Re: Digital TV - Semiconductor Play / CUBE Notes
Thread- As most know, the last mile is becoming a hotbed for many reasons that have previously been more data and voice related. But as HFC pipes are getting upgraded rapidly(some MSO say they'll be done with the first leg very soon), and VDSL appears to be a reality, TV land is merging DIRECTLY into the telecom infrastructure spending equation.
Voice/video/data will soon no longer be a buzzword, but a reality. In that respect I've been looking for ideas on how to invest in the video part. The voice and data are relatively easy sectors to invest in as compared to the video segment.
I came across many, many ideas but never could bring them to match what I thought the stats told me. And I ended up with only a few ideas I felt somewhat comfortable with.
I hope I don't regret this later, but below are my notes about one of the ideas. It's a semiconductor play on the digitalization of entertainment video C-Cube Microsystems(sym:CUBE).
Remember to take the entire report with a HUGE grain of salt. It's now over a month and a half old but IMVHO, still seems valid. Q200 came and went and everything I wrote previous to the results being announced, seemed to be still on track and valid. Remember I don't have fact checkers so there could be errors in my notes. If anyone is interested, please do extensive DD before investing. And if anyone happens to have any other thoughts about CUBE, especially negative opinions, please post. -MikeM(From Florida)
DVD digital video disk
STB set-top box
CODEC compression decompression
VCD video CD(I think?)- ie, cheap DVD
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July 4, 2000-- Here’s why I like CUBE currently. First, they have a new CEO. I never did like the former CEO, Alexandre Balkanski. I felt like he just didn’t understand all the pieces it took to run a successful company day to day. But now they have a new CEO (Balkanski is moving to the board), Umesh Padval. Umesh was formerly an executive at VLSI Technology. He impresses me for his sense of what it takes to run a company from the execution perspective. And I’m assuming, from his background, he has the technical knowledge to understand CUBE’s products in depth.
Second, our favorite, George Glider<vbg>, recommended CUBE in his January newsletter. But IMHO the average GG investor generally knows few details about GG’s picks from the technology perspective. Nonetheless it did get CUBE a lot of exposure. Something that will be invaluable once they start making headway with their new, slimmed down company. If anything, what GG did, makes CUBE even more of an undervalued investment. The average investor probably takes one look at a YTD stock chart and runs. But little do they know what transpired to bring the price from $110 level, down to it’s current $20/share level. And that is, they sold off a very large piece of the company. But the part they sold off, Divicom, was in danger. And as I have mentioned before, Divicom is what caused it’s acquirer, Harmonic, to blow up recently. But the stock price chart, I'm guessing, is what may keep a lot of investors from taking notice of the new CUBE. Hence it's floating around the $20/share level today (which translates to a $1.2 billion market cap).
Third, and most important, they are IMHO currently positioned very well to take advantage of the analog-digital conversion of all video entertainment mediums related to TV. They have done this by going after three key markets; DVD, STB, and CODEC.
VCD/DVD- Contributed 55% to Q100 revenues. It’s easy to understand their number one position in DVD chipsets. It’s because of their expertise in VCD (Video-CD a dying format used in China), transition them over to their lead in DVD silicon. But the downside is, the VCD sales are decreasing. So they have to make it up with growing DVD sales.
This is somewhat of a parallel situation that PMC-Sierra went through. They were a semi-designer(who had no foundry either), who formerly sold analog modem chips. But as that market died, they transitioned over to networking silicon.
Anyway, Umesh is secretive about what VCD contributes to their current top line. I wish I knew the breakdown between the two, but I don’t. My guess is VCD is high because Umesh doesn’t want to scare investors away. So this is the downside. Dying revenues on a current substantial source of revenues.
On the positive side, it does appear CUBE is number one in DVD chipsets. This year, it’s estimated there will be 8.5 million players will be sold. CUBE is well positioned to take advantage of this explosion in DVD players.
