Upgrade Specialist Vyyo Gets Downgraded
Wahlman downgraded Vyyo from Buy to Accumulate, and lowered its 12-month price target from $10 to $6. Vyyo shares were down 27 cents (5.68%) to $4.48 in early trading Tuesday.
During its earnings call last Thursday (Nov. 8), the company said it was closing in on two master purchase agreements with cable operators for Vyyo's 3 GHz "passives," a "future-proofing" ingredient necessary before operators deploy the active components and are able to use the fresh bandwidth for symmetrical, business-class services, or for residential, high-speed data and high-definition television (HDTV) offerings.
Vyyo said the market opportunity in the U.S. for the passive components alone is worth about $100 million per year. Vyyo's cable revenues for the third quarter were just $1 million, but up from $326,000 in the previous period. (See Vyyo Seeks 3 GHz Breakthrough.)
As for bandwidth alternatives, it appears that even one of Vyyo's key customers, Cox Communications Inc. , is deploying a different set of technologies to expand bandwidth in the nearer term. While Cox has installed Vyyo's 3 GHz technology in 16 of its 30 markets, primarily to support business services, the MSO is looking to upgrade to 1 GHz on the residential front, likely using gear from C-COR Corp. (Nasdaq: CCBL), Scientific Atlanta , and possibly other vendors. The closely held Atlanta-based MSO reportedly has already upgraded to 1 GHz in 70 percent of its markets, and expects to do so across the board. (See Cox Makes 1 GHz Moves .)
Other operators are also looking to other bandwidth "tools" before they consider spectrum overlays, including switched digital video (SDV), node splits, and more efficient encoding schemes. Comcast Corp. (Nasdaq: CMCSA, CMCSK), which is testing Vyyo's technology, has already said it plans to use an "improved" MPEG-2 compression technique to conserve as much as 50 percent of its capacity without affecting video quality. Imagine Communications , a startup based in the San Diego area, is considered a likely candidate for that portion of Comcast's business. (See Comcast Ready to Reclaim Bandwidth.)
As for the company's balance sheet, Wahlman says Vyyo may have to raise addition funds by the middle of 2008, noting an estimated fourth-quarter cash burn of $6 million, and $15 million for 2008. Vyyo ended the third quarter with $19.2 million in cash, cash equivalents, and short-term investments.
Wahlan also cited concern about Vyyo's relationship with StarHub of Singapore. StarHub is proposing a solution that includes Vyyo's technology for a government-subsidized network upgrade initiative, but the project has been delayed as much as four months, and there's no guarantee that StarHub will end up winning the bid. (See StarHub Goes Out-of-Band With Vyyo.)
Despite those concerns, Vyyo could be well positioned if at least two of its brightest stars align.
"The big picture here is that the combination of StarHub and Cox looks like it has at least a shot at causing other cable TV operators to walk down the 3 GHz path with Vyyo in coming quarters, leading to a significant revenue ramp in 2008 and beyond," Wahlman noted. "However, our previous revenue estimates were simply too optimistic as to the timing and near-term magnitude of this ramp."
— Jeff Baumgartner, Site Editor, Cable Digital News
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