Buy Harmonic: Current Quarter Estimates Supports Recent Bullish Momentum

Summary

Q2 2016, HLIT’s quarterly revenue jumped to $109.57 million, which has prompted investors to take a second look at the company’s future

In Q2, the gross margin has gone up to 53%, which greatly helped the management to reach near breakeven

Positive earnings estimate revisions suggest that analysts are becoming more optimistic about HLIT’s earnings for the coming quarter and year

HLIT has a price target of $7.00 per share, which offers secondary investors an additional 36.19% upside potential

Company Overview

Harmonic Inc (NASDAQ:HLIT) is involved in designing, manufacturing, and selling video and multimedia products. They also sell complete system solutions for this product category.

Harmonic Inc’s operations could be classified into two segments, the video products unit that deals with video processing, production, and playout solutions and other broader services, which they market to broadcast and media companies, streaming service providers, cable operators, and other telecommunications and satellite operators. On the other hand, their cable edge segment mainly supplies cable edge solutions and fringe services to cable operators.

As of September 7, 2016, Harmonic Inc had a market capitalization of around $392.90 million and employed around 989 people to run its operations.

Analysis of Recent Financial Performance

01_revenue

Figure 1: Harmonic Inc’s Quarterly Revenue Has Been Declining Since the Beginning of 2014

Over the last two years, Harmonic Inc’s quarterly revenue has been continually declining, falling from around $108 million in Q1 2014 to $82 million in Q1 2016, representing a 24.07% decline in eight quarters.

However, in Q2 2016, Harmonic Inc’s quarterly revenue jumped to $109.57 million, which has prompted investors to take a second look at the company’s future.

02_price

Figure 2: Harmonic Inc’s Stock Price Has Gone Up by 30.13% Since August 10, 2016

As a result, since August 10, Harmonic Inc’s stock price has been going up and currently trading at $5.14 per share. Based on the closing price of $3.95 per share on August 10, this represents an increase of 30.13%.

CEO’s Take on Recent Financial Results

During the Q2 2016 earnings call, Patrick Harshman, the President and CEO of Harmonic Inc, mentioned that demand trends for video products and services has improved in the last two quarters. The important part of his statement was that “bookings were healthy at $117 million, up 7% sequentially and 18% year-over-year.”

Also, in Q2, it was the third consecutive quarter when book-to-bill came out greater than one and their “backlog in deferred revenues grew to a record $190 million.”

Furthermore, the gross margin also improved during the last quarter, going up to 53%, which represented a 200 basis points. The improvement in gross margin had a sizable positive impact on the bottom line as “finally the EPS was [at] breakeven.”

While answering a question from Victor Chiu from Simon Leopold, regarding lower gross margin and the higher operating expenses compared to previous guidelines, Mr. Harshman said that their “Video business is essentially right on track.”

Analysts are Optimistic About Q3 2016

On September 7, Zacks Investment Research mentioned that in the past month, current quarter earnings estimate for Harmonic Inc has significantly gone up. “These positive earnings estimate revisions suggest that analysts are becoming more optimistic on HLIT’s earnings for the coming quarter and year,” said Zacks Investment Research.

“In the past 30 days, 1 estimate has gone higher for Harmonic with no downward revisions in the same time period. The trend has been pretty favorable too, with estimates narrowing from a loss of 4 cents a share 30 days ago, to a loss of 1 cent today, a move of 75%,” they added.

Conclusion

At the end of the day, Harmonic Inc is still losing money as their Q2 2016 EBITDA came out at -$8 million. However, the recent bullish momentum in the market, along with an optimistic estimate for the next quarter, suggests that their stock price would like to sustain this bullish momentum till the publication of the Q3 2016 earnings, which is expected to come out on October 25, 2016.

Meanwhile, Harmonic Inc has a high price target of $7.00 per share, which offers secondary investors an additional 36.19% upside potential. We believe short-term investors should consider increasing their exposure because there is a good possibility that Harmonic Inc’s Q3 2016 earnings will come close to the current estimates.