TERN looking to turn and tumble?
from recent WSJ article
The points were
that DOCSIS 1.2 might not be adopted as a standard, and
even if it is, it is unlikely to be widely deployed.
It was also pointed out that S-CDMA addresses a shrinking
segment of the market, namely non 2-way HFC upgraded
cable systems.
This also hurts TERN;
Heard in California: Has Terayon Inflated the Prospects For Its Cable-Modem Technology?
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By Brenda L. Moore
Wall Street Journal (California Eddition)
December 29, 1999
Terayon Communication Systems made its name in the cable-modem industry with unique technology that cuts through interference on older lines.
Now, industry officials and at least one investor say the Santa Clara company is causing some static itself -- overstating its role in establishing a new cable-modem standard.
Terayon is telling investors and analysts that an industry board is virtually certain to adopt the company's proprietary designs for the evolving modem standard for high-speed Internet access over cable lines. That would give Terayon a leg up while competitors scramble to apply its technology to their own products.
But the next generation of standards that could have included Terayon's technology is actually on hold. Bearish investors and some players in the standard-setting process say that while the company has been invited to submit a prototype for possible inclusion in the future, there is no guarantee that the technology will ever be certified.
"It may not be necessary to see the kind of complexity one would find" in Terayon's solutions, says Stephen Dukes, a member of the committee that certifies modems and vice president for digital broadband technology at MediaOne Group, a Denver cable giant. Mr. Dukes says calls from confused investors and analysts have led him to believe Terayon has "hyped" its role.
Indeed, investors have driven Terayon up to $63 a share, nearly five times its initial-public-offering price of $13 in August 1998. But skeptics exist: As of mid-December, short sellers -- who hope to profit by selling borrowed stock and replacing it later at a lower price -- had sold short 16% of Terayon's float.
Chief Executive Zaki Rakib denies overstating Terayon's prospects and says he believes that if his company meets certain tests set up by the standards committee, its technology will become part of the standard. He says any feeling by committee members that Terayon is hyping its role is caused by "people who fear" the adoption of Terayon designs -- rivals "who feel that this is a threat."
The industry has grown more competitive as cable companies, aiming to become pervasive Internet providers, began demanding a standardized technology. They want modems consumers can use with any cable system instead of sifting through dozens of proprietary devices that may work on one setup but not another. So, the major cable operators formed a consortium, CableLabs, in Louisville, Colo., to develop universal specifications.
The standard adopted by CableLabs is called Docsis, for "data over cable service interface specification." Since March, CableLabs has certified 13 companies as meeting the standard -- and their products are about to overtake sales of proprietary modems in the U.S. and Canada. Next year, Docsis-based units are expected to account for 79% of all cable modems shipped in North America, according to Kinetic Strategies, a Phoenix research firm.
The first generation of Docsis, 1.0, is based on technology known as TDMA ("time division multiple access"). Terayon's homegrown products are based on its S-CDMA technology ("synchronous code division multiple access"). S-CDMA is considered effective on older cable lines that have interference, or "noise." Terayon received Docsis certification, but for a modem using another company's chips.
A year ago, the committee began considering a major upgrade to the standards, which was to be known as Docsis 1.2, and asked Terayon to help develop a new standard using both TDMA and S-CDMA.
But in September, the group suspended the 1.2 effort, opting instead to tweak a lesser 1.1 upgrade already in the works -- adding improvements but not including S-CDMA. Industry members say the change came because of disagreement on whether Terayon's technology was needed or would add significant costs for cable operators.
CableLabs did invite Terayon to continue work on an S-CDMA prototype. If the company submits a modem that is cost-competitive and interoperable with early Docsis-based modems, it's "very likely (but not certain) that we will include this in a future release of the Docsis specification," David Fellows, chairman of the Docsis certification board, wrote in a September letter to people involved in the process.
