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Parsing the Harman Q2 2013 Earnings Call

Harman's stock plunged yesterday after releasing guidance well below analyst estimates for 2013. As one of the largest pro-audio manufacturers in the world and one of the only publicly traded pro AV companies, it's worth examining the underlying causes of this drop to see what it can tell us about the health and direction of the industry.

The good news is that Harman seems to have taken the biggest hits in its infotainment and lifestyle divisions, not in the professional division. This is largely attributable to a slowdown in the European automotive industry. The bad news is that Harman is talking about reducing up to 1,000 jobs in an effort to cut operational costs. They didn't specify which divisions these reductions would impact.

Harman is attributing any declines in the professional division to four factors: recessionary conditions in Europe, elections in the U.S. and China, fiscal cliff uncertainty, and Hurricane Sandy. While Europe isn't out of the woods yet, all other negative factors seem to be temporary. That's good news for Harman, and good news for the industry.

Here are all relevant quotes from yesterday's call as they relate to the professional division:

  • Recessionary conditions in Europe have impacted our Professional Division as well, as customers are delaying capital projects for installed sound and broadcasting.
  • The world's 2 largest economies, the United States and China, held presidential elections during this quarter. Many capital projects were delayed pending the outcome of these elections, fiscal cliff and many other uncertainties, impacting our Professional Division in particular. We expect that capital spending will pick up again as the election uncertainty has now been resolved.
  • In the Northeast, to a lesser extent, Hurricane Sandy, caused our customers to delay some capital projects as well, which have pushed out to next quarter. The outlook for the second half of our fiscal year 2013 shows a modest improvement.
  • We maintained our sector leadership and provided sound reinforcement for several high-profile events, including the 12-12-12 Sandy relief benefit concert at Madison Square Garden. Our focus on transportation vertical market continues to pay dividends, particularly in the emerging markets.
  • Following the successful installations in several countries, our IDX, had an integrated audio video paging solution will soon be installed in the Guangdong airport in China and Bangalore International Airport in India. Recently, we also launched an agreement to purchase Martin Professional, the world leader in professional lighting and video solutions for the entertainment industry. This acquisition will be an excellent complement of our professional customers in all our global markets, including the fast-growing BRIC nations who require increasingly advanced and integrated audio lighting solutions. Upon close of this transaction, which we expect to be completed during our fiscal third quarter, Harman will be able to offer a full audio, video and lighting solution for a wide range of live entertainment.
  • Gross margin in our Professional Division improved 220 basis points primarily due to the improved profitability of our new product introductions and benefits from footprint migration projects.
  • You should expect definitely a better half for us in our Professional business because Professional business was hurt for no fault of ours. The fiscal cliff and the capital project delays and uncertainty, and we have a pretty good inquiry level in that business. And that's a pretty rich business when it comes to profitability.

A full transcript of the call can be found here.