Their biggest competitors in this market comes from the companies that not only make the players, but their own silicon solutions as well. Umesh has said this is not such a good thing because a company like CUBE, can react much quicker to the market place. CUBE is, in essence, a design house. They own no chip foundry and own no DVD-player factory. They simply focus on the engineering aspect of silicon chipsets. Making them much more nimble to larger competitors. They sell their solutions to all the Asian firms wanting to get in on the DVD game. They are not limited like the, much larger, design/foundry/DVD manufacturer conglomerates.
Side Note: This is exactly what I thought it wasn’t a smart move for CUBE to buy Divicom in the first place. Divicom is a analog-digital TV conversion equipment specialist. So CUBE was basically buying one of their former customers. Well I wonder how this makes competitors of Divicom feel when CUBE tries to sell them pure silicon solutions(while owning a competitor)? Now that they divested of Divicom, CUBE can go look ALL their customers in the eye and say they don’t compete with them anymore. Must be a nice selling point.
Another thing to keep in mind regarding the DVD market is that today, it’s only playable. Not recordable. But in spite of this, sales of DVD players are strong. Once it’s recordable, then it will really be off to the races. I have no idea of the status of this major shift in DVD player market. But now that I see Blockbuster video stocking their shelves with DVD titles, I know the consumer doesn’t care and isn’t waiting. They are buying DVD players today in spite of them not being recordable.
STB- Contributed about 28% to CUBE’s revenues in Q100. CUBE is currently number three in this sector. The number one in the field is STMicroelectronics(formerly Thompson). Number two is Broadcom. The estimates call for 2.3 million STB to be sold in 2000. But IMHO, this may be on the low side. This is all tied into LMT discussions of the time frame to convert analog-digital in TV world.
As you may know, the FCC imposed June 2000 deadline for the mandatory availability of STB in consumer retail outlets has come and gone. I have no idea when STBs are going to be available to the retail market. Seems to me, it’s extremely difficult to predict. In the meantime, digital STB market will be service provider driven. There are glowing reports all over the place about STB market exploding, but I can find little hard evidence of this happening yet. So from the macro point of view, I’m still scratching my head on this one.
But there was a little buyout allowing CUBE to compete more effectively in the STB market. It’s their addition of TV-com. Supposedly this purchased company allows CUBE to offer not only front-end market, but back-end STB solutions as well. I’m not quite sure of it’s significance at this time.
CODEC- Now this entire CUBE market revenue classification is still slightly fuzzy to me. Umesh is clearly of the belief that CUBE is number one in Codec. Basically I take it to me, they lead in the professional services market. The consumer market for Codec is so nascent as to be meaningless today. And supposedly FWIW, they are the only current silicon supplier to have a SINGLE chip solution that both encodes and decodes content for the consumer marketplace.
But if we want to talk about the consumer market, Codec is required for one of three places. Hard disk storage of TV content, i.e., Tivo and Replay Networks applications for example. R-DVD(recordable) is another market which really does not exist yet. And finally, Digital VHS, which is almost non-existent today and I don’t know why they are spending their time on this market. I’m hoping Umesh drops it. Who wants to buy a tape VCR player today? I don’t care if it can do digital recording. But I’m thinking we should almost ignore the consumer Codec for now because it’s so hard to predict where it will go. But this still doesn’t mean there is not great potential for CUBE’s codec silicon.
IMHO, it’s greatest, short term growth will come from professional services marketplace. In other words, the behind the scenes stuff being purchased today by content providers and maybe the A-D equipment providers for the MSO marketplace. Overall, supposedly CUBE has a 6-12 month technology lead in Codec in general.
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Keep in mind, there are a some negatives that surfaced too while doing my DD on CUBE. One, as I pointed out already, is the declining VCD revenue stream out of China. It's still a big part of their top line. So DVD has to make up for it. Which apparently is going well. Umesh has stated DVD/STB/CODEC is growing at 40% per year. He said this on numerous occasions. So this hopefully, more than makes up the shortfall due to VCD
So there may be a lull of one, two, or even three quarters, while they ramp down VCD and ramp up DVD. But then, IMHO, it's off to the races IF they continue to execute. Sounds like to me Umesh realizes CUBE needs to be a silicon specialist and nothing else. I hope they don't pull another Divcom type acquisition.
