Harmonic (HLIT) is the leading independent producer of video broadcast and distribution equipment. The company had a history of lumpy quarters and missing guidance until Patrick Harshman took over as CEO in the June 2006 quarter. Since then, trailing four quarter revenues have grown from $234 million to $347 million after the quarter reported yesterday. The company has rationalized their operations, slightly increased head count, and made a big push for international business. They are about to open a European service center.

So why is the stock down almost $2 today, after pretty much hitting the consensus expectations for the June quarter? Two reasons. First, September quarter guidance was on the low side. Harshman has a history of guiding low and then beating even the high end of the range, but Wall Street takes the bait almost every time. In this case, the company said that second half revenues would come in between $175 million and $185 million. At the $180 million midpoint, the year-over-year gain would be only 5.4% and the gain over the first half would be a measly 1.9%. That also indicates that full year revenues would be $5 million to $6 million less than the consensus.

But on the conference call, the CFO said satellite revenues in the second half would be greater than the first half. Later he said satellite would be about 20% of revenues, or $37 million based on the midpoint of guidance. First half revenues for satellite was $33.5 million. Then, later in the call, CEO Harshman said Video Processing revenues would definitely be larger in the second half than in the first half. A bit later he said that Edge & Access would be a little larger in the second half. So the only way revenues could be as low as the midpoint of their guidance is if Software & Services revenue declines--but Software & Services is one of their fastest-growing segments! Wall Street responded to the written guidance in the press release, without listening to the conference call. Sadly, that happens all the time.

The second reason Harmonic is under pressure is because they are reporting earnings almost untaxed this year due to net operating loss carry forwards, but will report 2009 results using a 25% to 33% tax rate. The company should earn about 65 cents to 67 cents this year after minimal taxes, and then 60 cents to 65 cents next year fully taxed. But comparing fully taxed earnings to untaxed earnings is like comparing apples to oranges. Harmonic will grow revenues about 20% in 2009 to $435 million or so, and then continue to grow 20% per year for several years. Putting a 20X to 30X multiple on the fully-taxed earnings and adding back their $3 a share in cash seems like a reasonable valuation range for the leading independent video company--assuming they aren't taken over. Today's $2 decline in the stock's price makes one wonder just how short-term Wall Street analysts and hedge fund gunslingers can be.