2023-07-11 01:20:11 ET
Summary
- Harmonic Inc.'s revenues have increased by 7% YoY, driven mainly by broadband and Video SaaS, which grew by 23% and 72%, respectively. The company's EPS increased by almost 50% YoY.
- It has two main segments, broadband and video, with the latter being the faster-growing due to a 72% YoY increase in SaaS revenue. Harmonic is focusing on securing multi-year contracts to ensure future revenues.
- Despite potential risks, such as a slowdown in the SaaS business and competition in the broadband industry, the company's strong results so far have been impressive.
Investment Rundown
Harmonic Inc. ( HLIT ) continues to see revenues increasing a decent 7% YoY rate as they note broadband and Video SaaS are the main drivers behind this increase. Growing 23% and 72% respectively. What is further reassuring with HLIT is that they are able to turn this perhaps not too impressive revenue growth into a strong increase in margins instead as they are maximizing their performance. The EPS saw a near 50% increase YoY, reaching $0.12 in EPS for the quarter. Going forward the industry seems to be staying strong and demand is growing. With a solid balance sheet where long-term debts are non-threatening, I think HLIT is a buy at these prices, even if the p/e sits quite high at 22x on a forward basis.
Company Segments
Within the company, there are 2 main segments, the broadband, and the video segment. Here the video segment is the faster-growing one, much thanks to SaaS revenue being up 72% YoY.
Highlights (Earnings Presentation)
Harmonic is prioritizing getting strong multi-year contracts in order to stabilize and create predictable future revenues for the company. This also has the effect of creating more reliable cash flows which can be used for investment into new products. With the partnering with Charter Communications, Inc. ( CHTR ), HLIT is further solidifying its position in the market and creating an opportunity for its two segments to continue growing.
Earnings Highlights
With the release of the Q1 report for the company, they noted decent growth in the top line of the business, growing 7% YoY. But I think the spotlight should be on the bottom line instead, where the EPS went from $0.08 in Q1 2022, to $0.12 in Q1 2023. A very strong increase that has likely helped the company has its share price run-up so quickly in the last few months.
Q1 Results (Q1 Presentation)
Going forward the company actually sees the year 2023 as being better the previously anticipated. They raised the guidance in the last quarter as a result of the solid start to the year and the growing demand they are seeing in the SaaS part of the company. Reaching the midpoint of the revenue guidance would equate to a near 16% YoY growth, which could justify the current valuation the company has, with the FWD p/s being 2.74.
Guidance (Q1 Presentation)
Going into the next quarter for the company I think the market is expecting HLIT to continue growing their margins and that SaaS will have another good quarter. But keeping an eye on the broadband segment I think is also important. The company sees the TAM here as around $2 billion worth, growing 30% CAGR until 2025. It would be massive for HLIT if they could capture that momentum as the broadband segment is still responsible for the majority of the company revenues.
Risks
The main risks I see with investing in Harmonic at these prices are perhaps a slowdown and disappointment in the SaaS business. That could crater the estimated earnings for the company as this is both the most profitable part of HLIT and the fastest growing.
The challenges of the broadband industry are also quite great. There are many companies in this industry that can be competitive with HLIT. Both Comcast Corporation ( CMCSA ) and AT&T Inc. ( T ) are very established and can leverage their size to push out companies like HLIT.
Besides that though, the dilution of shares over the years is a little worrying and the growth of the business is only so far seeming to cover the loss in value investors are getting. But a lower EPS growth and a continuing dilution could make my buy rating go down to a hold instead.
Financials
Looking at the balance sheet for HLIT I think they are in great shape still. With a cash position of around $90 million that can with ease pay off the long-term debts of around $11 million. But more worrying might be the current debts which are $118 million right now. Here the cash flows will be necessary to help cover the expenses. But I fear there is still a risk that HLIT will be diluting shares in order to pay down these current liabilities.
Assets (Q1 Report)
Liabilities (Q1 Report)
Something else that is worth noting is the inventory for the company has been increasing on a QoQ basis of 9% which isn't worrying yet, but I think that if HLIT isn't able to turn inventories into growing revenues then the operating margins of the business will take a hit.
So far however I think that HLIT has developed its balance sheet into a solid position where after the current liabilities are paid off, they are on track to create a financial position for itself that could justify a higher valuation. In the coming quarter, I’d like to see a growing cash position and a decrease in current liabilities.
Valuation
As far as the valuation goes for HLIT it has only had three years now in a row with a positive bottom line so the p/e hasn't really had time to settle and reach some type of averages that you can reliably use as support for the current price. The 5-year historical average p/e for example is 160 which would make the current multiple of 22 extremely undervalued when comparing those numbers. But what makes HLIT appealing in terms of valuation is the fact that it's growing quickly and with the current estimates would be trading at a p/e of under 15 in 2024 with the current price. Besides, comparing it to a peer like Digi International Inc. ( DGII ) it might be trading at a higher multiple right now, but as growth is faster with HLIT, by 2024 the p/e will be below that of DGII. In terms of where I am happy to buy, anything under a p/e of 25 for HLIT seems like a good entry point given the current momentum of growth.
Final Words
I think that Harmonic Inc right now offers a decent entry point even if they have an FWD p/e of 22 right now. The growth the company is experiencing in some of its most profitable segments seems to be worth the premium. Harmonic has solid margins too far and I don’t think we are too far off from the company starting to generate enough cash flows to justify a stop in diluting shares and instead buying them back. That would in my opinion be a catalyst and a major tailwind for long-term investors in the company.
Company Overview (Investor Presentation)
With a strong outlook for the company's largest segment, I think HLIT can thanks to its market position capture the industry CAGR for the next several years. I am rating HLIT a buy at these prices and look forward to seeing the Q2 report for the company.
For further details see:
Harmonic: Growing Quickly And At A Fair Price