Harmonic Announces Third Quarter Results

Harmonic Inc. (NASDAQ: HLIT), a leading provider of broadcast and on-demand video delivery solutions, today announced its preliminary results for the quarter and nine months ended September 28, 2007. For the third quarter of 2007, the Company reported net sales of $82.3 million, up 31% from $62.9 million in the third quarter of 2006. For the first nine months of 2007, net sales were $223.8 million, up 30% from $172.3 million in the same period of 2006. Results for the third quarter of 2007 included significant revenue from a growing number of satellite customers deploying an increasingly broad range of new products and solutions. The Company also saw sequential revenue growth in both domestic and international markets, with international sales representing 46% of revenue in the third quarter. Gross margins also increased sequentially from the second quarter of 2007 as a result of a larger proportion of revenue from higher margin video processing solutions and software and services, partially offset by a charge of approximately $1.8 million to write down excess inventory of older products which are being replaced by the Company's new products. GAAP net income for the third quarter of 2007 was $9.4 million or $0.12 per diluted share, up from $4.0 million, or $0.05 per diluted share, for the same period of 2006. GAAP net income for the third quarter of 2007 included a net benefit from a reduction in excess facilities reserves of approximately $1.4 million, resulting primarily from an extension of a sub-lease. Excluding the lease benefit and non-cash accounting charges for stock-based compensation expense, the amortization of intangibles, and a one-time charge for acquired in-process technology from the recent acquisition of Rhozet Corporation, the non-GAAP net income for the third quarter of 2007 was $11.9 million, or $0.15 per diluted share, up from $7.5 million, or $0.10 per diluted share, for the same period of 2006. See "GAAP to non-GAAP Income/(Loss) Reconciliation” below for further information on the Company’s non-GAAP measures. As of September 28, 2007, the Company had cash, cash equivalents and short-term investments of $99.0 million, up from $82.2 million as of June 29, 2007. During the third quarter of 2007, the Company reduced its inventories by $6.2 million compared to the previous quarter. "We are very pleased with our strong sales and earnings growth, as well as our improved gross margins and operating efficiencies, for the third quarter and for the year-to-date,” said Patrick Harshman, President and Chief Executive Officer. "We believe that we have increased our market share among domestic and international satellite operators, which has been driven by our powerful MPEG-4 AVC high-definition and standard-definition video encoders, as well as our new video processing, video-on-demand and network management solutions.” "Our cable customers continue to deploy our industry-leading encoding, video-on-demand edge and optical access products, and we see growing interest in our innovative new solutions for switched digital video, time-shifted television, video-on-demand content preparation and streaming, video-rich navigation, and higher-speed Internet data delivery. In the emerging IPTV market, our IP-based video solutions have been winning new business with telco companies worldwide and, increasingly, drive network expansions for existing global telco customers.” "We remain very encouraged by our strengthening position in key service provider markets. We expect to continue to extend the breadth and depth of our products, and we believe that our global customer base will continue to further leverage the power of our new solutions to expand their video service offerings in exciting new directions.” Business Outlook The Company anticipates that the combined net sales for the fourth quarter of 2007 and the first quarter of 2008 will be in a range of $155 to $165 million and gross margins will be 41% to 43% on a GAAP basis. Non-GAAP gross margins for the same period, excluding stock-based compensation expense and the amortization of intangibles, are anticipated to be in a range of 45% to 47%. Conference Call Information Harmonic will host a conference call today to discuss its financial results at 2:00 p.m. Pacific (5:00 p.m. Eastern). A listen-only broadcast of the conference call can be accessed on the Company’s website at www.harmonicinc.com or by calling +1.706.634.9047 (conference ID number 19970165). The replay will be available after 6:00 p.m. (Pacific) at the same website address or by calling +1.706.645.9291 (conference ID number 19970165). About Harmonic Inc. Harmonic Inc. is a leading provider of versatile and high performance video solutions that enable service providers to efficiently deliver the next generation of broadcast and on-demand