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.
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.
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.
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.
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.
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.
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.
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.
"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."
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.
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.
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.
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.
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.
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.
"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.
"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.
"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."
terayon.com |
