At the entrance to BigBand Network Inc.'s (Nasdaq:BBND) R&D center in Azrieli Tower, is a large poster featuring a press release announcing yet another integration of the company's solutions - at US cable TV giant Cox Communications (NYSE: COX). The announcement is certainly cause for celebration.
Cox is the third largest cable television provider in the US, so it is hardly surprising that BigBand has featured the announcement alongside other joyous events commemorated on the office walls, such as employee trips, and the party following the successful IPO in March. But, given the timing, it appears that the announcement of the integration with Cox has added significance - an item of welcome news after a period when things weren't going all that well.
BigBand, which develops multimedia services platforms for cable and telecommunications networks, has managed to do a lot over the last six months including several surprises, some of them unpleasant. The first surprise came in mid-March, when the company floated on Nasdaq. The offering was originally priced at $10-12 per share. As with many successful offerings, the price rose by an extra dollar on the night before the offering, and the company unexpectedly raised $140 million at a value of $740 million after money. The stock began to gallop north as soon as the IPO was over, catapulting BigBand's market cap to $1.25 billion. However, events then changed course.
At the beginning of May, BigBand unveiled its results for the first quarter. As expected, the company reported $53 million revenue and non-GAAP earnings per share of $0.09, but said in its guidance that revenue and earnings for the second quarter would be virtually the same. This prediction was fairly accurate, and the company only managed to record the same earnings per share as in the first quarter because of the large amount of financing income it earned from its IPO. BigBand also revised downward its full-year guidance to $0.28-0.33 per share, from $0.30-0.35 per share. The stock immediately plunged 27% in response, making BigBand overnight another company that floated and then proved a disappointment.
Last week BigBand founder and CEO Amir-Bassan-Eskanazi spoke to "Globes" about what went wrong.
Globes: What do you say to investors after "surprises" like these, so soon after the IPO?
Bassan-Eskanazi: "We found ourselves with a number of unexpected expenses. The first of these is the copyright infringement suit that has been brought against us by another company (Imagine Communications), and that accounted for part of the increase in our costs ($500,000 in the first quarter, S.S.), and we weren't expecting this at the beginning of the year. There were also a number of secondary issues. But if you look at our current non-GAAP operating expenditure, excluding these items, we've pretty much met our forecast. From the aspect of sales, we're satisfied that we've met the forecast we set ourselves. I think that people focus more on revenue and less on expenditure. There was a certain amount of speculation and questions about specific projects, and I think that a lot of these questions show that the concern has been far greater than we thought."
And perhaps the way you've managed your expectations is not up to the standard expected on Wall Street? Perhaps annual forecasts would have worked better?
"We've discussed this at length, but considering that the targets we met were our own and not those of Wall Street, it would be better for us to miss the analysts' quarterly expectations instead of their full-year estimates, since the gap would have been much bigger. People will simply have to accustom themselves to believing the estimates we release, and I think that in time we'll prove ourselves, and we'll take it from there. Had we issued an annual forecast, I doubt if it would have been different. We've explained that our sales fluctuate, and investors have been aware of this from day one (disclosed in the company prospectus, S.S.). I hope that the variation will ease somewhat, and that people will get used to the way things work in this business. Overall, this instability is an inherent part of how the market works."
Bassan-Eskanazi has not given an interview with an Israeli newspaper for some time. The reason is his extended absence from Israel, but in a few weeks time, the company's shares will emerge from their lock-up period, and shareholders will then be able to sell shares, while the company, on the other hand, can attempt to hold a further offering. "If and when we do something like this, the company will make a formal announcement to investors," says in Bassan-Eskanazi in response to the rumors.
Vision from the word go
BigBand was founded by Bassan-Eskanazi and executive VP and CTO Ran Oz in 1998. The two first met ten years earlier in the laboratories at the Technion Israel Institute of Technology, and their paths continued to cross in the various organizations they both worked at in the years that followed. The idea was to provide systems that would manage telecommunications providers' bandwidth in order to transmit advanced broadcasts, without making significant investment in infrastructure. Bassan-Eskanazi and Oz's goal was to achieve a form of prioritizing of the television channels requested by each customer group, and instead of suppliers providing them with all their existing channels, thereby taking up a substantial portion of their suppliers' bandwidth, they would offer them a selection of channels with an option to access the rest on demand, thereby saving bandwidth - a function known as Switched Digital Video (SDV).
Another solution that BigBand offers is digitization of analog channels (Digital Simulcast), so that fewer digital channels will be needed, freeing up more bandwidth for advanced services. The company's technology provides a comprehensive analysis of customers' content preferences, something that can be a useful tool in other services such as focused advertising by region, age group, and preferences.
BigBand is now trying to enter new fields, in order to continue growing. One of these, which the company describes as a key growth engine, is the IPTV network provider market. The change began in 2006, after Verizon Communications Inc. (NYSE: VZ) purchased $30 million worth of equipment from BigBand, a deal that marked the latter's formal entry to the world of telecommunications solutions for the telecoms giants.
"Our vision was to transmit video over all networks," says Bassan-Eskanazi in response to investors' fears about the company's ability to provide IPTV solutions to telecoms providers
Another of BigBand's growth engines is data transmission over broadband to cable subscribers. The company has a mere 4% of this $1 billion market, which is dominated by Cisco Systems Inc. (Nasdaq: CSCO) with a 55% share, and Motorola Inc. (NYSE: MOT) with 15%.
Will your data solution be adopted this year?
"We won't see our CMTS solution entering the big companies this year. It is progressing slower than we thought, and the testing is taking longer. Another factor that lowered expectations was the switch to the new solution in this field (m-CMTS), and our recognition of these sales. Progress is slower than we expected, and this has been expressed in our forecast for the rest of the year."
Which brings us back to the IPO. Perhaps you really did float too soon, and the company wasn't mature enough yet for this?
"The flotation was part of the process of building the company. The networked video transmission field is likely to be even larger than it is today. It was important to our customers that we also continue to establish the company as a public one with $150 million in the bank. New video technology companies are now leading this field, and veterans like Cisco weren't able to hold on to this market. Juniper was the one that made the big break with the advent of Internet transmission over service supplier platforms; IBM was already there when the PC was the big issue, but Intel and Microsoft also entered. We believe that we have the ability to build a company on a scale that will make it the leader of the entire networked video transmission industry.
Are you referring here to the scale of Juniper and Microsoft? You've got big ambitions.
"Not Microsoft or Intel, because this is not a consumer's market, but look at how Juniper built the networking field. I think that our solution is radically different from that of the other companies, in the same fashion as Juniper differed in its approach to the networks market to Cisco and 3Com."
Perhaps the IPO price of $13 per share was too high.
"We set a price that we believed showed where the company stands. We believe that in terms of potential, the company represents the price that we set as a result of the feedback we received during the road show. Without commenting on the price today, or tomorrow, the company is in a growing market, and our market share justifies the share price. This is something that should be assessed over time."
Published by Globes [online], Israel business news - www.globes.co.il - on September 9, 2007
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