Terayon has the recent NYT article on its website:
terayon.com
The same as with the Gilder Report, this indicates they approve of the article's content.
While waiting for my daughter to arrive from San Francisco, I have time to go through the article paragraph by paragraph:
New York Times; April 13, 2000
Modem Company Growing in a Competitive Market
Profit Expected Despite Share Volatility
By ALEX BERENSON
The company has a hot new technology, ripe for hype, whose details are understood only by engineering experts. Its stock has tripled since October and is valued at about 40 times last year's sales -- despite losing more than one-quarter of its value yesterday in a stomach-churning decline.
By "hot new technology," are they referring to S-CDMA? If so, it's neither hot nor new. Cold and old is more accurate.
Steve Castillo for The New York Times
Zaki Rabib is the chief executive of Terayon Communication Sys tems, a company with a market valuation of almost $4 billion.
It is no wonder that short-sellers, who bet against companies they think are overvalued, believe they have found an easy target in Terayon Communication Systems, a company based in Santa Clara, Calif., that is in the hotly competitive business of making cable modems and other networking equipment. On Tuesday, a conference call conducted by Terayon executives to discuss first-quarter earnings turned into a surreal free-for-all as short-sellers using fake (and juvenile) names repeatedly attacked the company's honesty.
It was juvenile and it was surreal, but the issues were valid and deserved to be addressed with honest replies.
Yesterday Zaki Rakib, the Terayon chief executive, said he felt "sadness that a conference call of a public company could be turned into a circus," especially after a quarter when the company posted very strong results.
Zaki could have avoided turning the call into a "circus" if he and his CFO hadn't tried to dodge the questions. He could have acknowledged the maker of their OEM products even if the name was incorrect. He knew what the questions were referring to. As for the details of the TurboNet modems, again, a straight-forward answer would have deflated the situation. No circus needed. The questions surrounding the CableLabs "cease and desist" letter were more troublesome, but if Zaki had admitted there had been some difficulty between his company and the testing lab ---an honest response in the face of overwhelming evidence --- and proceeded to explain what he'd done to remedy the situation, he would have kept the questioning on a much higher plane. Instead he became extremely defensive and escalated the questioning.
To be sure, Terayon is not a stock for the faint of heart. After soaring from below $50 in early November to a midday high of $285.25 in early March, the company's stock has plunged. It closed yesterday at $119.75, down $43. But even after its recent decline, Terayon has a market valuation of almost $4 billion, not bad for a company that is less than a decade old and has never turned an annual profit.
Perhaps the hype generated from the Gilder organization deserves the credit and not the company's technology.
Yet underneath the mud, Terayon is growing exceptionally fast and establishing itself as a leader in the market for advanced cable modems and other communications equipment.
By what measure is Terayon a leader? If for its S-CDMA technology, then, yes, they're a leader. The question remains, if you're number one in a field of one can you be considered a leader? If so, what or who are you leading? Being a leader in an industry requires you to sell more than the competition no matter what modulations are involved.
In 1997, Terayon had $2 million in sales. Last year, sales were about $90 million. Next year, the company's sales could top $500 million, according to Wall Street analysts who follow it.
By posting this article on their website, is Terayon's management endorsing the revenue projection? If so, wouldn't it be more truthful to post analysts' expectations for FY2000? Last year's revenues were over $97 million and FY2000 is estimated to be $342M. Not quite as impressive a comparison, admittedly.
With growth like that in an environment where technology companies can go from start-ups to profitable giants in a decade, Terayon cannot be dismissed simply because it is young and losing money. This year, analysts expect that the company will be profitable on a cash basis for the first time, although several noncash charges will wipe out its bottom-line earnings.
Noncash charges that could go on indefinitely, leading to the obvious question: when will acquisitions be accretive? And how long until shareholders refuse to invest in a company that continues to dilute profits. These acquisitions have made creative accounting possible, but I maintain their pro forma numbers were derived in an unprofessional, if not unethical, manner and no doubt will be examined in the shareholder lawsuits.
On Tuesday, Terayon reported first-quarter sales of $59.3 million and profits of $1.9 million, or 6 cents a share, before one-time charges, up from sales of $15.9 million and a loss of $4.3 million a year earlier.
"One-time charges" is a misnomer and as close to fraudulent reporting as I've ever seen.
"There just aren't too many companies that have this kind of revenue momentum," said Steven D. Levy, a Lehman Brothers telecommunications equipment analyst, who calls Terayon a buy, his highest rating. "In a market where we're paying for growth, it is very reasonable that this stock has gone up as much as it has."
Steve Levy of Pairgain fame.
