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Harmonic Shares Slump On Lower Q2 Guidance

Shares in video technology specialist dropped more than 13% Monday after the company announced reduced guidance for the second quarter as it faces a “global slowdown” of its video business as larger customers start to plan for the company’s more “virtualized approaches” for video delivery.

The company said net revenue for the second quarter is now expected to be in the range of $108 million to $100 million, versus previous guidance of $113 million to $123 million. Harmonic also cut its expected GAAP gross margin – to a range of 44.5% to 46.5%, versus original guidance of 49.5% to 50.5%.

"We are disappointed in our second quarter results," Harmonic president and CEO Patrick Harshman said, in a statement. "We saw a global slowdown in our video business as several of our larger customers began planning for our new virtualized approaches for delivering video services. This video slowdown was particularly pronounced among EMEA and North American Broadcast and Media customers, where we also saw several anticipated projects delayed and growing consideration of the new Ultra HD format and new HEVC compression technology."

He said Harmonic’s North American cable business “performed better,” citing strong demand for Harmonic’s cable edge products, including the NSG Pro, a product that is starting out as a dense edge QAM, but will evolve to become a fully-integrated Converged Cable Access Platform (CCAP) that also integrates upstream capabilities and cable modem termination system (CMTS) functionalities. Harmonic is also developing the NSG Exo, a “distributed” form of a CCAP, that will do the opposite – start off as a CMTS, then add edge QAM capabilities later.

“Looking ahead, while the transitioning video market is turbulent and we are consequently cautious about our near-term results, the growing signs of coming video technology investment cycles and our cable customers' continuing positive response to our CCAP products are encouraging. We therefore remain positioned and focused on achieving the company's overarching objectives for driving sustainable top and bottom line growth,” Harshman said.

The shift to virtualization should be benefit Harmonic’s new VOS encoding platform in the long term, but “the transition requires extensive planning from carriers and likely leads to softness in the immediate term,” Raymond James analyst Simon Leopold said in a research note. “Additionally, our checks indicate that Ericsson's encoder products have gained traction at North American cable TV operators, and this could add to the pressure and present Harmonic's video processing business with a multi-front challenge.”

He maintained his “Underperform” rating on Harmonic and his target price of $6.38.

Harmonic shares closed Monday at $6.15 each, down 98 cents (13.74%) for the day.