RiverDelta Networks Inc.'s decision to pare down its work force by 20 percent last week is another signal of choppy economic seas in the cable-modem termination system sector, industry analysts said.
Larger players such as Cisco Systems Inc. and Motorola Broadband Communications Sector might be financially equipped to survive until the dark clouds pass over. But start-up vendors of next-generation products, like RiverDelta and Cadant Inc., will need to shore themselves up further.
RiverDelta last week confirmed May 18 layoffs affecting about 20 percent of its staff, or about 50 employees. Vice president of marketing Jeffrey Walker said the cuts affected several of the Tewksbury, Mass.-based vendor's departments, but its sales force was hardest hit.
Following the layoffs, RiverDelta still had more than 200 employees on board, he said.
Cuts at RiverDelta mirror the sluggish conditions that exist for both start-up and deeply entrenched CMTS manufacturers, noted Gartner Dataquest broadband communications senior analyst Patti Reali.
According to Reali's projections, this year the CMTS sector will be hard-pressed to match 2000's $638 million in revenues. Even market-share leader Cisco Systems Inc. saw its CMTS revenues dive by almost 50 percent during the fourth quarter of last year, she said.
"It will be a stretch for (CMTS revenues) to reach even $450 million this year," said Reali, who added that cable operators have improved at timing out their CMTS purchases.
RiverDelta's cuts were needed to keep expenses in line with the slowing market, Walker agreed. "We needed to ensure that we have a strong, viable company moving forward … [which] will shorten the time to profitability for us," he said.
The company's path to profitablility would likely be paved by the BSR-64000, its carrier-class, Data Over Cable Service Interface Specification 1.0-approved chassis. RiverDelta has also submitted its smaller BSR-1000 router to Cable Television Laboratories Inc. for DOCSIS 1.1 testing.
Lisle, Ill.-based Cadant is another CMTS start-up that could be facing a similar financial fight. CableLabs is currently testing that company's C4 CMTS for 1.1 qualification.
A Cadant spokesperson did not return phone calls by press time to answer questions about current staffing levels. But in an interview last month, Cadant vice president of marketing Gene Rosendale said the vendor had roughly 140 employees on board.
"If these [start-ups] are going to survive, they'll need a next round of funding rather quickly," Reali said.
Walker said RiverDelta is in the final stages of its third round of financing, which should finish sometime after next month's National Cable Show. Cadant may also secure its next round of cash in time for the show, said Rosendale.
RiverDelta raised roughly $46 million during its first two investment rounds. By comparison, Cadant secured $41 million following Series A and B.
Elsewhere, San Jose, Calif.-based start-up Pacific Broadband — which is building a full-blown CMTS of its own — announced early last month that it had raised $50 million of second-round financing.
Sources said strategic investors in RiverDelta's and Cadant's next round could include a number of MSOs that want to see those companies survive and thrive — and not only because they're bringing some promising technology the table. Some MSOs are loathe to be tied at the hip to Cisco, the sector's dominant vendor.
BAS Cashed In
Although RiverDelta and Cadant are eagerly awaiting another cash infusion, officials at both companies said they received acquisition offers last year, when the sector was still hot, but turned them down.
That was not the case for a former competitor, Broadband Access Systems Inc. BAS essentially set the valuation bar on CMTS start-ups when it closed an Oct. 2, 2000 deal with ADC Telecommunications.
ADC absorbed BAS in a stock deal worth roughly $2.25 billion when it was first announced last September. At that time, rumors swirled that RiverDelta or Cadant would be the next to play Let's Make a Deal
with a more-established vendor.
However, the lofty financials from the BAS-ADC marriage have come back to earth. ADC shares, which traded at $27.18 the day the acquisition was finalized, have steadily declined. The stock closed at $10.04 per share last Wednesday (May 23).
RiverDelta "has had several offers," including offers from "very recognizable names," Walker said in an earlier interview.
"The BAS deal was a shocker, but I was impressed and surprised that it took place," he said. "I still don't see how that math worked. Still, given the size of the market, there was a lot of strategic value to it."
Last summer and fall — prior to the economic downturn — Cadant retained a banking firm to screen acquisition inquiries, so its employees could stay focus on the task ad hand, said Rosendale.
However, "nobody is in a position to make a good offer these days," he said. Though he wouldn't rule out an acquisition in the future, "it's just not the driving motivation for building this company. We want to be here for the long-term, but the market might not allow that. We have to do what's best for the company."
Rosendale said Cadant also received offers.
High-speed-data and voice-over-Internet protocol services are expected to be the primary drivers for the next-generation CMTS market.
Although MSOs continue to aggressively roll out cable-modem services, VoIP has yet to pan out in North America, explained Pete Sherlock, vice president and general manager of network infrastructure solutions at Motorola Broadband's IP networks systems business unit. One VoIP subscriber consumes roughly as much capacity as three data subscribers, he said.
Until then, operators are expected to move more slowly on lab trials and seek bids before equipping their networks with next-generation DOCSIS gear.
"None of the major U.S. MSOs have made their selections on [DOCSIS 1.1 equipment]," said Sherlock, whose company makes a next-generation CMTS called the CAS 2000.
"By this time, we thought half of the operators would have made these decisions for reasonable shipments by late this year," he said.
And CableLabs has not yet certified or qualified any modems or CMTSs for DOCSIS 1.1, which certainly hasn't quickened the pace. Results of CableLabs' certification wave 18 are expected to become public on or around June 22.
The CMTS sector "started slowing down in the fourth quarter [of 2000] and into the first quarter [of 2001], because cable operators were hesitant to deploy 1.1 products that are potentially legacy on arrival," said Kinetic Strategies Inc. president Michael Harris.
Operators could also be feeling a bit queasy about forking over the large sums of money to switch out their 1.0 legacy equipment, Reali said. As a result, a major MSO migration to 1.0 might not occur until sometime next year, she predicted.
Waiting For The Bell
Though Cisco won the first DOCSIS 1.0 CMTS battle decisively, Harris said that start-ups and other veteran vendors could make a strong comeback in round 1.1, as equipment wins CableLabs approval and cable-based VoIP technologies stabilize.
Given the size of the market, though, there might be room for only a handful of CMTS sources. "If I was not among the top three suppliers, I don't think I'd find it to be that interesting of a business," he said.
While Harris expects Cisco to be among those three, he said the other two survivors could be any of the more prominent remaining players, including Cadant, RiverDelta, Pacific Broadband, Arris Interactive LLC/Nortel Networks, Motorola Broadband, Tellabs Inc. and Terayon Communication Systems Inc.
"The big question is, 'Who is going to lead the 1.1 market?' " said Harris. There may be no answer for another six to 12 months, he noted.