"For Occam to hold out for a higher price might have been risky. I don't know."
In this 'wonderful' economy?
It is not an unfair statement. Debateable....but not unfair.
One thing is for sure...it was a good deal for CALX, and SAFE/good timing for the deal to be done by the OCNW people behind the scenes.
If we were further toward 2011 and the stim turned out to be more problematic going forward, the price could have been lower...
As the deal stands, I 'm guessing compromises were made on both sides to increase both the survivability and profitability of both entities in an uncertain economic environment.
At a macro level...the government is running out of ways to stimulare this economy and more people are unemployed every day. The government will have to do something tangible other than building MORE roads, runways and rails in order to invest in the future and keep the voters distracted...if not entertained... till this bad economy blows over in a few years.
Consequently, between the stimulus, USF reform, and follow-on government stimulus efforts to come, I think that the combined CALX/OCNW entity is the best play around to capitalize on this space.
I believe that most of those who historcially inhabit this board are looking at broadband from a stimulus only perspective.
I agree that stimulus is a one-shot deal. It comes, it feels good, and then it goes. And after it goes, business might return to normalized levels. But if you look at the bigger picture, you must understand that stimulus is the tip of the iceberg. Broadband is one of the defining issues of the Obama administration. If you read what Genachowski and Adelstein have said, they are comparing the upgrading of our rural broadband infrastructure to the building out of the electrical grid. Read what they have written and think about how expansive their vision is. Don't underestimate it. What was once a pet cause of Obama's has now received strong bipartisan support.
The USF directs about $5 billion annually to support high cost rural phone service. It is almost a given that this will be redirected to support broadband.
First, re-read the stimulus bill. There are time limits on spending after the time of award. This is not an infinite pot of money and needs to get spent quickly or its not a stimulus.
Second, the USF funds will go to the EXACT same companies that it does today in the same amounts. Their budgets won't change at all.
Let's think. Calix has the GPON/ONT experience. I imagine their margins are good on the ONT line, but struggle on the C7, E7, and C5 lines.
The C7 is an ATM dinosaur, which will be MD'd. It may stick around for some of the larger Tier2’s that can’t put Ethernet and Access in the same sentence. Some of the E5 line is OEM'd, that sounds like great margin to me. (not!) The rest is Calix trying to understand Ethernet. I think they are having a hard time with the connectionless world. Layer 2 is not an easy world to tackle. Layer 2 doesn’t have built in security, scalability, or survivability. These have to be added somehow and a layer 3 device everywhere is not the answer.
Who has had an Ethernet access product since its inception? Let me think.....Occam. I think Occam understands how to make a solid Ethernet platform and make money on it; 40+% margins for a while now. Occam OEM'd most of its GPON portfolio and made the Active in-house. The GPON side has 10+ flavors and the Active side had 2. Occam lost focus by trying to tackle GPON and purchasing Terawave. The OEM ONT's are dragging Occam's margins down. If the ONT’s are bringing the margins down, what is keeping them up? That’s right…BLC cards.
This is my take. The BLC6000 line survives and the C7, E7 and E5 go away (BLC6000 replaces the E5/E7 Line). A new GPON product arrives with Calix/OSI knowledge at the heart and Occam knowledge for the transport. Calix invest in an Active E ONT that rivals their GPON portfolio. THe E3 line survives.
A decent margin for the Copper, Fiber and ONT's, the market doesn’t like 30% margins; it like 40+% margins. They may just be able to take on the experts in reverse engineering--ADTRAN!
CALIX is very heavy on Sales and Markting, while Occam is very heavy on finacial people. I do agree that Occam personnel should start looking for other work, only Occam engineering (the guys the write the code) will survive unscathed. Although CALIX may keep most of the finance crew. Occam has been public much longer that CALIX; CALIX may need the financial talent. Sales, Marketing, Operations, Test, etc will be significantly reduced. The Occam executive team will all retire. (Isn’t this the same crew that led Occam into an audit for mis-reporting financial information?)
Do you think Calix will even keep the Goleta, California office open? Maybe just for the software team……
It's a crap deal. They buy 20% IOC market share and they get some engineers that are more IP/Ethernet savvy. Bet that the Occam BLC gets capped out (because the margins are crap), and they shift to the E7 for a replacement. The E7 will come out with POTS, Combo, and T1 - and then you have the whole Occam solution covered. They will integrate the E7 into Occam's EPS (so pizza box growth will be done via E7) and the management will all be done through Calix CMS... That's what I predict. I think Calix will cut 50% or more of the Occam sales team. They will cut 75% of the overlap - HR, Accounting, Operations, Marketing, etc.
From the Calix side, their E5 (which is a Zyxel OEM) gets whacked, because now you have a 48-port ADSL and combo pizza box.
All in all, it does nothing exciting. It gives no entry into the Tier 1s, it doesn't expand their footprint into the Tier 2s. It's just an IOC and engineering play.
They actually can not get rid of either the C7 or the BLC. They have too many customers on each platform to eliminate them. Also, the smaller variants of the Occam products are the same blades as the BLC.
The two items that should be driving down Calix margins are mechanical cabinets and ONTs. Occam does a lot of retrofit of older AFC cabinets, so their margins should be better.
Just to give you guys a view, AFC card margins were in the 60% range. The cabinets were in the 20% range. The combination used to leave AFC in the mid-40s.
The issue for the combination going forward will be reducing the product lines in such a way that allows reasonable investment in both. I think you guys need to look at the situation at Centurylink + Qwest to best understand how this might have to work going forward.
So, if I'm reading these comments right, we've gotten three arguments:
<ul> <li>Calix gear should absorb Occam functions</li> <li>Occam's gear should live, Calix's should die</li> <li>Both sides' gear must live on</li> </ul>
That seems to cover the bases.
7's point is pragmatic -- yes, they'd have to keep supporting old Calix & Occam gear -- but which side's gear gets the emphasized R&D in the future? It sounds like that's going to be an interesting question.
I'm secretly hoping Vince will quote his own quote from our story, which I'll then quote back in a future story.