Terayon, with a market valuation of $6.1 billion after a scorching run the past few days, is expected to generate sales of $240 million this year, and $325 million in 2001. That means the company trades at price-to-2001 sales multiple of 19 times, which is a considerable discount to where Redback Networks trades.
In the December quarter, Redback reported sales of $26 million, and earnings of $2 million, or 4 cents a share. Terayon, on the other hand, reported sales of $38.7 million, and earnings of $1.2 million, which worked
out to be 4 cents a share.
Let's run through this together. TERN reported Revs of $37 million based on being able to get a waiver from Rogers so they could recognize $9 million. On January 25 they filed an S-3 with the SEC stating they had not received the waiver and would therefore not be able to recognize earnings. Let's back out that $9 million and talk about revenues of $28 million. To go from $28 million to $240 million in one year would be, what, almost 9X? Help me out. Are we talking a 900% increase in revenues in 4 quarters?
How are they going to do it? They have an agreement with Rogers who is threatening to return modems --- and who think so little of them they're lumped into "small manufacturer" category on their website:
rogers.home.com
Click on "more on Rogers' Advanced Technology" and scroll down to "cable modems."
In the home, a cable modem connects to the cable television coaxial wiring and also attaches to the user's Windows or Macintosh computer via a standard Ethernet connection. In the near future, "Internet appliances" and similar devices may provide access. Cable modems are sold by several vendors, including Motorola, Hewlett-Packard, Bay Networks, and a number of smaller manufacturers.
They also have an agreement with Shaw but there's no mention of Terayon on Shaw's website.
That's not important. We know they have good relations with both companies based on each receiving 3 million warrants.
After reading the details of the arrangements [SEC documents listed at end of post], you'll understand why even if Shaw and Rogers would prefer to install DOCSIS modems, they have everything to gain by not messing with public perception of Terayon as a preferred customer.
I wouldn't expect any substantial changes even if it means stock-piling what they don't deploy.
But back to my question about where TERN would get $240 million in revs for 2000. Best-case-scenario has TERN selling the same number of S-CDMA modems this quarter as last (sources say they're declining, but I'm giving them the benefit of doubt). Where will the 800 to 900% revenue growth come from? How much is Imedia's CherryPicker adding to sales?
A description of Imedia's product development from 10-Q:
In-process technology acquired consists primarily of major additions to Imedia's core technology, which is related to Imedia's planned developmentof new features. The majority of the intended functionality of these newfeatures is not supported by Imedia's current technology. Intended newfeatures include offering high quality video service over the Internet andmultiplexing data with video. The Company expects that in-processtechnology will be successfully developed and that initial benefits fromthese projects will begin in calendar 2001. Notwithstanding the Company'sexpectations, there remain significant technical challenges that must beresolved in order to complete the in-process technology.
Okay, no product enhancements before 2001. What are current products and who are their customers?
Combined unaudited revenues for Imedia and Terayon, calculated as if the companies were one, were $61.9 million for the first 9 months of 1999; $58.3 come from TERN. You do the math.
Turning to their other acquisitions:
Radwiz had sales of $3.057 million in 1998, and sales of $1.546 in the first 9 mos of '99.
Telegate had sales of $3.569 million in 1998, and sales of $4.338 million the first 9 mos. of '99.
The 8-K reads
,
As of December 31, 1998, the Company shareholders' deficiency was $ 6,111 and its working capital deficiency was $ 1,778. In 1998, the Company had a loss of $6,010 and a negative cash flow from operating activities of $ 5,061. The Company's management anticipates a negative cash flow from operating activities in 1999, in the amount of approximately $ 2,500, and considers that the Company will require additional financing in order to finance its activities in the future. Accordingly, there is substantial doubt whether the Company is able to continue as a going concern.
Telegate is the company set to bail TERN out with Rogers, at least if Gilder's report is correct. From the segments posted on Terayon's webpage:
Shaw's success caught the attention of the other great Canadian cable provider, Rogers (RG), which had been using Nortel cable modems from LAN City (Bay). Rogers turned to Terayon for help. Terayon struck two deals: one with Rogers cable for Terayon's cable modem system, and one with Rogers Communications for a joint venture to develop voice over cable technology. Almost immediately, according to Zaki, the Rogers voice partnership confirmed that VoIP for cable was not ready, particularly with TDMA. But Terayon acquired an Israeli cable telephony firm called Telegate that was already using Shlomo's S-CDMA...