In conversations with investors and analysts, Terayon continues to call its future modem the Docsis 1.2 standard, even though CableLabs dropped the name and isn't currently considering standards using S-CDMA. According to a tape of a Dec. 1 investor conference call, Mr. Rakib cited Mr. Fellows's letter in saying that "if the prototype delivers based on the specifications that are pretty much frozen, then they will approve it and from there on the next step would be certification."
"We are absolutely on track to continue to finish the development of the 1.2 system that will incorporate S-CDMA," Mr. Rakib said. He says he expects to have a prototype in mid-2000.
During the company's third-quarter earnings conference call in October, Mr. Rakib said, "As soon as we're through with the prototype, the issues that CableLabs has asked us to prove, that is for all practical purposes the stamp of approval for 1.2."
Mr. Rakib says he believes those statements to be true. He says he considers the "but not certain" part of Mr. Fellows's letter "legal language," rather than intent. "If they felt that this process is not going to" lead to a Docsis standard, "why go into all this effort?" he asks. Mr. Rakib also says he sometimes continues to label a future Terayon modem Docsis 1.2 "for purposes of staying consistent," even though CableLabs dropped the label.
Such statements trouble committee member Mr. Dukes. Terayon has "taken the liberty of saying there was a Docsis 1.2 and it's {based on} S-CDMA and they've hyped that," he says. "I'm quite disturbed by it because I get phone calls every day from investors and analysts {asking} what's going on? Is this true?"
Rouzbeh Yassini, executive consultant to CableLabs and its former staff leader on the certification committee, says CableLabs has told Terayon "where the focus is. ... At this point, there is no footprint of S-CDMA in this technology. More importantly, we have not attached the Docsis name" to any new standards.
Mr. Fellows, the committee chairman, says he believes Terayon's prototype will be delivered and be adopted "toward the end of next year." Two of the committee's five voting members say they can see instances in which Terayon's technology might be preferable. The fourth member, Mr. Dukes, has doubts, and the fifth couldn't be reached for comment.
Even if Terayon's technology isn't adopted, Mr. Rakib says Docsis isn't "do or die for me." Recent acquisitions are aimed at transforming Terayon from a maker of modems and data-distribution hubs known as headends, into a company that offers a system to integrate voice, video and data services.
Lawrence Marcus, an analyst at Deutsche Bank Alex. Brown, which as BT Alex. Brown was an underwriter on Terayon's IPO, says the deals show "that Terayon is a systems, not just a modem, company." He rates it a "strong buy," his "best small-cap idea" right now.
Andy Schopick, research director at Nutmeg Securities, Westport, Conn., who informally follows Terayon, says the acquisitions show that Terayon realizes it "must have a bigger and broader strategy." But that, says Mr. Schopick, introduces "a further element of uncertainty." He says of Terayon, "It better" become part of the Docsis standard eventually, "otherwise they become isolated."
Terayon's sales have been strong -- up 149%, to $23.4 million, in the third quarter. The company is expected to beat analysts' fourth-quarter sales and earnings estimates, but hasn't yet turned a profit. Analysts say that could happen in late 2000. But modem prices are falling, to as low as $190 today from about $300 a year ago, according to Kinetic Strategies.
Sales have been fueled by big deals for modems and headends with customers including Canada's two largest cable operators, Rogers Communications and Shaw Communications; United Pan-Europe Communications of the Netherlands; and Japan's Sumitomo. Mr. Rakib says those sales confirm the strength of Terayon's technology, particularly overseas, where there is no set standard.
But bears point out that three of those customers (Rogers, Shaw and Sumitomo) are Terayon shareholders and benefited from the stock rise. The bears particularly note an agreement in which Terayon issued Rogers two warrants, one to purchase a million shares at $37 apiece, then about the stock's price, and the other for a million shares at $1 each. In exchange, Rogers agreed to help Terayon develop and test its voice-over-cable equipment for a year.
"Rogers got basically a gift" to encourage it to buy Terayon products, says Anton Wahlman, an analyst with Warburg Dillon Read in New York.
Any thoughts, Mr. Pink? |
