Opposite Ends of the Spectrum

While beleaguered U.S. MSO Charter Communications Inc. (Nasdaq: CHTR) is hoping to avoid bankruptcy by restructuring its massive $20 billion debt load, low-key cable industry supplier Vecima Networks Inc. (Toronto: VCM) reported another banner quarter and is eyeing a big stock buyback, believing its shares are significantly undervalued in the current bear market. (See Charter Seeking 'Financial Alternatives' .)

The news from Charter comes as no surprise. Two years ago the company moved, albeit unsuccessfully, to recapitalize. (See Charting a New Course .) While Charter has steadily improved its operating performance since then, the MSO’s balance sheet remains a disaster. The resignation of three directors from Charter’s board in as many months hasn’t helped instill confidence in the company.

Charter is now trading at less than 15 cents a share, yielding a market cap of less than $60 million dollars. Bundling Charter’s debt with that corporate pocket change means the MSO is valued at about $3,600 per subscriber.

While Charter serves less than 8 percent of U.S. cable subscribers, the company has racked up about 20 percent of the U.S. cable industry’s total debt. That’s a scary spread.

Indeed, in mid-December, Moody’s downgraded Charter’s already sub-investment-grade credit rating even further, noting the MSO “reflected a high probability of default.”

Charter, of course, is controlled by Microsoft Corp. (Nasdaq: MSFT)-made billionaire Paul Allen. He assembled Charter during a run of MSO acquisitions in the late 1990s, seeing the company as the centerpiece for his "wired world" strategy. While Allen owns only about 51 percent of Charter, he controls 90 percent of its voting power.

Before this year’s financial market collapse, Allen was worth $16 billion. At that point, he could have transferred half of Charter’s debt to one of his credit cards and still had plenty of dough in his back pocket. Alas, Charter shareholders and bondholders seem to be the ones that could end up paying the tab.

Charter has warned that without restructuring or raising new cash it will default on the $7 billion in debt due for repayment in the next five years. As an incentive to avoid a costly bankruptcy, Charter is trying to convince its creditors to swap debt for equity, or change the terms of their existing debt arrangements.

This is not without precedent. This fall, U.K. MSO Virgin Media Inc. (Nasdaq: VMED) successfully renegotiated much of its near-term debt obligation with creditors, providing the company with breathing room during the current credit crisis. (See Virgin Hopes to Get Credit.)

And now for something completely different
While financial doom and gloom is par for the course at Charter, consistently rosy results are the story at Vecima.

Those with elephantine memory will recall the story of tiny Canadian company Wavecom Electronics, which nearly a dozen years ago made its mark by becoming the key supplier of QAM upconverters for nascent Docsis cable modem termination system (CMTS) players, most notably, Cisco Systems Inc. (Nasdaq: CSCO). Wavecom rebranded itself as VCom and completed its IPO in 2005, changing its name to Vecima in 2006. Today, Vecima is still a key supply partner to Cisco, which remains the dominant CMTS player. (See Vecima, Cisco Enter CMTS Deal.)

Through the years, Vecima has continued to improve the density, integration, and performance of its digital cable edge products. Today, Vecima offers a high-density universal edge product that supports 128 QAMs in a 2-RU box. That’s a long way from its MA4000 platform, which supported a maximum of 10 QAMs in twice the space.

Vecima now also offers an MPEG edge decoder dubbed CableVista that can handle 24 NTSC/PAL channels in a 1-RU chassis, plus its VistaLynx GigE-to-QAM converter and MediaLynx IP-to-QAM gateway. In addition to its standalone products, Vecima sells OEM modules to key cable infrastructure suppliers like Cisco, Motorola Inc. (NYSE: MOT), and BigBand Networks Inc. (Nasdaq: BBND).

Over the past five years, Vecima has generated a 30 percent compounded annual growth rate (CAGR) for revenue and profits. The company broke the $100-million mark in annual sales for the first time in its 2008 fiscal year, which ended June 30. Fiscal year 2008 revenues totaled $120.6 million, up 29 percent from the prior year, with a 42 percent margin. Total annual product shipments climbed 62 percent, to more than 200,000 units, while the company’s headcount increased 16 percent, to 915 employees.

No wonder Vecima executives are bullish on the company’s prospects, even in the face of the broader economic downturn. Earlier this week, the company said it planned to acquire up to 2.4 percent of its issued and outstanding common shares, equal to 9.9 percent of the total public float, at prevailing market prices.

While Charter continues to teeter on the brink of solvency, Vecima is thriving by delivering the technology components that are making the “wired world” a reality.

— Michael Harris, Chief Analyst, Cable Digital News