HLIT

[David Randolph]

Hello, this is the new thread for HLIT's trade, separated from NFLX's short.

I'll copy the related posts of the initial thread, which was Long HLIT & Short NFLX to this new thread and move the old combined thread to the Members Corner.

The following was the initial recommendation:

«I've been thinking about this macro trend, from movie rental to movie download, for a long time, but Apple TV tells me the time is now (although I guess Apple TV will only work with iTunes, there are several other devices which allow any downloaded film to be watched on TV, like a Kiss DVD player, for example).

It is already possible to download videos from the internet and watch them in your television set, my friend and partner Ramsburg has been doing it for years. But now I see it becoming the mainstream.

HLIT's business description is:

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 increase revenues and lower operational expenditures by using Harmonic's digital video, broadband optical access and software solutions to offer consumers the compelling and personalized viewing experience that is driving the business models of the future.

HLIT is the future.

NFLX is the past:

Netflix, Inc. operates as an online movie rental subscription service provider in the United States. It provides its subscribers access to a library of movie, television, and other filmed entertainment titles. As of December 31, 2005, the company provided approximately 4,200,000 subscribers access to a library of approximately 55,000 movies, television, and other filmed entertainment titles. Netflix was founded by Reed Hastings in 1997 and is headquartered in Los Gatos, California.

In the not so distant future, people will not be willing to wait for a DVD coming with the mail. They will download and instantly see it on TV.

Technically speaking, HLIT is bullish and NFLX is bearish:





HLIT had a strong quarter in Q3 2006 and the CFO said yesterday in a Needham presentation that Q4 will be the strongest of the year (and there's no seasonality). I particularly appreciated Q3, because gross margin rose from 43% to 50%, and we've been seeing that an expansion in gross margin is one of the most important factors in stocks about to explode in price. Since management says Q4 will be even better, and with the current macro trend, I'm a bull on the stock.

I know NFLX also has growing revenues and rising gross margin, but it is valued at 30 times next year's earnings, and I don't think that business will be around in three years time, at least not with the current business model.

For the following updates I'll separate this thread in two, because these are two different trades (although connected).

The trading plan is:

Buy 6.66% of capital in HLIT and short 6.66% of capital in NFLX.»

[David Randolph]

Reply #1 on: January 12, 2007, 10:09:57 AM, by Se7en:

In other words, a close above 8.30 would be bullish short term?!

[David Randolph]

Reply #2 on: January 12, 2007, 10:45:31 AM, by Melf Elf:

«Se7en,

The upside takeout of the 7.51 Right Shoulder is bullish, as long as HLIT trades above it.

It also was bullish to take out the 7.75 highs of the Left Shoulder.  That "shouldn't" happen, if the pattern is bearish, and it suggests that the resolution "should be" to the upside.

Any closes back below 7.75 and 7.51 (the highs of the shoulders), puts that bullish resolution in question.  We could go back to those numbers for a re-test though.  The 50DMA is at about 7.80, too.

Sorry, I put the wrong number on the chart, the high of the Head, which was 8.67, not 8.30, so HLIT needs to print 8.68 to take it out to the upside.

That would put a target of 10.29 IN PLAY.»

[David Randolph]

Reply #3 on: January 12, 2007, 03:28:44 PM, by freimuch:

«Melf, The following is what made the stock move yesterday from Briefing.com.

Live In Play


11-Jan-07
07:23  CMCSA Comcast: Appears likely to spend aggressively on Triple-Play land grab opportunities in 2007; ARRS and HLIT well positioned to benefit -   

Thomas Weisel believes CMCSA is likely to be an aggressive spender in CY07 based on: 1) their expectation for a 71% increase in Comcast Digital Voice net additions; 2) stated plans to ramp the co's HD/VOD offerings; 3) robust growth in data subscribers and traffic; 4) triple-play upgrades to the acquired Adelphia, TWC and Susquehanna properties; and 5) a ramping SMB initiative. Firm believes that ARRS and HLIT are likely beneficiaries of CMCSA's initiatives given their strong relationships with the operator. Firm notes that CMCSA expects to double its HD on-demand offering by YE07, viewing this capability as a competitive advantage over satellite operators, especially DTV. CMCSA ests that 3 mln businesses are within or near the co's service area, all of which are prime targets for the co's phone and data services and believe ARRS could see a meaningful piece of spending here based on its leadership in multi-line EMTAs and the capacity demands that would be placed on CMCSA's CMTS infrastructure.

