Earnings reports

Terayon Sees Winter Slump

Terayon Communication Systems Inc. says its first-quarter revenues will slump while its litigation, consulting, and accounting fees will remain high, and its steady losses will continue for at least another quarter.

These revelations prompted three Wall Street analysts to cut their earnings estimates and share price targets for Terayon, which is widely considered a prime takeover candidate.

"We continue to have questions about Terayon's longer-term outlook as a standalone entity," wrote George Notter, a senior research analyst for Jefferies & Company Inc.

The latest financial disclosures could make Terayon a less attractive company to buy or prompt some would-be suitors to pull out of the current three-way bidding contest among Motorola Inc. (NYSE: MOT), Cisco Systems Inc. (Nasdaq: CSCO), and Harmonic Inc. (Nasdaq: HLIT). At the very least, the fresh filings may well decrease the sale price for the financially struggling firm.

Terayon reported revenues of $17.7 million for the fourth quarter, down 42 percent from $30.5 million in the year-ago period but in line with its earlier estimates and analysts' latest expectations. The company's flagship digital video solutions unit accounted for the lion's share of that total, generating $16.3 million in revenue, down 20 percent from $20.3 million a year earlier.

The Silicon Valley firm registered a net loss of $4.6 million for the fall quarter, wider than the $3.1 million loss that it posted in fall 2005. Despite an overall reduction in operating expenses, the company blamed the bigger loss largely on higher than expected legal, consulting, and audit fees associated with its accounting problems and shareholder lawsuits.

For the full year, Terayon reported revenues of $76.4 million, down 14 percent from $90.7 million in 2005. But the company lost just $3.3 million in 2006, greatly narrowing its 2005 loss of $27.0 million, as it cut its overall operating expenses and pulled out of such lower-margin businesses as cable modems and cable modem termination systems (CMTSs).

Terayon's first-quarter outlook is bleak. Company executives said they expect to report a larger net loss of $7.5 million to $10.0 million for the winter quarter because of slumping digital video product revenues and continued high legal, consulting, and audit fees.

"We saw cable operators pull in a number of projects in the fourth quarter from the first quarter," said Terayon CEO Jerry Chase, estimating that this acceleration "drained" about $3.0 million to $3.5 million worth of business from the pipeline. As a result, the company expects overall revenues of $10.5 million to $12.5 million for the first quarter, much lower than Wall Street's initial estimates.

Terayon officials also expect to rack up another $5.0 million in legal and accounting expenses for the first quarter, after recording significant fees in previous quarters. But they expect these costs to drop sharply in the second quarter as they conclude the lengthy financial restatement process.

"The bags have been packed," said Terayon CFO Mark Richman, referring to the lawyers, auditors, and consultants. "They're not here anymore."

Having landed their first big telco customer last year, Terayon executives think they can sign up other large phone companies in 2007. Chase said he's looking to boost the telco-driven share of the company's revenues to 30 percent to 35 percent by the end of the year, up from 20 percent in the fourth quarter. "We believe we'll see this telco beachhead expand in 2007," he said.

— Alan Breznick, Site Editor, Cable Digital News

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