I admit I need help here. How did Rogers discover "VoIP for cable wasn't ready, particularily with TDMA" if they were working with Terayon's S-CDMA? Shouldn't that read they discovered Terayon wasn't ready with VoIP in any form? Gilder goes on to say, "but Terayon acquired an Israeli cable telephony firm called Telegate that was already using Shlomo's S-CDMA." This implies Telegate product(s) will fill in where Terayon's have failed --- in other words Rogers isn't pleased with Terayon's S-CDMA. The current situation with the Rogers waiver leads credence to Gilder's implication.
What I need to understand is how Gilder can dismiss Rogers' findings and accept the Telegate substitution without asking what's involved. What exactly does Telegate have? The 8-K shows $4.338 million in sales for the first 9 months of '99, puny numbers by anyone's standards. Puny or not, to assess what value Telegate brings to TERN, we need to know if they're planning to sell the same products and if so, to whom, and what if any modifications need to be made. My sources say there was an ASIC involved that had to be re-worked and TERN did not give the go-ahead. Would the DTAlex Brown analyst have an up-date on this part of development? After all, if Gilder's assumptions are correct, Telegate's products have a lot riding on them.
I have to admit I'm a little peeved at Gilder for printing an article that makes his readers look like idiots. Here's how the article begins:
Every GTR subscriber knows a company that developed CDMA technology that others first claimed was unnecessary and unworkable. The technology proved itself with better handling of data and greater capacity. It excelled in Asia, and was finally adopted as an industry standard. The name of that company, of course, is...Terayon (TERN), now poised to repeat Qualcomm's (QCOM) remarkable success.
Where was it "adopted as an industry standard?" And how is it "poised to repeat Qualcomm's remarkable success?" Thrown out of 1.2 and Adv PHY at CableLabs isn't exactly "poised for success." Is it through Telegate they're going to find success? Or Imedia? And what story is Gilder pitching? If CDMA, then how do you explain success in the face of being thrown out of Rogers? And if not CDMA, then what? If their access products, then what distinguishes them from other companies who've been developing their technologies far longer? What's Terayon's edge? Without CDMA, what story do you spin?
Gilder continues:
Terayon was formed in 1993 in Silicon Valley to pursue the vision of broadband over cable developed by Zaki and Shlomo Rakib in Israel. Analogous to Qualcomm's wireless CDMA, S-CDMA uses spread spectrum techniques to modulate signals across a swath of available spectrum rather than chopping them up into time slots in a narrow band as in Time Division Multiple Access (TDMA). Just as in wireless, S-CDMA over cable offers a shared medium system with more flexible handling of bursty data, greater capacity, and far superior immunity to noise. Like urban cellular environments, cable coax spectrum is fraught with interference and noise...
Is this a string of non-sequitors? For the above paragraph to make any sense, we need clarity on how wireless CDMA and cable-based S-CDMA differ. And when using "more" and "greater" and "far superior," we need to know what's being compared.
And, finally,
...By 1998 Terayon was nearly broke when Canadian cable company Shaw Communications (SJR)-which saw S-CDMA as a critical edge in converting cable TV customers to broadband Internet users-approached the Rakibs to make an investment. With Terayon's technology Shaw leads all @Home partners in subscribers and cable modem penetration rates...
I know Shaw uses Terayon, but they also use a long list of other manufacturers, including Motorola. Isn't it misleading to say "With Terayon's technology Shaw leads all @Home partners in subscribers and cable modem penetration rates?"
I don't have the rest of the article, as TERN's website only has selected segments, so I don't know if the rest is as irresponsible as what's posted here.
At any rate, I would love to be enlightened. The numbers are all there in SEC findings. And, since even Gilder is saying Telegate will bail TERN out --- or implies as much --- I think anyone would want to know what Telegate has and how it's likely to add to revenues over the next few quarters.
