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Did Calix Get a Bargain on Occam?

A 46 percent premium for Occam Networks Inc. (Nasdaq: OCNW) sounds hefty, but some analysts think it might have been a good deal for Calix Inc. (NYSE: CALX).

Between upcoming American Recovery and Reinvestment Act (ARRA) windfalls and a general feeling that Occam was undervalued, there's even some belief that Occam should have held out for more. (See Calix CEO Claims Occam for Its Ethernet and Calix-Occam Surprises.)

"They were paying for what they think is going to be Occam's share from flow-through from the stimulus project," says Jeff Heynen, an analyst with Infonetics Research Inc. "That isn't going to be overnight. It could be out to 2013. In my back-of-the-envelope calculation, Occam could gain $100 million through stimulus projects."

Calix's $171 million cash and stock offer on Thursday was about 46 percent higher than Occam's previous closing level. But it doesn't look so large when you consider analysts expect Occam to report revenues of about $113 million for 2011, according to Thomson Financial .

A combined Calix/Occam would continue to compete with Adtran Inc. (Nasdaq: ADTN), but analysts don't expect that to change Adtran's life much.

Some, such as Vince Vittore of Yankee Group Research Inc. , didn't feel compelled to get excited about the deal at all: "I got a message from someone on Facebook saying, 'This is huge!' I said, 'Why?' " Vittore says.

Vittore contends Occam serves mostly Tier 3 providers, separate from the Tier 2 market where Adtran and Calix duke it out.

It's possible that the competition for some noteworthy contracts could be affected. Calix supplies CenturyLink Inc. (NYSE: CTL), but not Qwest Communications International Inc. (NYSE: Q). As those companies merge, some more heft could make Calix "a little bit more of a threat" to win that business, says Mike Genovese, an analyst with Soleil Securities Group Inc. Genovese follows Adtran, but not Calix or Occam, and he doesn't consider the Calix/Occam deal to be all that monumental. (See Qwest, CenturyLink Plan $22.4B Marriage.)

Nor would the companies' combined Recovery Act work have much impact on Adtran. "Market share changes in that Tier 3 space are hard to come by," Infonetics' Heynen says. "Maybe they're replacing old Alcatel Litespans or Lucent Stingers and stuff, but it's not like a Tier 3 gets a stimulus award and says, 'We're going to swap out Adtran.' "

— Craig Matsumoto, West Coast Editor, Light Reading

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OSXman 12/5/2012 | 4:23:26 PM
re: Did Calix Get a Bargain on Occam?

Was your question serious or was it rhetorical?  Calix got the bargain of a lifetime and Occam's board of directors was, once again, asleep at the wheel. 


There are some large shareholders in Occam who aren't happy, and I don't consider this story to be over. 

Toad680 12/5/2012 | 4:23:25 PM
re: Did Calix Get a Bargain on Occam?

I couldn't agree more.  By my count known Occam customers have won over $600 million in stimulus awards.  That's $100-120 million in revenue to Occam alone.  There are many unknown Occam customers, as well as stimulus winners without incumbent suppliers for access gear.  So stimulus revenues are likely to be much higher.  And all of those middle mile projects will have access networks built off of them.


The headline buyout price reads $171 million, but really, Occam has $44 million in net cash.  So they are paying $125-130 million for Occam.  That is less than 1x Jessup's forward revenue estimate.  And revenue will grow materially from there in 2012.  It really is the deal of a lifetime for Calix if they get it at this price.


And they will be lucky to close it too.  The rumors that I have been hearing are that Occam is stealing their business at TDS.  Calix needs to buy Occam because they can't compete with both Adran and Occam.


I am not a happy shareholder and think the deal should be valued a lot higher.

OSXman 12/5/2012 | 4:23:25 PM
re: Did Calix Get a Bargain on Occam?

You comment that analyst estimates are for about $114mm in revenues for 2011.  That's not a good figure.


There are only two analysts who follow Occam to the point of having estimates.  Jesup & Lamont had an estimate of $140mm for 2011 and their analyst is more up to speed.  The $114mm figure was held by Jefferies and is a stale estiamte that dates back to August of this year.  Recently, Jefferies has opined that the stimulus effect will be larger and sooner so if they were not so busy stealing Occam from shareholders, the revised estimate would certainly be higher.

googol_byte 12/5/2012 | 4:23:23 PM
re: Did Calix Get a Bargain on Occam?