services including high definition, video-on-demand, network personal video recording and time-shifted TV. Cable, satellite, broadcast and telecom service providers can utilize Harmonic’s digital video, broadband optical access and software solutions to offer consumers a compelling and personalized viewing experience. Harmonic (NASDAQ: HLIT) is headquartered in Sunnyvale, California with R&D, sales and system integration centers worldwide. The Company’s customers, including many of the world’s largest communications providers, deliver services in virtually every country. Visit www.harmonicinc.com for more information. Legal Notice Regarding Forward-Looking Statements This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements related to our expectation that we will experience growing cable demand for our new solutions for switched digital video, time-shifted television, video-on-demand content preparation and streaming, video-rich navigation, and higher-speed Internet data delivery; our expectation that we will continue to extend the breadth and depth of our products; our belief that our global customer base will continue to leverage the power of our new solutions to expand their video service offerings; our expectation that our combined net sales for the fourth quarter of 2007 and the first quarter of 2008 will be in the range of $155 to $165 million, our gross margins will be 41% to 43% on a GAAP basis, and our non-GAAP gross margins for the same period, excluding stock-based compensation expense and the amortization of intangibles, will be in a range of 45% to 47%. Our expectations and beliefs regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include the possibility that our products will not generate sales that are commensurate with our expectations; the mix of products sold and the effect it has on gross margins; delays or decreases in capital spending in the cable, satellite and telco industries; customer concentration and consolidation; general economic conditions; market acceptance of new or existing Harmonic products; losses of one or more key customers; risks associated with Harmonic's international operations; inventory management; the effect of competition; difficulties associated with rapid technological changes in Harmonic’s markets; the need to introduce new and enhanced products; and risks associated with a cyclical and unpredictable sales cycle. The forward-looking statements contained in this press release are also subject to other risks and uncertainties, including those more fully described in Harmonic’s filings with the Securities and Exchange Commission, including our Annual Report filed on Form 10-K for the year ended December 31, 2006, our Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2007, and our current reports on Form 8-K. Harmonic does not undertake to update any forward-looking statements. EDITOR’S NOTE – Product and company names used herein are trademarks or registered trademarks of their respective owners.   Harmonic Inc. Condensed Consolidated Balance Sheets (In thousands) (Unaudited)   September 28, 2007   December 31, 2006 Assets Current assets: Cash and cash equivalents $ 40,993 $ 33,454 Short-term investments 58,038 58,917 Accounts receivable, net 69,339 64,674 Inventories 36,341 42,116 Prepaid expenses and other current assets   11,911     12,807     Total current assets 216,622 211,968   Property and equipment, net 14,084 14,816   Intangibles and other assets   69,647     55,178     $ 300,353   $ 281,962     Liabilities and stockholders’ equity Current liabilities: Current portion of long-term debt $ ? $ 460 Accounts payable 15,583 33,863 Income taxes payable 726 7,098 Deferred revenue 30,794 29,052 Accrued liabilities   43,904     44,097     Total current liabilities 91,007 114,570   Accrued excess facilities costs 11,126 16,434 Other non-current liabilities   17,211     5,824     Total liabilities   119,344     136,828     Stockholders’ equity: Common stock 2,100,140 2,078,941 Accumulated deficit (1,919,025 ) (1,933,708 ) Accumulated other comprehensive loss   (106 )   (99 )   Total stockholders’ equity   181,009     145,134     $ 300,353   $ 281,962   Harmonic Inc. Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited)   Three Months Ended Nine Months Ended Sept. 28, 2007   Sept. 29, 2006 Sept. 28, 2007   Sept. 29, 2006   Net sales $ 82,295 $ 62,856 $ 223,814 $ 172,346   Cost of sales   46,652   33,059   130,454   101,064     Gross profit   35,643   29,797   93,360   71,282     Operating expenses: Research and development 11,018 10,021 31,615 29,554 Selling, general and administrative     14,911 16,931 46,357 48,623 Write-off of acquired in-process technology 700 ? 