LATER IN THE DAY YOU GET THE FOLLOWING

HLIT Harmonic: Expected DBS win a positive, but impact overestimated- Friedman Billings (8.07 +0.72)

Friedman Billings notes the co announced it received a meaningful order for high definition encoders from a major direct broadcast satellite operator. The firm says they have long anticipated at least one H.D encoder win for Harmonic, and they view this news as a fundamental positive for the co. However, the firm continues to believe that the impact from this win on 2007 results is not as large as many expect and that actual results this year will underperform bullish expectations. The firm notes that this win does not affect their view on the co's 1H07 results, as they have "baked in" about $7 mln in incremental D.B.S business into their model. Firm reits Underperform and $5 tgt.

TODAYS NEWS:

12-Jan-07
07:23  HLIT Harmonic estimates raised at Thomas Weisel on suspected win at DISH (8.16 )

Thomas Weisel notes that at an investor conference on January 11, mgmt from HLIT indicated that the co had received a substantial MPEG-4 HD encoder order from a major North American satellite provider at the end of December. While management was not specific, the firm's industry checks indicate that HLIT has received an initial order from Echostar (DISH) for the rollout of local H.D., an opportunity that they believe could eventually reach roughly $50 mln and that was not in their previous $270 mln 2007 revenue estimate. Firm raises their 2007 rev est to $285 mln from $270 mln (consensus $274.5 mln).»

[David Randolph]

Reply #13 on: January 13, 2007, 01:54:08 PM, by la-onda:

«HLIT Investor presentation Jan. 11th of 2007 part 1 

[David Randolph]

Reply #14 on: January 13, 2007, 01:56:55 PM, by la-onda:

presentation part 2 ( I am invested, nice CC and nice slides with useful investor information; link: http://www.wsw.com/webcast/needham16/hlit/)



cheers
Oliver

[David Randolph]

I've studied some more about HLIT and I guess my initial assessment of the company's business model was wrong

The company's profile is:

«Harmonic Inc. (HLIT) 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 increase revenues and lower operational expenditures by using Harmonic's digital video, broadband optical access and software solutions to offer consumers the compelling and personalized viewing experience that is driving the business models of the future.»

I saw "broadcast", "video", "broadband", and thought it had to do with helping companies to deliver video content over the internet, like films, video clips and commercials, for example.

But I was wrong, it has to with enabling video on demand capabilities for cable and satellite tv companies, helping mobile companies to send video content to their subscribers, inserting ads on video content and time shifted TV (TIVO and HAUP enable this same experience).

So, HLIT is more of a mean of existing cable and telco companies to respond to the internet challenge. The concept is:

- Why download a movie from the internet to watch it on TV if I can ask for that movie at my cable operator's video on demand service?
- Why download content from the internet to see it on my iPod or mobile phone, if my mobile operator has its own library of video content? (also, mobile operators might want to send video commercials to mobile phones as a video message - and give those subscribers a lower price on calls - just an idea to why mobile operators might want to send videos to their subscribers - to get a possible explanation to why these services now represent 30% of HLIT's revenues, up from 21% in 2005. If you have other explanations for "why a mobile telecom company would want HLIT's services?", please post - I'm sure Michael has some good ones, because he knows mobile telecom companies very well).

You see, if cable and satellite TV operators do nothing, their audience and commercial value will decline, because people will watch content coming from the internet instead of regular television.

Of course, there's room for everybody, and TV and internet will coexist going forward, but the balance between the two may change a lot and cable and satellite tv operators need to respond.

For years I've been thinking that the commercial space between programs will be worth less and less, because people will delete the ads with Tivo, HAUP or probably Apple TV, or they'll use their remote control to switch channels while there are commercials. I guess that in 10 years nobody will see the commercials between TV programs, so cable and satellite operators need to change their advertising business model. I believe they will start putting small ads mixed with content, as it happens on the internet. This way, to watch the content, you need to see the ad. HLIT has this service.

So, HLIT's play is somewhat different than I initially thought, but the chart remains bullish and the CFO still said the 4th quarter will be the strongest of the year (igniting a "buy the rumor"), so I'll continue holding HLIT as I keep studying the company and prospects.

[Michael]

Some interesting news today:

Arris bids $1.2 billion for Norway's Tandberg TV

Monday January 15, 5:05 am ET
By Richard Solem and Wojciech Moskwa

U.S. communications technology firm Arris on Monday bid $1.2 billion in cash and shares to acquire Norwegian digital broadcast systems maker Tandberg Television

Tandberg TV has more than a 25 percent share of the global video processing market and its 2006 revenues are expected to be around $350 million, it said. One of its main rivals in the digital video business is U.S.-based Harmonic Inc (NASDAQ:HLIT - News).

http://biz.yahoo.com/rb/070115/tandbergtv_arris.html?.v=2

I have to admit that I am not familiar with Tandbergs financials but if Arris is willing to pay $1.2 billion for a company with 360 million in Revenue HLIT should everything else equal be worth 816 million (expected revenue 245 million). HLIT's market cap is 624 million so this news should give the share price a boost when the stockmarket opens tomorrow 

[David Randolph]

Thanks for posting that news and analysis Michael, it makes perfect sense. Not such a high open, though, perhaps because the stock is up so much over the short term, and it might be somewhat tired.

