C-COR Can Deal — Now, Can It Deliver?
With a Baker’s Dozen of Deals Done, Vendor Shifts Focus to New Services
By Mike Farrell -- Multichannel News, 4/3/2005 8:00:00 PM
State College, Pa. — State College, Pa.— Tucked away in this tiny central Pennsylvania town — home of the Nittany Lion and Penn State football — C-COR Inc. has spent the past five years reinventing itself in a big way.
Through 13 acquisitions — five in the past year alone — costing a total of about $440 million, C-COR has secured a product line that moves it away from a core business tied primarily to the upgrade cycles of cable operators into one that addresses their future needs to manage and create new products and services like video on demand, fiber-optic transport and voice-over-Internet protocol technology.
| C-COR’s 13 Acquisitions |
|---|
| How a cable vendor spent $440 million: |
|
Source: C-COR Inc. and published reports. |
| 7/12/99 — Convergence.com, Atlanta-based provider of Internet-enabling technical services. C-COR renamed C-COR.net after the merger. Purchase price: $48 million in C-COR stock. |
| 9/20/99 — Silicon Valley Communications Inc. — provider of high performance fiber-optic equipment for broadband networks. Purchase price: $50 million in C-COR stock. |
| 1/20/00 — Advanced Communications Services Inc.: Riverside, Calif. engineering, design and technical services for HFC system rebuilds and upgrades. Purchase price: Under $5 million. |
| 2/21/00 — Worldbridge Broadband Services: provider of technical and systems integration services for broadband communications industry. Purchase price: $53.8 million in C-COR stock. |
| 4/30/01 — MobileForce Technologies Inc.: Pleasanton, Calif. developer of workforce management and wireless computing solutions for broadband and large field services industry. Purchase price: $20 million. |
| 7/5/01 — Aerotec Communications Inc.: provider of broadband telecom construction services. Purchase price: $2.25 million. |
| 8/6/01 — Broadband Communications division of ADC Telecommunications Inc.: Buys ADC’s cable portfolio of cable infrastructure products. Purchase price: $32 million. |
| 7/8/02 — Philips Broadband Networks: Transmission products, optical nodes, network amplifiers, line extension and network optimizing technologies. Purchase price: $78 million. |
| 4/15/04 — Lantern Communications Inc.: metropolitan area network packet-based transport products. Purchase price: $20 million. |
| 5/11/04 — Alopa Networks Inc.: End-to-end activation, management of digital services over cable. Purchase price: $15 million. |
| 7/6/04 — Stargus Inc.: Network optimization, subscriber usage reporting, capacity planning. Purchase price: $17 million. |
| 9/7/04 — Optinel Systems: Ethernet transport solutions for residences and businesses. Purchase price: $9.5 million. |
| 1/3/05 — nCUBE Corp.: On-demand and digital advertising insertion software. Purchase price: $89.5 million. |
C-COR is out of the acquisition phase: it closed its latest deal in January.
Now comes the hard part: integration and execution. And, possibly, some setbacks.
RECENT STUMBLE
On March 23, C-COR lowered its quarterly guidance for the second time in a row, telling investors and analysts that revenue for its fiscal third quarter (ended March 25) would be between $47 million and $49 million instead of the $70 million to $75 million previously expected. C-COR said the reasons for the shortfall were two-fold: accounting rules prohibited it from recognizing some revenue from its last acquisition, nCUBE Corp., and orders from certain customers came in too late to be recorded in the period.
In early January, C-COR had warned revenue would be between $58 million and $59 million in its fiscal second quarter, instead of the $62 million to $66 million previously anticipated. Second-quarter revenue, released on Jan. 20, was $58.5 million.
News of the latest revenue shortfall hit the stock hard. C-COR shares fell to a new 52-week low of $6.05 apiece on March 23, before rebounding to close at $6.41 that day.
The nCUBE accounting glitch was more a sign of oversight than of inherent problems. C-COR had expected a large portion of nCUBE’s $20 million backlog to be transferable in the third quarter, but because of the accounting rules, less than $7 million was recognized.
While that money was lost to the revenue line, it was recorded as cash. C-COR didn’t lose that money — it just had to put it somewhere else on its books.
As far as the late orders, C-COR has recently completed several master agreements with MSOs for different products that took longer than expected to complete.
While C-COR said it expects to experience some impact from the accounting changes in the fourth quarter, it will be of a lesser degree.
C-COR said that it expects bookings to be about $80 million in the third quarter with backlog at about $73 million.
STRONG FUNDAMENTALS
Independent Research Group analyst Erik Zamkoff said that while the lowered guidance was disappointing, C-COR’s fundamentals are still strong.
“I’m certainly not happy to see that they missed a quarter, but at the same time, I think fundamentally they are in front of a big opportunity,” Zamkoff said. “Positioning-wise, I think the businesses they bought put them in the sweet spot of future cable spend.”