700 ? Amortization of intangibles   143   45   365   179     Total operating expenses   26,772   26,997   79,037   78,356     Income (loss) from operations 8,871 2,800 14,323 (7,074 )   Interest and other income, net   1,296   1,319   3,266   3,522     Income (loss) before income taxes 10,167 4,119 17,589 (3,552 )   Provision for income taxes   750   103   807   482     Net income (loss) $ 9,417 $ 4,016 $ 16,782 $ (4,034 )   Net income (loss) per share Basic $ 0.12 $ 0.05 $ 0.21 $ (0.05 )   Diluted $ 0.12 $ 0.05 $ 0.21 $ (0.05 )   Shares used to compute net income (loss) per share: Basic   80,371   74,588   79,570   74,286     Diluted   81,642   75,050   80,743   74,286   Harmonic Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)   Nine Months Ended September 28, 2007     September 29, 2006 Cash flows from operating activities: Net income (loss) $ 16,782 $ (4,034 ) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Amortization of intangibles 3,661 672 Write-off of acquired in-process technology 700 ? Depreciation 5,089 5,719 Stock-based compensation 4,475 4,376 Gain (loss) on disposal and impairment of fixed assets (31 ) 55 Changes in assets and liabilities: Accounts receivable (4,234 ) (9,314 ) Inventories 5,777 2,877 Prepaid expenses and other assets 799 (8,133 ) Accounts payable (18,217 ) 3,486 Deferred revenue 3,714 2,474 Income taxes payable (271 ) 366 Accrued excess facilities costs (5,661 ) 683 Accrued and other liabilities   (3,242 )   764   Net cash provided by (used in) operating activities   9,341     (9 )   Cash flows from investing activities: Purchases of investments (70,584 ) (58,061 ) Proceeds from sale of investments 71,578 71,030 Purchase of Entone, Inc. convertible note (2,500 ) ? Acquisition of property and equipment, net (4,193 ) (3,677 ) Acquisition of Rhozet Corporation, net of cash received (1,370 ) ? Acquisition costs related to the merger of Entone Technologies, Inc.   (2,466 ) ?   Net cash provided by (used in) investing activities   (9,535 )   9,292     Cash flows from financing activities: Repayments under bank line and term loan (460 ) (615 ) Repayments of capital lease obligations (65 ) (61 ) Proceeds from issuance of common stock, net   8,292     4,017   Net cash provided by financing activities   7,767     3,341     Effect of exchange rate changes on cash and cash equivalents   (34 )   (38 )   Net increase in cash and cash equivalents 7,539 12,586 Cash and cash equivalents at beginning of period   33,454     37,818     Cash and cash equivalents at end of period $ 40,993   $ 50,404   Harmonic Inc. Revenue Information (In thousands) (Unaudited)   Three Months Ended Nine Months Ended September 28, 2007   September 29, 2006 September 28, 2007   September 29, 2006   Product Video Processing $ 38,623 47% $ 26,116 42% $ 92,790 41% $ 66,363 38% Edge & Access 29,156 35% 25,143 40% 95,891 43% 77,029 45% Software, Services and Other   14,516 18%   11,597 18%   35,133 16%   28,954 17% Total $ 82,295 100% $ 62,856 100% $ 223,814 100% $ 172,346 100%   Geography United States $ 44,638 54% $ 29,265 47% $ 125,665 56% $ 81,968 48% International   37,657 46%   33,591 53%   98,149 44%   90,378 52% Total $ 82,295 100% $ 62,856 100% $ 223,814 100% $ 172,346 100%   Market Cable $ 41,608 51% $ 39,060 62% $ 139,310 62% $ 102,500 60% Satellite 26,462 32% 5,421 9% 43,706 20% 17,784 10% Telco & Other   14,225 17%   18,375 29%   40,798 18%   52,062 30% Total $ 82,295 100% $ 62,856 100% $ 223,814 100% $ 172,346 100% Use of Non-GAAP Financial Measures In establishing operating budgets, managing its business performance, and setting internal measurement targets, the Company excludes a number of items required by GAAP. Management believes that these accounting charges and credits, most of which are non-cash or non-recurring in nature, are not useful in managing its operations and business. Historically, the Company has also publicly presented these supplemental non-GAAP measures in order to assist the investment community to see the Company "through the eyes of management,” and thereby enhance understanding of its operating performance. The non-GAAP measures presented here are gross margins, operating expense, net income (loss) and net income (loss) per share. The presentation of non-GAAP information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and is not necessarily comparable to non-GAAP results published by other companies. A reconciliation of non-GAAP net income/(loss) to GAAP net income/(loss) is included with the financial statements contained in this press release. The non-GAAP adjustments described below have historically been excluded from our non-GAAP measures. These adjustments, and the basis for excluding them, are: Restructuring Activities Severance Costs The Company has incurred severance costs in cost of sales and in operating expenses in connection with the closing of its manufacturing and research and development facilities in the UK. In addition, severance costs were incurred due to a reorganization of its senior management