In closing, the SEC segments I referred to earlier:
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Shaw Warrant Exercise On March 11, 1999, Shaw Communications, Inc. (Shaw) purchased 1,500,000 unregistered shares of the Company's common stock at $6.50 per share,resulting in net proceeds to the Company of approximately $9,750,000. The shares were purchased pursuant to the exercise of a warrant to purchase3,000,000 shares of the Compan's common stock issued to Shaw in 1998.During 1998, the Company also issued a warrant (the Anti-DilutionWarrant) to Shaw to purchase an indeterminate number of shares of theCompany's common stock. The Anti-Dilution Warrant is exercisable at the option of Shaw during the period that Shaw owns equity securities of the Company (purchased in April 1998) and in the event the Company issues new equity securities at below the current market price as defined in the Anti-Dilution Warrant. The aggregate exercise price is $1.00. Should the Company be required to issue to Shaw certain additional shares of its common stock under the Anti-Dilution Warrant, future material charges may arise thatwould adversely affect the Company's results of operations.
The Company recorded cost of goods sold of approximately $140,000 and $440,000 for the three and nine months ended September 30, 1999, respectively, relating to shares issuable pursuant to the Anti-Dilution Warrant (none during the three and nine month period ended September 30, 1998).3. Product Development Assistance Agreement On March 18, 1999, the Company entered into a one-year Product Development Assistance Agreement (Development Agreement) with Rogers Communications Inc. (Rogers Communications). Under the terms of the Development Agreement, Rogers Communications will provide the Company assistance with the characterization and testing of the Company's subscriber-end and head-end voice-over-cable equipment. In addition, Rogers Communications will provide the Company with technology to assist theCompany in connection with its efforts to develop high quality, field proven technology solutions that are DOCSIS -compliant and packet cable-compliant.In consideration of Rogers Communications entering into the Development Agreement, the Company issued Rogers Communications two fully vested and non-forfeitable warrants, each to purchase 1,000,000 shares of common stock.One warrant provides for an exercise price of $1.00 per share and onewarrant provides for an exercise price of $37.00 per share. The warrants may be exercised at any time in full or in part through March 31, 2000. The fair value of the two warrants is estimated to be approximately $45,000,000and will result in a noncash charge included in operations over the one-year term of the Development Agreement. For the three and nine months ended September 30, 1999, the Company incurred approximately $11,200,000 and$24,000,000, respectively, of product development expense related to theDevelopment Agreement.In addition, on March 18, 1999, the Company entered into a SupplyAgreement with Rogers Cablevision Limited (Rogers Cablevision), a subsidiary of Rogers Communications. Under the Supply Agreement, the Company agreed to make available to Rogers Cablevision its current TeraLinkGateway and TeraLink 1000 Master Controller, and TeraPro Cable Modems andspecified software. The Company also committed to certain product pricing and specifications. Under the terms of the Supply Agreement, Rogers retains the right to return to the Company all product purchased until certain conditions are met by the Company. Accordingly, the Company does not recognize revenue on shipments to Rogers until the milestones have beenachieved or Rogers has waived the right to return the product. For the three and nine months ended September 30, 1999, Rogers waived their right to return certain product purchased and the Company recognized approximately $5.0 million in revenues from sales to Rogers. The Supply Agreement and the Development Agreement do not constitute acommitment by either Rogers Cablevision or Rogers Communications to purchaseor deploy any particular volume or quantity of the Company's product. No such commitment will be made unless Rogers Cablevision or Rogers Communications issues a purchase order to the Company.
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And from Shaw's filing on Sedar:
Series F Convertible Preferred Stock Dividend. We recorded a dividend of$23.9 million in the nine months ended September 30, 1998. The dividendrepresented the fair value of a warrant to purchase 3,000,000 shares of ourcommon stock (the Shaw Warrant), and was recorded under the provision of the Financial Accounting Standards Board's Emerging Issues Task Force IssueNo. 96-13, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock; The Shaw Warrant was issued in connection with the sale of $5.0 million of convertible preferred stock to Shaw (the Shaw Financing). Our accounting conclusion was that the sale of preferred stock was, in substance, a financing transaction and not the issuance of equity instruments in exchange for goods or services. When we issued the $5.0 million of convertible preferred stock and the Shaw Warrant on April 6, 1998, our singular objective was to obtain sufficient liquidity to continue as a going concern. At the time of the Shaw Financing, our ability to continue as a going concern was in serious doubt. At March 31,1998, we had only $109,000 in cash, but were using cash of approximately $1.0 million, net, per month in operations. In addition, we had a deficit in working capital of $8.8 million. On March 11, 1999, Shaw purchased 1,500,000 shares of our common stock under the terms of the above warrant,resulting in net proceeds to us of $9.8 million.
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