Getting to that sweet spot is part of a calculated five-year plan initiated by C-COR chairman and CEO David Woodle shortly after he joined the company in 1998. Woodle, who had been a vice president in charge of a $5-million division of Raytheon Corp., realized quickly that if C-COR continued to focus on RF amplifiers and other cable hardware, it wouldn’t last long in this industry.
C-COR was one of the pioneers in the cable-equipment industry — it was the first company to put integrated circuits on telephone poles — and has been selling and making RF amplifiers and related hardware for more than 50 years. C-COR was also once a cable operator itself. It owned a small system in central Pennsylvania that it sold in 1970.
While C-COR has not abandoned RF products, it has expanded its product line to include tools that will allow MSOs to manage and deliver VOD and telephony, focusing mainly on Internet-protocol technology.
So far, the deals have about doubled C-COR’s revenue (it averages about $60 million per quarter compared to $30 million in 1998). C-COR also has expanded its reach beyond the United States: international sales were about 37% of total revenue last year, compared to 10% in 1998. And last year, about 25% of C-COR’s total business was in software and services.
“A company like that was at one of those tricky inflection points,” said Ferris, Baker Watts Inc. media-technology analyst Murray Arenson. “Frankly, I give them credit for making some bold moves geared toward capitalizing on future and developing markets. If they didn’t do that, we’d be second-guessing them for different reasons.
“I don’t disagree that the development of IP video and IP TV is a big deal and they’re positioning themselves well for that market,” Arenson added.
C-COR sees continued expansion in the international market — it would like to see international sales reach 50% of total revenue in the next few years — and also sees opportunities in the regional Bell operating companies’ moves to offer video along with voice and data to compete with cable.
But it could have worked out very differently. When Woodle joined C-COR in 1998, some chief technology officers at some MSOs were pointing him in a different direction.
TOO LATE FOR SOME
“The first feedback I got when I joined to C-COR was, 'You’d better start making [digital] set-tops; you’d better start making CMTS [cable-modem termination systems],’ ” Woodle said during an interview in early March. “I looked at them and said, 'We’re late.’
“Even though it was just starting — [early cable-modem provider] At Home [Corp.] only had 100,000 customers in 1998 — these things were already built. I said to the guys, 'What are you going to do five years from now once you build all of this?’ What they said is that they were going to have to figure out how to manage all of this mess.”
That’s when Woodle decided to go another route by concentrating on three areas — optical-transport technology, software to manage advanced services and software to manage the on-demand environment.
Drawing on his experience with Raytheon — he used to build large networks for the government — Woodle knew that these networks all could be managed with software. But he was taking a bit of a risk because there was no mandate from cable operators for these products.
“Knowing that we needed to manage this with software, I felt that was an area that didn’t have a lot of competition, was untapped, and was going to be needed someday in cable,” Woodle said, “So, it was a little bit of a risk-taker to be there early. There wasn’t a mandate, but there was some forward-looking input that said 'If you guys are trying to take a guess at where we’re going to be, this is a problem we’re going to have and if you can figure out how to help us solve it when the time comes, you should be in good shape.’ ”
NOT TARGETING CISCO
One thing Woodle won’t admit to is that C-COR aims to go head to head with computer equipment juggernaut Cisco Systems Inc.
“C-COR is not trying to be Cisco,” Woodle said. “We are not trying to do everything for enterprise networks and we’re not trying to build all the switching and management tools that Cisco is building.
“What we’re trying to do is trying to provide infrastructure and automation tools that allow our customers to roll out IP services over their networks and do it profitably and reliably. Since we built the networks and brought in through acquisitions the technologies and people that know how to do IP, what I’m trying to do is marry the legacy network knowledge with the current IP knowledge.”
Zamkoff said that expanding into new areas of technology, especially ones that are not yet fully established, was risky but necessary.
“I call them the gutsy company,” Zamkoff said. “Their [RF] business would have been a declining annuity.”
Although C-COR has received the most attention for the five acquisitions it made in 2004 (Lantern Communications Inc.; Alopa Networks Inc.; Stargus Inc.; Optinel Systems Inc.; and nCUBE), C-COR’s expansion plan actually involved about 13 different purchases. The plan began with its buy of Silicon Valley Communications Inc., a Santa Clara, Calif.-based provider of high-performance fiber-optic equipment for broadband networks in September 1999.
C-COR went on to make a series of strategic purchases between 2000 and 2003, filling in specific areas of its product lines.
Those acquisitions first concentrated on technical services for broadband networks (Convergence.com; Worldbridge Broadband Services; and hybrid fiber-coax equipment Advanced Communications Services Inc.).
C-COR then began to spend big money buying ADC Telecommunications Inc.’s Broadband Communications Division in 2001 for $32 million and Royal Philips Electronics N.V.’s Philips Broadband Networks in 2002 for $80 million.
In between C-COR filled in some holes with the purchase of a construction company, Aerotec Communications, and a developer of workforce-management software, MobileForce Technologies Inc.