Don't be fooled by their cash. I believe it will take all the cash they currently have to pay their tax bill. I don't think most investors realize this. So the balance sheet isn't going to look nearly as strong after they write the check to the IRS for $300 million(!). I believe they have already written the check in Q200 so they will show close to a zero cash balance for Q200 results. But on the bright side, they are cash flow positive. But to be honest, I haven't verified this for myself. Sounds like Umesh feels they have little need to go out and borrow funds, even after the whooping tax bill is paid. I'm not 100% certain I'm correct about the figures. I need to go back and verify the tax bill. But when I first read about it, I thought to myself that it's odd that it matches their current cash balance.
STB- Well the chips do no good if the MSOs don't roll out digital TV. So far between 2 and 3 million cable homes are digital. So that leaves 67 million or so, without digital boxes. Lot's of room for growth. But with 10 million customers signed up for DBS services, I'm wondering how much potential is left in that market. From what I understand, all 10 million customer are receiving digital content already. But DirectTV wants to ramp ALL of them up to higher services and maybe this is where there will be another round of spending by DirectTV to purchase CUBE chips? But I'm not even sure if DirectTV is or has been a customer of CUBE. Probably not. But I'm just concerned about the overall use of digital STB is my main point.
CODEC- I'm personally hoping this is where the big ramp up will come from. But if the NAB keeps resisting DTV rollouts with the MSOs, then this market may take longer to develop than planned. They seemed to be resisting quite strongly. This in spite of the FCC demands they speed it up. So much so, that the FCC sets fake deadlines that come and go, with no penalties. So I'm thinking this DTV via the MSO must be a serious stumbling block. But I believe the consumer Codec products may develop sooner. This being the writeable DVD, and Tivo type hardrive knockoffs. Maybe the Codec silicon market will be driven by the consumer products, then the professional codec market later.
I’m of the feeling that the new Cube Semiconductor has to be pretty much an un-discovered investment idea. Those are the kind I like. But then again, Maybe I’m plain wrong and although well-postitioned, Umesh will fall flat on the execution side. If so, position means nothing.
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I'll list out the competitors. But I wouldn't know how to rank them as competitors. Some I picked up in my own DD, others came from SEC filings. Here they are, broken down best I can figure out. Note that there are overlaps so some companies appear multiple times:
Consumer Electronic Competitors
-ESS Technology (sym:ESST)
-STMicroelectronics / formerly SGS-THOMSON Microelectronics / (sym:STM)
-Zoran (sym:ZRAN)
-Sony (sym:SNE)
-MEC (sym:??)
-Matsushita/Panasonic (sym:MC)
STB
-Broadcom (sym:BRCM)
-Conexant (sym:CNXT)
-LSI Logic (sym: LSI)
-STMicroelectronics (sym:STM)
-Texas Instruments (sym: TXN)
CODEC
Broadcast Encoder Competitors
-Intel (sym:INTC)
-AMD (sym:AMD)
-Motorola (sym:MOT)
-IBM (sym:IMB)
Communication Decoder Competitors
-STMicroelectronics (sym:STM)
-Phillips (sym:?)
Consumer CODEC Competitors
-I think it's too early?
-Wonder who sells to TIVO or ReplayTV?
Note: There is some kind of relationship between CUBE and Thomson Multimedia (sym:TMS). Apparently TMS owns 1% of CUBE. And they have the option to go to 3% if TMS hits purchase goals. Total mystery to me how this deal was worked. I thought TMS was connnected to STM. If so, then it was a hell of a coup for CUBE to take business away from STM.
I hope I covered the competitors well. Don't forget, in spite of all these, CUBE has the number one position in DVD and the CODEC market. And number three in STB. |
