Harmonic (HLIT) blew the doors off with their recent quarterly earnings and, even better, I think Wall Street is beginning to understand what we have been talking about for over a year. Sales rose 17% to a record $88.4 million, and they reported their sixth straight profitable quarter under the new CEO, hitting 19 cents a share pro forma, and 15 cents under GAAP. The consensus was at $83.6 million and 15 cents pro forma. Harmonic provides a rolling six-month forecast instead of quarterly guidance, and said first half sales would be $165 million to $175 million, bracketing the consensus outlook for $171 million. They are sandbagging a little, and I expect them to do close to $400 million in 2008, with earnings over 50 cents a share.

The stock rose about $1.50 on the news. It may just have been a knee-jerk reaction to beating their numbers, but the questions on the conference call made me think that analysts are beginning to understand that:

• The cable TV business remains strong as cable companies fight back against telephone company VVD (voice-video-data) offerings;
• Harmonic has diversified away from U.S. cable in a dramatic way, and they are now an important supplier to the telephone companies as well;
• Harmonic has regained its #1 position with the satellite companies, and they in turn are fighting tooth-and-nail against both cable and phone companies (or partnering with them to provide the second V in VVD);
• Harmonic has a substantial non-U.S. business growing even faster than their U.S. operations;
• In addition to their traditional lead in video encoders, as shown by recent satellite contract wins, Harmonic is in numerous new, fast-growing areas like switched digital video, Internet Protocol TV and cable modem termination systems;
• Even the traditional video infrastructure markets are growing a very respectable 15% to 20% per year;
• The emerging video markets are growing 40% per year or more;
• Very strong orders in the December quarter, when much other capital spending weakened, show that the video infrastructure buildout is stronger and growing faster than ever before;
• Harmonic will report about $500 million in sales in 2009, up 60% from 2007.

There were a number of larger brokerage firms on the conference call asking questions that do not currently publish a recommendation on HLIT. I suspect we will see some new research soon.