Dark Cloud Over HFC
A run of bad news has turned an unflattering spotlight on the market for hybrid fiber coax (HFC) equipment and services. And investors are straining for glimpses of what's ahead.
HFC networks provide access to broadband services hosted on cable TV operator networks, which link fiber at the network head end with coaxial connections to customer homes and businesses at neighborhood hubs. HFC's become a focal point for optical investors, who view it as a key access element in emerging broadband networks. (See Last Mile Lexicon for a full explanation and diagram of HFC architecture.)
Growth's been good in this segment and it's predicted to get better: CIBC World Markets, for instance, says over 20 million subscribers worldwide will rely on HFC access by 2004 (most estimates say there are about 4 million now).
But lately, investors have been put off by a string of market mishaps. Here are the highlights:
- November 4: AT&T Broadband, a provider of HFC access services, announced it will stop ordering equipment through January 2001 in an effort to balance its books (see Market Digests AT&T Broadband News). The news had a domino effect on a range of key suppliers to AT&T Broadband, including Antec (Nasdaq: ANTC) and Harmonic Inc. (Nasdaq: HLIT).
- December 15: Antec, which makes HFC gear, announced that due to its reliance on AT&T Broadband's business, it will have to lower guidance for its fourth quarter: Now analysts like CIBC expect it to show a net loss of about $0.13 per share on revenues of $180 million instead of a gain of $0.14 on revenues of about $250 million. Antec also revealed its failure to get the loan it requires to complete a deal with Nortel Networks Corp. (NYSE/Toronto: NT) to form Arris Interactive (see Nortel's Broadband Cable Play).
- December 18: Terayon Communication Systems Inc. (Nasdaq: TERN), another HFC supplier, warned its fourth-quarter earnings will reflect a $34 million to $36 million loss, due to canceled orders and the discontinuation of one of its cable modem products.
Part of the problem is out of the hands of the HFC vendors and service providers. "Investors are kind of depressed. Major companies are suffering a funding and confidence problem," says analyst Robert Nelson with Utendahl Capital Partners (no Web site yet). He says cable access is a more practical and cost effective alternative than some other access methods such as DSL (digital subscriber line). But it's taking a bit of time to evolve -- time that he says investors aren't willing to grant. As a result, he says HFC service providers and suppliers are "buffeted on one side by changes in investor excitement and on the other by the need for a strategy that makes sense."
Other analysts say some HFC companies are suffering from a market that's taking off. "It's not the industry. The standardization of cable modems [via DOCSIS specs -- see Last Mile Lexicon] has opened up the market. There are over 30 vendors now providing cable modem equipment," says Alan Bezoza, access analyst with CIBC. "There are also a lot more customers. The market's tougher."
Some problems are company-specific. About Monday's Terayon announcement, for instance, "I think this has as much to do with Terayon as the market itself," says Tim Savageaux, infrastructure analyst at W.R. Hambrecht & Co.. It looks to him as though Terayon customers have either stockpiled products over time or are turning to other suppliers -- or both.
Some analysts see the market droop in HFC stocks as an opportunity. "We find the Antec shares a good value at these depressed levels and reiterate our Buy rating on the shares," wrote Jim Jungjohann and colleagues from CIBC in a note yesterday.
In trading early today, Antec's shares were selling at $8.03. Harmonic's had dropped nearly 11 percent and were trading at $7.69. Terayon's had fallen about 7 percent and were trading at $4.38. AT&T Broadband is not yet tracked separately from its parent company, although that's expected to happen sometime in 2001 (see Terawave Intros PON Suite).
-- Mary Jander, senior editor, Light Reading http://www.lightreading.com