Vendors Encouraged by 3Q Trends

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Cable-equipment vendors expressed growing optimism that the worst is behind them, as a slew of quarterly earnings reports over the past two weeks reflected their confidence that a stable purchasing environment now exists in the industry.

"The uncertainty seems to be diminishing," said Bob Stanzione, the chairman and CEO of Arris Inc.

Added C-COR.net Corp. CEO Dave Woodle: "We have a stabilized spending environment."

Several factors are driving the resurgence. The data and voice market have continued to grow, in terms of both existing products and services about to be launched, like voice-over-Internet protocol (VoIP) telephony.

"We're seeing significant signs going from trial to market [for VoIP]," Stanzione said. "2004 will be an inflection point and 2005 is shaping up as a bang-up year for VoIP. The lab phase of VoIP is over."

MSOs are still spending on maintenance, Woodle noted. New nodes, lasers and line extensions, for example, are part of Time Warner Cable's budget — which accounted for 16% of C-COR.net's $57 million revenue in the quarter.

New spending from Adelphia Communications Corp. also is giving some tech vendors a much-needed lift.

"I think they are pushing to get the majority of their rebuild done in the next calendar year," Woodle said. "We've seen a boost in spending."

And new set-top products, such as boxes with digital video recorder hard drives, helped Scientific-Atlanta Inc. post earnings of $42.7 million in the quarter, a quantum leap over last year's $11 million in the same period.

C-COR.net actually swung back into the black, posting fiscal first quarter net income of $4.8 million, compared with a net loss of $7.3 million in the year-earlier period.

Overall revenue jumped from $44.6 million last year to $56.8 million, for the quarter ending Sept. 30, and the company expects to slightly exceed that revenue number in the current quarter.

Among the hot items: C-COR.net's 1310 optical transmitter for video-on-demand deployments.

Both Terayon Communication Systems Inc. and Arris Group Inc. posted net losses for third-quarter 2003, but both narrowed the shortfall and saw signs of an uptick in revenues.

Terayon posted a net loss in the quarter of $7.2 million, compared to a net loss of $16 million in third quarter 2002. But revenue jumped 54% over last year, from $24.5 million to $37.6 million, as well as 23% sequentially.

Executives at Terayon pointed to increased sales of Data Over Cable Service Interface Specification (DOCSIS) 2.0 gear and digital-video equipment.

"We are encouraged by an improving trend in cable operator capital spending," Terayon CEO Zaki Rakib said in a statement.

Like C-COR.net, Terayon expects even stronger sales in the fourth quarter, estimating revenue between $40 million and $43 million.

Arris reported a net loss of $14.6 million in the third quarter, compared with net income of $5 million in the year-earlier period. Net sales in third quarter 2003 hit $113 million — a sequential increase over the second quarter's $102 million, but still below last year's third quarter of $180 million in sales.

Led by increased sales of cable modems and host digital terminals, broadband revenue in the quarter jumped from $66.5 million in second quarter to $75 million in the third at Arris.

S-A posted earnings of $42.7 million on sales of $395.6 million in its first fiscal quarter ending Sept. 30, compared to earnings of $11 million on sales of $311.6 million in the year earlier period.

"It is becoming apparent that DVR services are very important for cable operators," chairman and CEO Jim McDonald said.

S-A said it shipped 177,000 Explorer 8000 DVR set-tops in the quarter, and 940,000 set-tops overall. Over the past 18 months, S-A said it shipped 563,000 DVRs.

By the end of the year, S-A will make available an HD version of its Explorer 8000 DVR set-top. S-A added that it shipped 291,000 cable modems and 60,000 HDTV set-tops in the quarter.

Concurrent Computer Corp. reported sequential but lower year-over-year financial results. For the first quarter of its fiscal year ending Sept. 30, Concurrent reported revenue of $22.1 million, down 27% from last year's $18.9 million, but ahead of the previous quarter's $15.5 million. Net income for first quarter was $600,000, the same as the year earlier period.

VOD-division revenue dropped to $10.4 million in the quarter, from $13.4 million last year. Concurrent said it expects VOD revenue to be in the $10 million to $12 million range in the current quarter.

CommScope Inc. reported earnings of $1.1 million on sales of $148.7 million in the third quarter, compared to a net loss of $19.6 million on sales of $147.8 million in the year earlier period.

The cable manufacturer also announced it's purchasing Avaya Inc.'s local area network cabling division, Avaya Connectivity Solutions, for cash and securities valued at $263 million. ACS builds cabling and equipment for telephone central offices, connecting PCs, workstations, phones, local-area networks and other communications devices.

That transaction would essentially double the size of CommScope. ACS had revenues of $542 million for the 12 months ending Sept. 30, compared to CommScope's $555 million.

In the quarter, CommScope attributed the revenue rise to its broadband/video sector, which accounted for $121.6 million of the $148.7 million revenue in the quarter.

CSG Systems Inc. absorbed an $119.6 million arbitration award in its fiscal third-quarter ending Sept. 30, causing quarterly revenue to be $25.5 million versus $145.1 million. An arbitrator awarded Comcast the $119.6 million on Oct. 7 to settle the lawsuits between CSG and Comcast over CSG's old AT&T Broadband contract.

The charge caused CSG to post a net loss of $93.8 million in the quarter, compared to a profit of $17.2 million in the year-earlier period. CSG executives said they saw a stabilization in spending from service providers and were "cautiously optimistic" about results going forward.

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