following the appointment of a new Chief Executive Officer. The Company excludes one-time costs of this nature in evaluating its ongoing operational performance. We believe that these costs do not reflect expected future expenses nor do they provide a meaningful comparison of current versus prior operating results. Excess Facilities The Company has incurred excess facilities charges and credits in operating expenses due to adjustments related to vacating and subleasing portions of its Sunnyvale campus and to the closing of its manufacturing and research and development facilities in the UK. The Company excludes one-time costs of this nature in evaluating its ongoing operational performance. We believe that these charges and credits do not reflect expected future expenses nor do they provide a meaningful comparison of current versus prior operating results. Product Discontinuance In connection with the restructuring of its operations in the UK, the Company recorded charges for excess inventory in connection with discontinued products. The Company excludes one-time costs of this nature in evaluating its ongoing operational performance. We believe that these costs do not reflect expected future expenses nor do they provide a meaningful comparison of current versus prior operating results. Non-Cash Items Stock-Based Compensation Expense Harmonic has incurred stock-based compensation expense in cost of sales and operating expenses as required under FAS 123R. The Company excludes stock-based compensation expense because it believes that this measure is not relevant in evaluating its core operating performance, either for internal measurement purposes or for period-to-period comparisons and benchmarking against other public companies. Amortization of Intangibles and Charge for Acquired In-Process Technology The Company has incurred amortization of intangibles and has taken a charge for acquired in-process technology related to acquisitions the Company has made. Management excludes these items when it evaluates its core operating performance. We believe that eliminating these expenses is useful to investors when comparing historical and prospective results and comparing such results to other public companies because these expenses will vary if and when the Company makes additional acquisitions. Harmonic Inc. GAAP to Non-GAAP Income (Loss) Reconciliation (Unaudited)   Three Months Ended September 28, 2007 Three Months Ended September 29, 2006 (In thousands) Gross Margin Operating Expense Net Income Gross Margin Operating Expense Net Income GAAP $ 35,643 $ 26,772 $ 9,417 $ 29,797 $ 26,997 $ 4,016   Cost of sales related to stock based compensation expense 255 255 184 184 Research and development expense related to stock based compensation expense (563 ) 563 (331 ) 331 Selling, general and administrative expense related to excess facilities expense 1,384 (1,384 ) (2,058 ) 2,058 Selling, general and administrative expense related to stock based compensation expense (870 ) 870 (729 ) 729 Amortization and write-off of intangibles from acquisitions   1,337   (843 )   2,180     169   (45 )   214     Non-GAAP $ 37,235 $ 25,880   $ 11,901   $ 30,150 $ 23,834   $ 7,532     Non-GAAP income per share Basic $ 0.15   $ 0.10   Diluted $ 0.15   $ 0.10   GAAP per share Basic $ 0.12   $ 0.05   Diluted $ 0.12   $ 0.05   Shares used in per-share calculation – basic   80,371     74,588   Shares used in per-share calculation – diluted   81,642     75,050     Nine Months Ended September 28, 2007 Nine Months Ended September 29, 2006 Gross Margin Operating Expense Net Income Gross Margin Operating Expense Net Income (Loss) GAAP $ 93,360 $ 79,037 $ 16,782 $ 71,282 $ 78,356 $ (4,034 )   Cost of sales related to severance costs 188 188 300 300 Cost of sales related to stock based compensation expense 719 719 727 727 Cost of sales related to product discontinuance 772 772 — — Research and development expense related to severance costs (334 ) 334 (12 ) 12 Research and development expense related to stock based compensation expense (1,439 ) 1,439 (1,304 ) 1,304 Selling, general and administrative expense related to severance costs (131 ) 131 (650 ) 650 Selling, general and administrative expense related to excess facilities expense 813 (813 ) (2,058 ) 2,058 Selling, general and administrative expense related to stock based compensation expense (2,317 ) 2,317 (2,342 ) 2,342 Amortization and write-off of intangibles from acquisitions   3,266   (1,065 )   4,331   $ 493 $ (179 ) $ 672     Non-GAAP $ 98,305 $ 74,564   $ 26,200   $ 72,802 $ 71,811   $ 4,031     Non-GAAP income per share Basic $ 0.33   $ 0.05   Diluted $ 0.32   $ 0.05   GAAP (loss) per share Basic $ 0.21   $ (0.05 ) Diluted $ 0.21   $ (0.05 ) Shares used in per-share calculation – basic   79,570     74,286   Shares used in per-share calculation – diluted   80,743     74,726