Terayon's main business is making cable modems, the boxes that enable consumers to connect to the Internet at very high speeds over standard cable lines. With Internet users looking for faster access to bandwidth-hogging music and multimedia applications, the cable modem market is exploding. Kinetic Strategies, a research firm in Phoenix, estimates 15.9 million cable modems will be installed in North America by the end of 2003, up from 2 million today.
Nothing wrong here. All straight forward.
Companies vying for a piece of the market include Broadcom and Cisco Systems.
But Terayon supporters say the company has an edge over its competitors in the cable modem business, thanks to a superior technology. Most other companies use a method known as TDMA, or time division multiple access, to transmit data over cable lines, while Terayon uses S-CDMA, or synchronous code division multiple access.
The company does not have an edge over its competitors. By no stretch of the imagination can it be said that Terayon's non-standard technology is winning market share.
Most analysts agree that CDMA offers better performance than TDMA. CDMA offers "greater capacity and far superior immunity to noise," the electrical interference that distorts data transmission, the Gilder Technology Report wrote in February. As a result, cable operators that use Terayon modems can offer high-speed Internet access to subscribers even over older cable systems.
Here we're dealing in outright lies. By quoting the Gilder Report they're building lies on top of lies.
But in what may be the biggest controversy surrounding Terayon, the company's detractors argue that Terayon and analysts friendly to it have overstated the advantage of Terayon's technology. The reason: big cable companies have created a consortium called CableLabs that will certify that all new modems work interchangeably on a single standard, called Docsis. Most United States cable operators will buy modems only if they meet that standard, and so far CableLabs has not incorporated Terayon's CDMA technology into Docsis. In addition, any company that wants to qualify for Docsis must agree to license its technology to other modem suppliers without asking for royalties.
Facts that negate many of the claims made earlier in the article.
That locks Terayon in a neat Catch-22, critics of the company say.
Terayon's technology advantage will not help it crack the crucial United States cable market unless it agrees to give up its advantage, for nothing. They note that Terayon has so far had little success winning customers among big United States cable operators.
"People who have bought this stock on the thought that the company will receive a royalty stream from other cable modem manufacturers may be sorely disappointed," said James Chanos, a well-known short seller who has bet on a decline in Terayon's stock.
Short sellers sell stock they have borrowed, hoping to buy it back later when its price has fallen.
An honest assessment, again making earlier claims inoperative, to use a phrase from the Nixon White House.
But bullish analysts say that Mr. Chanos and other short sellers have overplayed their hand on this crucial issue. Terayon already has a Docsis-certified modem that uses TDMA technology, and the company has a good chance of winning CableLabs' approval in the near future for a modem that will use both CDMA and TDMA technology. More important, the company is establishing itself as a leader in the huge Asian cable market, having recently won important contracts in China and South Korea.
Their OEM DOCSIS will not make them a leader anywhere and their S-CDMA-TDMA product may not be certified "in the near future," in addition, it may not find a market when it is. How have their contract wins in China and South Korea made them leaders? If they're referring to leadership in the S-CDMA market, then I have to question again if you can be a leader if you're the only player.
"The company will be successful whether or not they're in the U.S. standard. They're doing very well in Canada. They're doing very well in Asia," said Tim Long, a communications equipment analyst at Merrill Lynch.
First of all, to be a leader you have to be a player in the US market. To think otherwise is to live in denial. Furthermore, if Terayon's Canadian markets are growing, why does Rakib refuse to pull out customer numbers or product percentages? Could it be their sales in Canada aren't growing and that S-CDMA sales are slowing?
"We're just expecting phenomenal growth." Mr. Long rates Terayon a short- and long-term buy.
In addition, bullish analysts argue that Terayon is copying Cisco's very successful strategy of using highly valued stock for strategic acquisitions. Terayon's cable modems are only one part of a strategy that will eventually include data, voice and multimedia transmission equipment over wireless, cable systems and phone lines.
This may prove true down the road a ways. Right now it's important to judge how successful Terayon is in growing its proprietary sales and in bringing new products to market. So far there's no proof of either.
"They've gone from being a middle-of-the-pack cable modem company to having a nice suite of products," said Ned Brines, manager of the $850 million Phoenix Engemann Aggressive Growth fund, which owns about 70,000 Terayon shares. "They're either going to be dramatically larger, or they're going to be part of someone else."
What's in this "nice suite of products?" Terayon has not introduced one new product of their own for over a year if not more. Of their acquisitions, they've sold Imedia's CherryPicker but to my knowledge nothing else. Their 10-K says products from acquisitions won't be shipping till 2001. I'm willing to grant the company a kudo for their "nice suite of products" if I could just find out what they are and what sets them apart from the competition.
A tale told by an idiot --- full of sound and fury . . .
Pat |
