Harmonic Announces Preliminary Fourth Quarter and Year End Results

Harmonic Inc. (NASDAQ: HLIT), a leading provider of broadcast and on-demand video delivery solutions, today announced its preliminary and unaudited results for the quarter and year ended December 31, 2007. For the fourth quarter of 2007, the Company reported net sales of $88.4 million, up 17% from $75.3 million in the fourth quarter of 2006. For the full year 2007, net sales were $312.2 million, up 26% from $247.7 million in 2006. The Company saw revenue growth in both domestic and international markets, with international sales representing 43% and 44% of revenue for the fourth quarter and for the full year of 2007, respectively. The strong revenue growth reflects sales to an expanding range of cable, satellite, telco and other customers that are deploying a growing array of new video products and solutions. Gross margins increased sequentially from the third quarter of 2007, principally as a result of a larger than expected proportion of revenue from higher margin video processing solutions and software and services. GAAP net income for the fourth quarter of 2007 was $13.3 million, or $0.15 per diluted share, up from $5.0 million, or $0.07 per diluted share, for the same period of 2006. For the full year 2007, GAAP net income was $30.1 million, or $0.36 per diluted share, up from $1.0 million, or $0.01 per diluted share in 2006. Excluding non-cash accounting charges for stock-based compensation expense, the amortization of intangibles, and excess facilities costs, the non-GAAP net income for the fourth quarter of 2007 was $17.1 million, or $0.19 per diluted share, up from $9.9 million, or $0.13 per diluted share, for the same period of 2006. For the full year 2007, non-GAAP net income was $43.3 million, or $0.52 per diluted share, compared to $13.9 million, or $0.18 per share, for 2006. See "GAAP to non-GAAP Income Reconciliation” below for further information on the Company’s use of non-GAAP financial measures. The results provided in this press release are subject to final audit and any adjustments required prior to filing of our annual report on Form 10-K for the year ended December 31, 2007. As of December 31, 2007, the Company had cash, cash equivalents and short-term investments of $269.3 million, up from $99.0 million as of September 28, 2007. During the fourth quarter of 2007, Harmonic completed a public offering of 12.5 million shares of its common stock, which generated net proceeds to the Company of approximately $142 million. "2007 was an outstanding year for Harmonic,” said Patrick Harshman, President and Chief Executive Officer. "We are very pleased with our success in extending our product portfolio and expanding our global customer base. Our powerful new video encoding, video processing, video-on-demand and edge and access solutions have strengthened our technology leadership and driven our strong sales growth, improved gross margins and increased profitability. We have also improved the efficiency of our operations and our inventory management and strengthened our balance sheet. Our successful public offering during the fourth quarter provides us with a strong financial foundation to further grow the business, as well as to continue to pursue selective acquisitions to enhance our technology and market reach.” "We enter 2008 with a very strong competitive position in cable, satellite and telco markets worldwide, and a growing position in new broadcast and Internet video delivery markets. The powerful trends toward more high-definition, on-demand and anytime, anywhere video continue to intensify and reshape the video delivery marketplace. Going forward, we expect to continue to extend the breadth and depth of our product solutions to address these major trends, and intend to continue working with our expanding global customer base to take their video services in exciting new directions. We are very encouraged about our opportunities for growth in 2008 and beyond.” Business Outlook The Company anticipates that the combined net sales for the first half of 2008 will be in a range of $165 to $175 million and gross margins will be 43% to 44% 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 47% to 48%. 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 identification code 30363329). The replay will be available after 5:00 p.m. Pacific at the same website address or by calling +1.706.645.9291 (conference identification code 30363329). 