How could this be a "deal of a lifetime"?  Even at less than 1X revenue, it is still a huge multiple of EARNINGS.  Even with the "stimulus", the company is still losing money and EBITDA negative.  The company only has 40% gross margins in the best of times, and sells to small tier 3 carriers.  Investors should be thankful that someone offered a 40% premium for this dog.


 


Calix would be better suited to focus on the mobile market and make a strategic acquisition that gets them into adjacent markets, rather than consolidate the low end access market.

DCITDave 12/5/2012 | 4:23:23 PM
re: Did Calix Get a Bargain on Occam?

I guess i don't get how this works: "By my count known Occam customers have won over $600 million in stimulus awards.  That's $100-120 million in revenue to Occam alone."


Does Occam usually get about 1/3 of what its customers win in the broadband stimulus grants? Management guidance on the stimulus was pretty vague on the last conf call so I'm trying to figure how so many see so much upside for Occam.

Toad680 12/5/2012 | 4:23:23 PM
re: Did Calix Get a Bargain on Occam?

Even under the most conservative assumption of 10%, $650 million of awards have been won by disclosed Occam customers.  So that would be an incremental $65 million in revenue to Occam.


There are customers that have won awards that are not publicly known.  Occam is also in RFPs for many projects that don't have encumbant vendors.  I have actually heard that they would be getting a big crack at the awards that TDS won.  Although Bob and Carl seemed to deny this on the call.  It is just rumor.


In any case, it is hard to see Occam's incremental revenue below $100 million.  And if you use more reasonable assumptions, you get to numbers very well north of that--especially if you consider the additinoal business that the middle mile projects will ultimately result in.


The industry has also been talking about a lul in spending ahead of the stimulus awards, so you could also build in some type of normalization of spending patterns as the final awards are announced.


In any case, Bob has described the stimulus as a once in a career opportunity for Occam.  I am shocked that anyone would sell the company before that even begins to play out...  Expecally at under 1x revenue.


Price is just too low on this one.

Toad680 12/5/2012 | 4:23:23 PM
re: Did Calix Get a Bargain on Occam?

A couple of quarters back, Bob said on their call that their gear earned 10-30% of network spend, depending upon network type, etc.  They have become a little more conservative as the stimulus has gotten closer and said at least 10-15%.


Andrew Schmitt, before joining Infonetics, had a piece published that was an analysis of Fairpoint's deployments plans and the revenue to Occam.  He came up with a range in that piece, but the midpoint was 17.5%.


Industry consultants that I have heard from think the number is in the low 20% range and they use 20% in their projections.

paolo.franzoi 12/5/2012 | 4:23:22 PM
re: Did Calix Get a Bargain on Occam?

 


One cautionary note about the Stimulus.


In the long term, this represents a huge challenge for Occam and to a lesser extent Calix.  The stimulus money will not grow the overall market.  All it is going to do is move spending up.  So, what you could hope for is some short to medium term revenue boosts and then a revenue decline.


Why decline?  Well, once the money is spent and the plant modernized it does not get done again.


seven


Edit:  1 thing to add.  Your math on Occam customers is flawed.  The only EXCLUSIVE Occam customer is Fairpoint.  The rest have some Occam product and products from other vendors.  So before you start counting money divide the number by the percentage to be spent on Access Products THEN estimate whether Occam will win the bid.


 

OSXman 12/5/2012 | 4:23:22 PM
re: Did Calix Get a Bargain on Occam?

It is a huge multiple of historical earnings and a low multiple of future earnings and cash flow--and that's what counts. 


As for Calix, their historical financials are much ulgier than Occam's.  Occam has done a good job of staying near cash flow breakeven.  Calix has burned through a LOT of cash. 

paolo.franzoi 12/5/2012 | 4:23:21 PM
re: Did Calix Get a Bargain on Occam?

 


Okay, Toad...you are a 2000 line phone company.  All 2000 lines have GPON installed.


What do you do?


The equipment market in the small carriers is in essence limited by installing the maximum technology on every line.  Here is my suggestion if you really think there is a huge market increase about to occur.  Go back and look at AFCs revenues and add in Next Levels Revenues circa say 2002.  Now compare that to the sum of Calix and Occam.  You will see that these numbers are not greatly different.


Basically, it is possible to build a nice little business in this space.  Not one that anyone cares about acquiring or has long term high growth, but a nice profitable little business if its well managed (see AFC and Adtran).  It is possible to lose money hand over fist (see Occam and Calix).


seven


 

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