SOLIDLY 'NEW’
But with the five acquisitions made this year, C-COR has solidified its position in new services, Zamkoff said.
“I think nCUBE has first-rate asset-management and advertising-insertion software, so potentially you’ll see C-COR, Broadbus and N2 working together to go after opportunities on that side of the universe,” Zamkoff said. “I think the industry moves toward an EPON [Ethernet passive optical network] architecture, and I like the combination of Lantern and Optinel to address that. That also potentially opens up the telecom market. I’m very encouraged by their workforce-management product, which already has some traction at Time Warner.
“And then the product I’m most excited about is from Alopa which if they catch the right wave should be able to do well in an environment where cable is aggressively rolling out IP telephony.”
Woodle said that when he first set out on the acquisition strategy, he looked at more than 40 companies. Woodle struck the deals himself — with the help of a few key executives — mainly because C-COR wasn’t big enough to have its own Mergers & Acquisitions team.
Along the way, Woodle and his team cut some pretty good deals, which gave C-COR an unwarranted reputation as a bargain hunter. Woodle dismisses that characterization, but admitted it gave some potential acquisitions pause when he stepped to the negotiating table.
“Sometimes it worked to the negative when someone felt we weren’t going to negotiate a good deal. They would say 'OK, Woodle, I’ve heard of you [and] your reputation, you’re going to try to buy low,’ ” Woodle said. “We’ll only pay a value we think is a good value.
“There were some open communications in the analyst community that 'Hey, C-COR just did another great low-cost deal,’ I didn’t think I underpaid; I think I paid what we needed to. But the investors in that didn’t feel good. An example is if $80 million went into a company publicly and we paid $20 million for it, it was kind of like 'You got a great deal.’ Well, not really. I’m just saying it was only worth $20 million, based on what was there.”
AT ALL THE MEETINGS
Despite any early trepidation, Woodle said the companies with which he negotiated came to welcome the idea that management was in on the deals in the earliest stages.
“Some people were surprised that the management team would be back through the meetings,” Woodle said. “But that worked to our advantage. We have a reputation of doing what we say we’re going to do.”
Woodle added that because of C-COR’s small size — and because the companies it was targeting were even smaller — it was important to have management in on the early stages of discussions.
“I feel that we’re small, these companies were small and the plan and the people have to gel,” Woodle said. “It’s a plan that I have to drive [into] the company. If I don’t look those guys in the eye and really ask those tough questions and understand what’s coming in, that’s where you get these failures. And I can tell you, there’s no one that’s come in here and has found anything different than what they were told coming in.”
Woodle prides himself on C-COR’s ability to retain key management at the companies it has acquired, a move he said was key to ensuring that the integration process would move smoothly.
One of those managers that decided to stick around after merging with C-COR is Mike Pohl, who was president and CEO of nCUBE. Pohl is now running C-COR’s software division, C-COR Solutions.
nCUBE was a major player in the VOD software arena and has a digital ad insertion technology that it is becoming popular with operators. But Pohl said that he realized that to survive, nCUBE would need more.
“It was the next logical step,” Pohl said of the decision to sell. “You do have to have a suite of solutions. What we have now is an IP network end-to-end solution that you can buy some, all or none.”
Access and Transport division president John Caezza, who came to C-COR in the ADC Telecommunications acquisition, said the speed at which the deals were done also led to a smoother integration.
“It was much more beneficial to the organization for us to move quickly,” Caezza said. “We had a plan going in, we pushed the people hard, we didn’t give them a lot of time to think about what could have been or commiserate with one another. We moved them forward and I think, more often than not, we’ve been very successful with the way they worked out.
“We’ve picked key people out of the organizations, we’ve intermingled them, we’ve kind of flipped their responsibilities from one side to the other so they get a better appreciation for the other side of the fence and we’ve eliminated the fence pretty quickly for everybody.”
MANAGERS HELPED OUT
Woodle added that once a potential acquisition was identified and he and his CFO William Hanley looked over the financials and believed they would fit in with the overall strategic plan, he then brought in one of his division managers to see how that company would fit in.
“John would come in, if it was on the product side, and really do the due diligence, or if it was software, I would bring in somebody else,” Woodle said. “The point is he wasn’t handed something later on that he hadn’t seen before or been involved with.”
Despite the recent accounting glitches, C-COR believes that most of its integration issues are behind it now, a characterization that Zamkoff agrees with.
“The key is, now it’s one company,” Zamkoff said. “The master-purchase agreements means the industry is now looking at C-COR as C-COR, not [as] C-COR, Alopa, Stargus, nCUBE, Lantern and Optinel. I think that’s progress across the board, because it makes the sales process easier for the different baskets of goods that they have.”
No related content found.
Featured Company
-
Telestream
Telestream products are used by the world's leading media and entertainment companies and corporations for transcoding and workflow automation. Telestream helps customers transform their media for multiplatform distribution to web, mobile, DVD, cable VOD, podcast and broadcast pl..more
VIEW ALL GALLERIES