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 video 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 expectations regarding our final results for the fourth quarter and year ended December 31, 2007; our belief that our financial position will allow us to further grow our business, as well as to continue to pursue selective acquisitions to enhance our technology and market reach; our belief that we enter 2008 with a very strong competitive position in cable, satellite and telco markets worldwide, and a growing position in new broadcast and Internet video delivery markets; our belief that powerful trends toward more high-definition, on-demand and anytime, anywhere video will continue to intensify and reshape the video delivery marketplace; our expectation that we will continue to extend the breadth and depth of our product solutions to address these major trends, and that we will continue working with our expanding global customer base to take their video services in exciting new directions; and our expectations regarding net sales, GAAP gross margins and non-GAAP gross margins for the first half of 2008. 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 final results for the fourth quarter and year ended December 31, 2007 will change based on final audit and any adjustments required prior to our filing of our annual report on Form 10-K for the year ended December 31, 2007; we will not identify or complete selective acquisitions; the trends toward more high-definition, on-demand and anytime, anywhere video will not continue to develop at its current pace, or at all; 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 September 28, 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)     December 31, 2007   December 31, 2006   Assets Current assets: Cash and cash equivalents $ 129,005 $ 33,454 Short-term investments 140,255 58,917 Accounts receivable, net 69,627 64,674 Inventories 34,064 42,116 Deferred income taxes 2,885 ? Prepaid expenses and other current assets   17,205     12,807     Total current assets 393,041 211,968   Property and equipment, net 14,082 14,816   Intangibles and other assets   67,889     55,178     $ 475,012   $ 281,962     Liabilities and stockholders’ equity Current liabilities: Current portion of long-term debt $ ? $ 460 Accounts payable 20,500 33,863 Income taxes payable 481 7,098 Deferred revenue 37,375 29,052 Accrued liabilities   45,378     44,097     Total current liabilities 103,734 114,570   Accrued excess facilities costs, non-current 9,907 16,434 Other non-current liabilities   20,305     5,824     Total liabilities   133,946     136,828     Stockholders’ equity: Common stock 2,246,969 2,078,941 Accumulated deficit (1,905,733 ) (1,933,708 ) Accumulated other comprehensive loss   (170 )   (99 )   Total stockholders’ equity   341,066     145,134     $ 475,012   $ 281,962   Harmonic Inc. Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited)   Three Months Ended Year Ended December 31, 2007   December 31, 2006 December 31, 2007   December 31, 2006   Net sales $ 88,374 $ 75,338 $ 312,188 $ 247,684   Cost of sales   47,350   45,174   177,804   146,238     Gross profit   41,024   30,164   134,384   101,446     Operating expenses: Research and development 11,315 9,901 42,930 39,455 Selling, general and administrative 17,961 16,621 64,318 65,243 Write-off of acquired in-process technology ? ? 700 ? Amortization of intangibles   160   291   525   470     Total operating expenses   29,436   26,813   108,473   105,168     Income (loss) from operations 11,588 3,351 25,911 (3,722 )   Interest and other income, net   2,997   1,816   6,263   5,338     Income before income taxes 14,585 5,167 32,174 1,616   Provision for income taxes   1,293   126   2,100   609     Net income $ 13,292 $ 5,041 $ 30,074 $ 1,007     Net income per share Basic $ 0.15 $ 0.07 $ 0.37 $ 0.01     Diluted $ 0.15 $ 0.07 $ 0.36 $ 0.01     Shares used to compute net income per share: Basic   88,469   75,670   81,882   74,639     Diluted   90,377   76,547   83,249   75,183     Harmonic Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)   Year Ended December 31, 2007   December 31, 2006 Cash flows from operating activities: Net income $ 30,074 $ 1,007 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles 5,338 2,200 Write-off of acquired in-process technology 700 ? Depreciation 6,661 7,383 Stock-based compensation 6,196 5,722 Loss on disposal and impairment of fixed assets 74 297 Changes in assets and liabilities: Accounts receivable (4,516 ) (20,550 ) Inventories 8,052 (3,224 ) Prepaid expenses and other assets (5,717 ) (4,316 ) Accounts payable (13,129 ) 13,396 Deferred revenue 9,715 7,774 Income taxes payable 207 493 Accrued excess facilities costs (6,684 ) (877 ) Accrued and other liabilities   (1,258 )   (671 ) Net cash provided by operating activities   35,713     8,634     Cash flows from investing activities: Purchases of investments (178,476 ) (70,398 ) Proceeds from sale of investments 98,300 84,820 Acquisition of property and equipment, net (5,868 ) (5,143 ) Acquisition of Rhozet, net of cash received (1,950 ) ? Purchase of Entone, Inc. note receivable (2,500 ) ? Acquisition of Entone Technologies, Inc., net of cash received   (2,465 )   (26,232 ) Net cash used in investing activities   (92,959 )   (16,953 )   Cash flows from financing activities: Proceeds from issuance of common stock, net 153,337 4,778 Excess tax benefits from