Positive News from today's Red Herring Online
The quiet cable play makes some noise
By Peter D. Henig
Red Herring Online
April 14, 1999
If high-speed Internet access over cable is so hot, how come so few investors have heard of Com21 (CMTO)? It's one of the leading global suppliers of modems, head-ends, and other equipment that cable communications operators use to provide broadband access.
Com21 went public in May 1998 and has performed well in the aftermarket, although not to the standard of some of the highest flying Internet-related IPOs. Currently trading at $30 per share (it priced at $12), Com21 has played second fiddle to the more aggressively marketed Terayon Communication Systems (TERN), which debuted in August 1998 at $13 per share and now trades in the mid-$50s. But analysts are warming to the market opportunity within Com21 and are quickly, albeit quietly, pumping up the stock.
"If someone held Terayon, I'd tell them to sell some of it and buy Com21," says Joel Achramowicz, senior equity analyst with Preferred Capital, a non-underwriter of Com21's IPO. "They have an excellent track record for network management software, already have quality-of-service levels, strong management, good R&D, and I think there's even more opportunity with the stock." He just raised his rating on the stock to Strong Buy.
Although digital subscriber line (DSL) technology for high-speed Internet access over phone lines has gained traction, cable-based Internet access still maintains a healthy lead in the broadband market.
There's plenty of business now, and in the future, for Com21 and Terayon. Forrester Research reports that 95 million U.S. homes -- 65 million of which are cable subscribers -- are currently passed by cable operators; 20 to 25 percent of the cable systems have already upgraded to two-way. Forrester predicts that by 2002, 60 million U.S. homes will be online. Sixteen million of online homes will have high-speed access, and 13 million of those will enjoy connectivity over cable for the "last mile." Outside the U.S., high-speed online users will total an additional 24 million.
Although Com21 CEO Pete Fenner calls it a big-player game, with companies like Siemens, Motorola (MOT), and 3Com (COMS) all interested in establishing a bigger presence in cable access equipment, the company still has a strong first-mover advantage. Its new modem technology works with any brand of head-end equipment installed at the cable plant, not just Com21's own equipment.
"Com21 has a product being tested at the cable labs right now which can guarantee quality of service, robust performance, and can be used by businesses for high-speed access, so they are farther ahead than Terayon," says Patti Reali, analyst with the Gartner Group/Dataquest.
A strong technology position counts for a lot in this field, even if the market valuation for Com21 still trades at a discount to Terayon. "If you look at the fundamental aspects of the companies, every aspect of Com21 is superior to Terayon," says Mr. Achramowicz. "Terayon has yet to submit a modem to the cable labs for testing, and therefore I think the market is putting the cart before the horse in terms of relative valuations."
Currently, Com21 has a market capitalization of $650.9 million, minus options and warrants, compared to Terayon's more robust $1.08 billion.
APPLES TO APPLES
Terayon's advantage right now is its high-profile deals, which give it a large installed base of 485 head-end units in the U.S., totaling 5.7 million homes passed. The head-end base is the benchmark for future potential modem sales -- interoperability notwithstanding -- and is one of the metrics used in the cable modem game.
According to its CEO Mr. Fenner, Com21 also has a large and growing footprint, with 3.6 million homes passed in the U.S. and 3.8 million passed in Europe. Mr. Fenner reports a 17 percent global market share in cable modems.
And although its financials still don't have it running in the black, the company's revenue growth has been strong. Mr. Fenner says he is currently comfortable with Credit Suisse First Boston's projections of $86 million in sales for 1999. This would be up significantly from $48 million in 1998 and $15 million in 1997.
Moreover, after raising an additional $30 to $40 million in a secondary offering, the company is now "in a good position to pick up some technology," according to Mr. Fenner. It can also invest further in the cable Internet access infrastructure, alongside its cable partners.
THE CABLE BUY
But the real value proposition within Com21 -- or within Terayon, for that matter -- is not how much it is worth right now, but rather how much it's worth to someone else. Rumors of a potential big contract for Com21 are flying around, and 3Com expressed interest in buying the company from the beginning. Clearly, a takeover is not out of the question.
"I think this enterprise is worth at least a billion dollars," says Mr. Achramowicz. "Lucent, Fujitsu, Alcatel, maybe even Cisco, are all potential buyers, and at $1 billion that would only be ten times revenue."
"You're dealing with a pure-play business, which is nice, but you've got some heavy hitters like Motorola and Nortel in there," says Mr. Achramowicz. "At the same time, those heavy hitters wants a presence in the business, and they see Com21 as a ripe target."
Shaw Communications and Cisco Systems (CSCO) already own 9 and 6 percent, respectively, of Terayon, and Seimens invested $5 million in Com21 prior to the IPO. Looks like the stars are lining up for the quiet cable modem player to start making some noise in the markets.
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