I think this is the article your referenced (posted on the PAIR thread; theStreet.com is a restricted site, so not available to some of us here):
Phone Giants Aware of the Cable Challenge
By Kevin Petrie
Staff Reporter
03/18/99 03:19 PM ET
In the rush to bring fast Internet access to the masses, the Baby Bells will need big help
if they are ever going to beat back the cable companies.
Their best weapon might just be Aware (AWRE:Nasdaq), a 77-person company in
Bedford, Mass., that designs and licenses software that permits high-speed access over
copper telephone lines.
When used in modems or at a phone company's central office, Aware's technology
enables copper-wire networks to deliver data at rates that are more than 25 times faster
than 56-kilobit modems. The key is that you can still use your boring old phone lines
without disrupting phone service on the wire. Aware's technology, which is simpler and
faster than earlier incarnations of digital subscriber line technology, adheres to a
standard called G.Lite, approved initially by the International Telecommunications Union
in October. The ITU is expected to ratify the standard in June.
Among the well-heeled partners to which Aware licenses its software is Lucent
(LU:NYSE), which uses the software in chipsets that are built into Compaq's
(CPQ:NYSE) new Presario 5100c Series Internet PCs and 5600 Series PCs for home
use. Compaq began shipping those computers in November.
The challenge for companies that derive their revenue from royalties -- and there aren't
many in the tech sector -- is that they sometimes have trouble collecting. Consider
Mountain View, Calif.-based Rambus (RMBS:Nasdaq), whose memory-chip
technology sparked a skirmish between Intel (INTC:Nasdaq) and Micron
(MU:NYSE), putting Rambus' royalty stream in doubt. There are still rumblings of
dissent among memory-chip makers, even though Intel has given its blessing to Rambus.
Home Is Where the Cable Modem Is
Baby Bells follow cable modems into the home
Subscribers 1998 actual 1999 est. 2002 est.
Cable modems 400,000 1 million 4.3 million
Consumer DSL
(includes g.lite) 25,000 250,000 2.7 million
Total subscribers 425,000 1.25 million 7 million
Source: Yankee Group
License companies are also several steps removed from their end customers, and their
growth depends on how quickly their customers expand sales efforts.
"It means that your operating model is volatile," says Philip Coburn, senior vice
president with New York money manager Lynch & Mayer. He declined to state his
firm's holdings, but in the most recent quarter, Technimetrics doesn't list Lynch & Mayer
as a holder of Aware. The good news for Aware is that it has minimal sales costs, and
thus license revenue goes straight to the bottom line.
Aware has spread its technology among numerous customers, including Siemens
(SMAWY:Nasdaq ADR) and 3Com (COMS:Nasdaq). It typically collects payments
45 days after the close of the customer's quarter. "We know what our royalty revenue
will be long before [our own] quarter ends," says CFO Richard Moberg. Analysts
estimate that royalties will swell from one-quarter of revenue this year to one-half in
2000. The other revenue stream is generated by tailoring its software for individual
customers.
Aware turned a profit of $575,000, or 3 cents a share, on revenue of $4 million in the
fourth quarter, reversing a year-earlier loss of $1.8 million on revenue of $1.8 million.
Analyst Charles Pluckhahn with Stephens, an investment bank based in Little Rock,
Ark., predicts gross margins will jump to 84% this year from 55% last quarter, and
operating margins will increase to 22% from 6%. Stephens has no underwriting
relationship with Aware.
Aware might just achieve the success that has so far eluded PairGain (PAIR:Nasdaq),
an older DSL supplier whose stock is down 75% since early 1997. PairGain sells to
Baby Bells but has grappled with severe price competition from rivals like Adtran
(ADTN:Nasdaq). PairGain sales were flat last year, and profits fell 9%, excluding
one-time items. The company is also developing G.Lite products, but is lagging behind
Aware and will not ship until next month.
The Parisian telecom supplier Alcatel (ALA:NYSE ADR) does have a serious hold on
phone companies' central offices, according to research firm Ryan Hankin Kent. But
Aware has more of an advantage with consumer modems, says analyst Claude Romans.
Of course, the Baby Bells have broken many Internet promises in the past. In August
1997, for example, U S West (USW:NYSE) said it hoped to sign 100,000 ADSL
subscribers in 1998. It changed its technology plans midstream and finished 1998 with
only 25,000 subscribers.
One reason is that the Bells are trying to avoid cannibalizing their lucrative sales of T1
data lines to businesses. Aware's Moberg explains that a T1 line can carry 1.5 megabits
of data downstream and cost anywhere from $800 to $2,500 per month. Aware's
G.Lite will match that performance but will cost only $50 to $100 per month.
This time it's different, the thinking goes, because Aware's G.Lite makes life simpler for
the Bells. Rather than visiting each home or business, a phone technician can simply
install the technology in its central offices. Another spur is new competition from cable
modems, promoted in particular by AT&T (T:NYSE) and its recently acquired TCI.
About 400,000 customers now use cable modems, according to estimates from Yankee
Group.
Bell Atlantic (BEL:NYSE) is testing G.Lite in Manhattan now and hopes to have ADSL
available for 10 million customers by year-end. It hasn't selected a vendor yet. SBC
(SBC:NYSE) and America Online (AOL:NYSE) have paired up to provide ADSL,
including G.Lite.
At least with Aware's technology, the Bells might have a chance against cable
companies. |