stock-based compensation 70 ? Repayments under bank line and term loan (460 ) (812 ) Repayments of capital lease obligations   (72 )   (82 ) Net cash provided by financing activities   152,875     3,884     Effect of exchange rate changes on cash and cash equivalents   (78 )   71     Net increase (decrease) in cash and cash equivalents 95,551 (4,364 ) Cash and cash equivalents at beginning of period   33,454     37,818     Cash and cash equivalents at end of period $ 129,005   $ 33,454     Harmonic Inc. Revenue Information (In thousands) (Unaudited)   Three Months Ended Year Ended December 31,2007   December 31,2006 December 31,2007   December 31,2006   Product Video Processing $ 42,283 48 % $ 30,492 41 % $ 135,085 43 % $ 96,855 39 % Edge & Access 30,083 34 % 32,500 43 % 125,957 40 % 109,529 44 % Software, Services and Other   16,008 18 %   12,346 16 %   51,146 17 %   41,300 17 % Total $ 88,374 100 % $ 75,338 100 % $ 312,188 100 % $ 247,684 100 %   Geography United States $ 50,264 57 % $ 44,449 59 % $ 175,711 56 % $ 126,420 51 % International   38,110 43 %   30,889 41 %   136,477 44 %   121,264 49 % Total $ 88,374 100 % $ 75,338 100 % $ 312,188 100 % $ 247,684 100 %   Market Cable $ 47,479 54 % $ 53,236 71 % $ 186,789 60 % $ 155,736 63 % Satellite 21,637 24 % 8,405 11 % 65,343 21 % 26,189 11 % Telco & Other   19,258 22 %   13,697 18 %   60,056 19 %   65,759 26 % Total $ 88,374 100 % $ 75,338 100 % $ 312,188 100 % $ 247,684 100 % 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 and net income 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 financial measures to GAAP financial measures 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 costs 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   The Company 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.   -- Impairment and Amortization of Intangibles   The Company has incurred amortization of intangibles and has taken a charge for acquired in-process technology related to acquisitions the Company has made. In addition, the Company recorded an impairment of its fixed assets and intangibles due to its decision to discontinue a product line. 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 Reconciliation (Unaudited)   Three Months Ended December 31, 2007 Three Months Ended December 31, 2006 (In thousands) Gross Margin Operating Expense Net Income   Gross Margin Operating Expense Net Income   GAAP $ 41,024 $ 29,436 $ 13,292 $ 30,164 $ 26,813 $ 5,041   Cost of sales related to severance costs 287 287 Cost of sales related to product discontinuance 1,134 1,134 Cost sales related to stock based compensation expense 280 280 202 202 Research and development expense related to stock based compensation expense (573 ) 573 (334 ) 334 Selling, general and administrative expense related to severance costs (198 ) 198 Selling, general and administrative expense related to excess facilities costs (482 ) 482 (116 ) 116 Selling, general and administrative expense related to stock based compensation expense (868 ) 868 (810 ) 810 Impairment and amortization of fixed assets and intangibles 1,474 (160 ) 1,634 1,237 (491 ) 1,728             Non-GAAP $ 42,778 $ 27,353   $ 17,129   $ 33,024 $ 24,864   $ 9,850   GAAP income per share – basic $ 0.15   $ 0.07 GAAP income per share –diluted $ 0.15   $ 0.07 Non-GAAP income per share – basic $ 0.19   $ 0.13 Non-GAAP income per share –diluted $ 0.19   $ 0.13 Shares used in per-share calculation – basic   88,469     75,670 Shares used in per-share calculation – diluted   90,377     76,547     Year Ended December 31, 2007 Year Ended December 31, 2006 Gross Margin Operating Expense Net Income   Gross Margin Operating Expense Net Income   GAAP $ 134,384 $ 108,473 $ 30,074 $ 101,446 $ 105,168 $ 1,007   Cost of sales related to severance costs 188 188 587 587 Cost of sales related to product discontinuance 772 772 1,134 1,134 Cost of sales related to stock based compensation expense 998 998 957 957 Research and development expense related to severance costs (334 ) 334 (12 ) 12 Research and development expense related to stock based compensation expense (2,012 ) 2,012 (1,638 ) 1,638 Selling, general and administrative expense related to severance costs (131 ) 131 (848 ) 848 Selling, general and administrative expense related to stock based compensation expense (3,186 ) 3,186 (3,124 ) 3,124 Selling, general and administrative expense related to excess facilities expense (recovery) 331 (331 ) (2,174 ) 2,174 Impairment and amortization of fixed assets and intangibles 4,740 (1,225 ) 5,965 1,730 (670 ) 2,400             Non-GAAP $ 141,082 $ 101,916   $ 43,329   $ 105,854 $ 96,702   $ 13,881   GAAP income per share – basic $ 0.37   $ 0.01 GAAP income per share –diluted $ 0.36   $ 0.01 Non-GAAP income per share – basic $ 0.53   $ 0.19 Non-GAAP income per share –diluted $ 0.52   $ 0.18 Shares used in per-share calculation – basic   81,882     74,639 Shares used in per-share calculation – diluted   83,249     75,183