The CFO clearly said Q4 will be the strongest of the year, and Q3 already had $62 M in revenues, gross margin of 50% and EPS of $0.05.

Estimates are for $70 M revenues and EPS of $0.09 for the 4th quarter. The forward earnings multiple is 29.

Hmmm, your post made me compare HLIT and ARRS, and ARRS seems much more solid and cheaper:

- HLIT's 2006 PER is 55. ARRS's 2006 PER is 13;
- HLIT's 2006 PSR is 2.56. ARRS's 2006 PSR is 1.59.

I'm selling HLIT, this trade is a mistake.

[Michael]

Hi David,

I like the whole Video, TV to PC and IPTV story which has huge implications on a number of companies.

Some of them are obvious like HAUP, ONT, ARRS and HLIT and some are less obvious like companies in the storage sector like KOMG and STX.

HLIT is trading at 52 weeks high today after a short consolidation and the chart looks very appealing.

[Melf Elf]

HLIT is trading at 52 weeks high today after a short consolidation and the chart looks very appealing.

Michael,

That sure does look appealing.  Nice Heads Up.  Thanks.  Applause.

My analysis on HLIT to Se7en is above, if you're interested and want to scroll back, but basically, this is the bullish scenario that we've been discussing in the HAUP folder.

HLIT closed yesterday at 8.68, one penny above the high of the Head, which was 8.67.  That often is very bullish, technically, because the Bears who shorted what looked like a Bearish H&S Top now know that it wasn't, that the stock is at a new high, as you mentioned, and that they're now in danger of getting caught in a short squeeze to the upside.

Reply #2 on: January 12, 2007, 10:45:31 AM, by Melf Elf:

Sorry, I put the wrong number on the chart, the high of the Head, which was 8.67, not 8.30, so HLIT needs to print 8.68 to take it out to the upside.

That would put a target of 10.29 IN PLAY.»

10.29 is IN PLAY, as long as HLIT trades above 8.68.

I just bought it at 8.91.

Good luck!

[Melf Elf]

HLIT closed yesterday at 8.68, one penny above the high of the Head, which was 8.67.  That often is very bullish, technically, because the Bears who shorted what looked like a Bearish H&S Top now know that it wasn't, that the stock is at a new high, as you mentioned, and that they're now in danger of getting caught in a short squeeze to the upside.

10.29 is IN PLAY, as long as HLIT trades above 8.67.

Interesting Bull and Bear struggle.

After the upside takeout of The Head, to 8.98, The Bears managed to knock it all the way down to 8.33 this morning, putting 10.29 ON HOLD.

The chart this morning looks like The Bears tried to hold a ball under water.

BOING!

10.29 is back IN PLAY.  At least, for the moment.    

[ScottishTrader]

So the question on everybody's lips is....  Can HLIT break $9??? 

Chart looks bullish, looks like it wants to, but its just gotta get that punch!  Not today but maybe tomorrow?

P.S. Melf, I'm with you on this one, in at 8.90.  I'll hang on here as long as it doesn't close below 8.60.  That seems like it should be saupport now.  (below that its 8.46, but that is approaching a little more than I want to put out on this one...)

[Melf Elf]

So the question on everybody's lips is....  Can HLIT break $9??? 

Another question on everybody's lips is..."How is the market going to react to earnings that will be reported after the bell today?"

 

Chart looks bullish, looks like it wants to, but its just gotta get that punch! 

Right.  As long as it's not in the stomach, or anywhere below that. 

Not today but maybe tomorrow?

Probably tomorrow, after earnings.

P.S. Melf, I'm with you on this one, in at 8.90.  I'll hang on here as long as it doesn't close below 8.60.  That seems like it should be saupport now.  (below that its 8.46, but that is approaching a little more than I want to put out on this one...)

I managed to pocket 3% on the "Beachball Bounce" last Friday, off 8.33, so from my 8.91 entry, my risk now is reduced to about 6.7% if I'm stopped out at 8.05.  That's the "last low/last support" (8.06), prior to the upside takeout of the Head, so I'll go with that as my stop.

If HLIT is indicated at anything below 8.06 tomorrow morning after earnings, I'll sell at the market and take the hit, no questions asked.

Good luck!

[ScottishTrader]

Ah you gotta love  earnings season, it really sorts the men from the boys - nothing like a little suck it and see    I think I need to think about this a little more, but the chart sure says it wan that upside break....