Terayon Makes Job Cuts, Banks on DOCSIS Silicon

By JEFF BAUMGARTNER -- Multichannel News, 2/5/2001

Declaring 2001 "a year of transition and rebuilding," Terayon Communication Systems Inc. got off to a quick start last week with the launch of a new division that will build and market cable-modem silicon based on Data Over Cable Service Interface Specification standards and proprietary advanced physical layer technology.

In what has become a disturbing trend among broadband vendors suffering from cable-operator spending slowdowns, Terayon also reported that it slashed its work force by 13 percent.

Terayon CEO Zaki Rakib said most of the head-count reduction would come from the company's cable-modem development division. That cut affected 130 Terayon employees. Today, the company has about 710 staffers.

That news comes in concert with a sluggish fourth quarter for Terayon, which reported a higher-than-expected fourth-quarter pro forma loss of $50.8 million, or 77 cents per share, down from a profit of $1.2 million (2 cents) in the same-year period.

Analysts had expected the company to lose 41 cents per share in the fourth quarter. Terayon said fourth-quarter revenues surged 63 percent to $62.9 million.

Undaunted, Rakib said he hopes Terayon's new chip unit would eventually boost the company's overall staffing levels as it adds engineering and marketing talent. He'd also like it to "unlock the value" of the company's chip-set properties.

Pending 1.1 certification from Cable Television Laboratories Inc., Rakib said Terayon could see profits from its chipsets by the fourth quarter of this year.

Terayon had submitted its advanced physical layer cable-modem and headend prototypes to CableLabs, Rakib added, including FA-TDMA (frequency division/time-division multiple access) and a hybrid combination of FA-TDMA and Terayon's proprietary S-CDMA (synchronous code-division multiple access) modulation scheme. The company plans to market those chips under the Terayon brand and to sell them to other CPE (consumer-premise equipment) vendors, Rakib said.

Terayon's S-CDMA is at the center of a consolidated lawsuit that alleges the company made misleading statements concerning the technology's inclusion in future DOCSIS specifications.

CableLabs is presently poring over the "advanced PHY" issue, but hasn't decided what direction it will take. Senior vice president of communications Mike Schwartz said CableLabs had "no significant progress" to report regarding advanced PHY.

Nonetheless, Rakib said he remains "positive and confident that a decision will be make this year."

In the meantime, Terayon has already decided to cancel development of a DOCSIS modem based on a Conexant Systems Inc. design. But Rakib said Terayon plans to continue making and selling stand-alone "TeraJet" models, which are DOCSIS 1.0-certified and can be software-upgraded to the more advanced 1.1 spec.

Terayon's "110" modem includes an Ethernet port; its "210" model features universal-serial-bus support.

But some analysts believe Terayon will ultimately shift its cable-modem focus to the silicon side and leave the low-margin DOCSIS cable-modem market behind altogether.

Terayon reported shipment of 193,000 cable-modems during the fourth quarter, 63 percent of them proprietary. Terayon also shipped 438 cable headends during the period.

"They really don't want to play in the commodity DOCSIS modem market," Kinetic Strategies president Michael Harris said. "I think Terayon is trying to shift, at least on the CPE side, into a silicon player."

Last week, Rakib told analysts and reporters Terayon will focus on higher-margin products, such as its cable-modem termination system and "CherryPicker" digital-video gear.

In addition to cable, Terayon has also made key acquisitions to enter other broadband-equipment markets, including the digital subscriber line and satellite arenas.

Rakib also predicted Terayon won't bleed red from selling cable modems because it will sell the equipment to operators as part of an overall "end-to-end" package.

With cable-modem prices heading to $99 over the next year, the market might not be able to sustain the legions of DOCSIS vendors that are out there today, Harris said.

Cable-modem vendors "will be dropping like flies over the next 12 to 18 months," Harris predicted, noting that the retail market for the equipment has yet to reach true scale and largely remains an MSO-controlled channel.

Harris estimates that the top five DOCSIS cable-modem players (Motorola Broadband Communications Sector, Thomson Consumer Electronics, Com21 Inc., Toshiba and 3Com Corp.) generate 90 percent of the current business.

ROBOTICS REAPPEARS

That doesn't mean others won't try, despite the growing odds of failure.

For example, U.S. Robotics rejoined the cable high-speed market last month, unveiling its first cable modem since 1997 at the Consumer Electronics Show in Las Vegas.

U.S. Robotics, a well-known brand among dial-up modem users and retailers that also sells digital-subscriber-line and ISDN (integrated services digital network) gear, admitted it re-entrance is a bit tardy. But company officials bristled at the suggestion that it would have a difficult time making up ground on deeply entrenched competitors.

Those rivals include U.S. Robotics' 20-percent owner, 3Com.

"We are late, but we have strong brand equity. There's room for growth in this market," U.S. Robotics product line manager Rob Thomson said.

U.S. Robotics plans to differentiate itself from the competition with value-added features such as "plug-and-play" universal serial bus ports that can support networked appliances. The company will also focus on "usability and the out-of-box experience" for consumers, Thomson said.

"Cable operators have complained on the amount of time it takes customers to install cable modems. We've been helping people install modems since the '80s," he added.

Thomson said U.S. Robotics plans to release its cable modems to commercial channels in April. The company presently is conducting trials with MSOs, but Thomson declined to name them.

For now, U.S. Robotics also will focus on getting its gear through CableLabs' rigorous DOCSIS certification tests. The company's "Ethernet Cable Modem" has already been stamped with 1.0 certification. That product is software upgradable to 1.1.

U.S. Robotics also plans to release as USB-enabled model in the second quarter of 2001. A EuroDOCSIS version is in the works as well, Thomson said.