After listening to Terayon's conference call this week, I decided to go back over their SEC filings.
The just-reported quarter hasn't been filed. However, from the prior quarter I found a description of their DOCSIS efforts:
>>>>>
The market for broadband access products and services is characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. A significant element of our strategy is to advance industry standards and to extend our technology leadership and achieve rapid time to market. In November 1998, we were selected by CableLabs to co-author DOCSIS 1.2, an enhanced version of the DOSCIS cable modem specification based in part on our S-CDMA technology. Since then CableLabs has reaffirmed its intention to add advanced upstream physical layer (PHY) capabilities to the DOCSIS
specifications as enhancements; however, CableLabs has modified its plans for how the specifications will be created. In September 1999, CableLabs indicated that it wants to proceed with the advanced PHY work on two parallel tracks; one for the inclusion ofTerayon S-CDMA technology, as proposed by Terayon, and one for the inclusionof Advanced TDMA technology, as proposed by other companies.
CableLabs wants work to proceed in parallel on these two complementary technologies, but the intention remains to include both as operating modes in a future version of the DOCSIS specification, consistent with the original plans for DOCSIS 1.2. As part of the new plan to add advanced physical layer capabilities to DOCSIS, CableLabs has dropped reference to DOCSIS 1.2, the name given in November 1998 by CableLabs to the specification that includes advanced PHY. In order to advance the standardization of cable modem technology, we have given CableLabs assurances that we will contribute some aspects of our S-CDMA technology to the DOCSIS intellectual property pool upon completion and acceptance of a specification that includes our S-CDMA technology. We intend to develop future products that are standards compliant and are actively participating in the development of additional industry standards. As part of our efforts to offer standards compliant products we introduced a CableLabs certified DOCSIS 1.0 cable modem to the market in the third quarter of 1999.
>>>>>
[From another part of the document:]
<<<<
CableLabs has requested that we submit a prototype of a DOCSIS system that incorporates an S-CDMA advanced PHY capability for testing. CableLabs has stated that if the testing of this prototype reveals that the S-CDMA advanced
PHY works as claimed, and if the costs for adding S-CDMA to DOCSIS products are in line with estimates, then it is highly likely that it will add S-CDMA advanced PHY capabilities to a future version of the DOCSIS specification.
There can be no guarantee that the prototype we submit to CableLabs will demonstrate the level of performance that CableLabs seeks, or, that even if it does meet performance expectations that CableLabs will incorporate the technology into a future version of DOCSIS specifications. In addition, if CableLabs does proceed to include S-CDMA in a future DOCSIS specification, there can be no guarantee that the DOCSIS S-CDMA specification will be the same as the specification we incorporated in the prototype submitted for tests.
If CableLabs does not adopt an enhancement to the DOCSIS specifications based on S-CDMA technology, or if it adopts a version that is substantially different than what we propose, it is likely our future revenues and operating
results will be adversely affected. It may also cause us to incur substantial additional research and development expenditures to adapt our specifications to the version adopted by CableLabs.
CableLabs has not established a schedule for adding either the S-CDMA or Advanced TDMA capabilities to the DOCSIS specifications; although, CableLabs has indicated that they want to proceed expeditiously. Delays in the establishment of a firm specification for S-CDMA in DOCSIS could harm our plans to sell DOCSIS compatible modems and headend equipment. In particular, if the final DOCSIS S-CMDA specification is not approved prior to the time when the company is ready to ship DOCSIS products with S-CDMA features included, then we could face two choices. The first would be to delay the introduction of those products until the DOCSIS S-CDMA specification is released. The second would be to introduce the S-CDMA features as proprietary enhancements on top of a standard DOCSIS product. Either one of the choices could harm revenues and operating results.
<<<<<
In looking at my notes from the conference call, one analyst asked for an update on DOCSIS, saying, "Could you highlight current status on 1.1, timing, and success in Europe where customers are proprietary." The CEO answered, "We'll have prototype by mid year and approved by end of year. Make no mistake this is advanced certification that includes S-CDMA."
Based on the SEC documents, there is now no such animal as 1.2, so can I conclude Terayon is going for 1.1 certification based on its S-CDMA? Does CableLabs have to re-invent 1.1 to accomodate S-CDMA?
IN their SEC filing they mentioned introducing a DOCSIS modem in Q3 1999. This is the OEM phantom from Toshiba. In conversation with a former TERN manager this afternoon, I learned they are not selling any Toshiba modems as they would in fact be re-sellers and the margins are so tight they wouldn't make a profit.
TERN alludes to this possibility in the above SEC document.
Now, if they don't have a DOCSIS product of their own and they can't make money re-selling Toshiba's, where will next quarter's revenues originate?
The company refused to break-out customers or products, so there's no way to tell if their current proprietary products are slipping. My contact suggested they were and said this is why they wouldn't discuss details.
During the conference call, someone asked about their not meeting specifications from Rogers and having to have the conditions waived in order to recognize revenue. The CEO said they had, indeed, received a waiver and were able to book revs as needed. "Would no revs have been recognized without that exception," the analyst asked. "No. . . we would have been able to recognize but wanted to be in compliance with Rogers and is why we asked for an exception," Rakib said.
This clearly shows Rogers is pushing for DOCSIS products indicated in their partnership agreement.
From SEC filing:
<<<
In March 1999, we entered into a one-year Product Development Assistance Agreement with Rogers Communications Inc. Under the terms of the Development Agreement, Rogers will assist us with the characterization and testing of our subscriber-end and head-end voice-over-cable equipment. In addition, Rogers will provide us with technology to assist us with our efforts to develop high quality,field proven technology solutions that are DOCSIS-compliant and packetcable-compliant. The Development Agreement has a term of one year. In consideration of Rogers entering into the Development Agreement, we issued Rogers two fully vested and non-forfeitable warrants, each to purchase 1,000,000 shares of common stock. One warrant has an exercise price of $1.00 per share and one warrant has an exercise price of $37.00 per share.The warrants may be exercised at any time in full or in part through June30, 2000. The fair value of the two warrants is estimated to be approximately $45,000,000 and will result in a noncash charge included in operations over the one-year term of the Development Agreement. As a result of the Development Agreement, our results for the three months ended June 30, 1999 include a noncash charge of $11.2 million and our results forthe six months ended June 30, 1999 include a noncash charge of $12.8million.
<<<<<
The agreement ends in March 2000 and based on the comments regarding specifications not being met, I'm wondering what will happen next. Again according to my source, the company will be compelled to continue acquiring in order to hide what's really happening with their core technology.
Okay, enough on DOCSIS. Would anyone like to discuss Terayon's warrants?
BTW, based on current 10-Qs, I'm guessing TERN will have to break out some of the information they refused on the conference call.
I'll be watching. . .
Pat |
