BigBand Looks to Resolve BigProblems
After BigBand shares took a big hit in after-hours trading Thursday, the bleeding continued the day after. Shares reached $6.42 each, down 29.22 percent or $2.65, in mid-day trading Friday. That's in stark contrast to its strong debut as a public company in mid-March, and early May when the stock closed as high as $21.43. (See BigBand IPO: Boing!.)
Jefferies & Co. Inc. downgraded BigBand to "Hold," reducing 2007 revenue estimates to $181.7 million, from $224.6 million.
"We recommend that investors stay on the sidelines," Jefferies analyst George Notter said, in a research note.
Morgan Keegan & Company Inc. analyst Simon Leopold downgraded the stock to "Market Perform, forecasting that the stock will settle to a potential fair value range of $7.54 to $8.90.
"BigBand has been a big disappointment for us. We think the company has a cool product in a great market segment, but executing in an increasingly competitive and demanding environment has proven a greater challenge than we appreciated," he wrote.
BigBand Chairman and CEO Amir Bassan-Eskenazi addressed the confluence of factors leading to slashed revenues for the third quarter on a conference call with reporters and analysts late Thursday afternoon.
He reiterated two root causes: "transition issues" with BigBand's video business, and "softness" of its data business, which is led by the Cuda cable modem termination system (CMTS), a product BigBand picked up in 2004 from ADC (Nasdaq: ADCT). (See BigBand Buys ADC's IP Cable Unit.)
As for the video business, "telco TV revenue is slowing down as a major customer works through normal cycle of inventory depletion," Bassan-Eskenazi said, likely referencing Verizon Communications Inc. (NYSE: VZ), which uses BigBand's Broadband Multimedia-Service Router (BMR) to convert RF- and IP-based video traffic, and represented more than 40 percent of sales in the first half of 2007.
This greater than expected slowdown "may take more than a few quarters to work through," he said.
Although BigBand is considered the deployment leader of SDV technologies in the cable arena, the company had slower than expected revenue growth in the third quarter, citing "integration challenges" and unexpected, higher levels of software customization work.
ThinkEquity LLC analyst Anton Wahlman said unrecognized SDV revenue may be tied to delays in receiving the final 20 percent that comes in after full customer acceptance.
Bassan-Eskenazi cast aside a suggestion that his company has had trouble integrating on the Motorola Inc. (NYSE: MOT) cable platform. Save for a recent SDV installation with Cox Communications Inc. , the vast majority of BigBand's deployments have been on Scientific Atlanta -based cable systems. (See Cox Flips BigBand's DV Switch .)
Whatever the case, the issues won't be ironed out overnight. "We expect these integration challenges to persist for a few quarters," Bassan-Eskenazi said.
Analysts also peppered BigBand with questions about the fate of its CMTS, asking whether it made financial sense to shut it down and cut the losses. Last month, the company confirmed it was not mothballing the CMTS, but acknowledged it experienced a "slight reduction" in headcount at its Westborough, Mass., unit. However, it hired about the same number for its China operation. (See BigBand Reduces CMTS Staff and BigBand Not Abandoning CMTS .)
When pressed, Bassan-Eskanazi was cryptic about the fate of the CMTS unit. "I'm not going to comment on this," he said, adding that making a decision now would be premature, and that the company could share more details in November when it reports third quarter results. He added that BigBand still believes that both high-speed data and video will ride on networks and remain an integral requirement of cable operators.
At the same time, the company did confirm it has lost some CMTS deals due in part to more aggressive pricing from competitors. Arris Group Inc. (Nasdaq: ARRS), considered one of the CMTS players using that tactic, has said it expects to boost its share from about 25 percent to 33 percent by 2010.
Leopold said his checks confirm that Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC) are replacing older BigBand CMTS gear with Arris equipment in the newly acquired Adelphia Communications cable systems. Notter, who puts BigBand's CMTS share at just 3 percent, said some of that lost business may have gone to Motorola and Cisco Systems Inc. (Nasdaq: CSCO), the market leader.
"In summary, we did not execute well in Q3, and we have work to do," Bassan-Eskenazi said.
— Jeff Baumgartner, Site Editor, Cable Digital News