the DiviCom division of C-Cube Microsystems (CUBE), an unanticipated slowdown in satellite customer spending and an unexpected drop in sales to AT&T (T), its largest customer.

On Tuesday, Harmonic's stock closed down 17 1/2, or 43%, at 23 5/16. That price is well below Harmonic's high of 157 1/2, reached on March 6. The shares have shed more than 130 points over the past several weeks.

Industry analysts revised their earnings estimates for the company Tuesday, and at least one downgraded Harmonic's stock rating, following the announcement.

Analysts at SG Cowan, which downgraded the stock two weeks ago from a strong buy to a buy, revised its per-share earnings estimate for the second quarter to 11 cents, down sharply from its earlier estimate of 29 cents a share.

While Blaine Carroll, an SG Cowan analyst, maintained a long-term buy on the stock, he noted that the company's near-term prospects look increasingly uncertain.

In a comment issued Tuesday afternoon, Carroll pointed to two pressing issues Harmonic now faces: regaining business with AT&T and successfully integrating Divicom. Assuming it would take a few quarters for the company to sort out the issues, Carroll lowered the company's fiscal year 2000 earnings-per-share estimate by nearly 40%, to 75 cents a share from $1.22.

SG Cowan co-managed an offering of Harmonic's stock within the last three years.

Donaldson, Lufkin & Jenrette Securities, which had also projected second-quarter earnings of 29 cents per share, has since lowered its estimate to 15 cents. The investment firm has not underwritten the company's stock.

DLJ also revised its revenue expectations for the 2000 fiscal year to $447 million, down from $498 million, and reduced its earnings-per-share estimates for the fiscal year to 95 cents from $1.19. Analysts also lowered the per-share price target to $40 to reflect the lower growth prospects and execution-related risk.

In an accompanying explanation, Hasan Imam, a DLJ analyst, wrote, "Merger-related organizational problems continue to be an issue, and we believe that execution risk has increased."

CIBC World Markets downgraded the stock from a buy to a hold rating on the news, citing "reduced near-term and long-term fundamental expectations." Analysts at the Wall Street firm said they believe the stock will remain in a "prove it" mode for the next few quarters as investors try to determine a good price level at which to buy the stock.

In the meantime, CIBC has revised its earnings-per-share estimates for Harmonic's second quarter to 12 cents, lowering expected earnings-per-share for the 2000 fiscal year to 60 cents, 3 cents lower than actual earnings from the previous year. CIBC does not have an underwriting relationship with Harmonic.

Harmonic expects to release actual second-quarter earnings in mid-July. Despite the anticipated shortfall, company executives remained optimistic.

¿Except for reduced sales to AT&T, our core fiber optic business continues to grow across our worldwide base of cable customers,¿ Anthony J. Ley, the company's chairman, president and chief executive, said in a statement. "We remain very excited about the merger and emerging market opportunities before us."

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