Description
Bigband Networks, BBND, is, admittedly, a bit of a cigar butt, however, it is a cheap stock with a lot of upside potential and a good margin of safety.
BBND develops, markets and sells network based platforms that enable MSO's and telecoms to offer video services over coaxial cable, fiber and copper networks. Specifically, BBND focuses on emerging areas that allow operators to offer richer content and more personalization, which in turn lowers subscriber churn and increases advertising revenues for its customers. BBND's Switched Digital Video, SDV, allows operators to more efficiently deploy high definition television and video on demand. BBND also sells products for the IPTV market. It has sold to over 200 customers worldwide and lists 7 of the 10 largest MSO's in the US as customers.
BBND was the first to develop and deploy SDV and for several years growth was very strong as MSO's built out in advance and rolled out HDTV. Results over the past few quarters have disappointed shareholders and following the most recent downward revision to guidance the stock fell almost to zero enterprise value. The bear case on the stock is that there are already 37 million homes passed in the US for SDV currently, so the bulk of the growth is behind the company. While it is true that homes passed will reach a saturation point, MSO's will eventually digest the current capacity and have to start adding more SDV capacity as utilization rises and more HD channels are added. Currently, there is some stabilization in BBND's product revenue, so MSO capex might be bouncing along the bottom now in this area. This weakness is expected to continue through the end of the year. BBND also thought its telecom customers would deploy IPTV sooner that they have. Management now believes this will be a 2011 event as some of the large carriers that are trialing this platform are taking longer than anticipated to commercially deploy it as they work through network integration issues. Although the delays have frustrated investors, management still thinks this is a big opportunity.
In response to this slowdown, management has realigned its cost structure. 6% of the work force has been cut, which is resulting in $7 million of annualized savings.
As SDV revenue stabilizes and newer products begin to gain acceptance, particularly for IPTV, the top line should begin to grow again in 2011. With the benefit of the cost cutting that took place earlier in the year, BBND should be able to generate about $130 million of revenue in 2011 with EBITDA excluding stock based compensation around $8 million and grow from there.
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Price
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$2.80
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Shares
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68.7
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Market Cap
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192.4
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| |
|
|
|
Cash
|
|
33.1
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|
Marketable Securities
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130.0
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Debt
|
|
0
|
| |
|
|
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EV
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29.3
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| |
|
|
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Cash burn
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|
15
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EV2
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44.3
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This stock is definitely out of favor, down from an all time high of over 20 in 2007 to a negligible enterprise value. According to Bloomberg, there are 8 analysts covering the stock, with 7 holds and 1 sell. Results have been very weak and choppy, but BBND has $163.3 million of cash and marketable securities on the balance sheet, which will provide a lot of support as MSO's digest their large SDV purchases and telecoms slowly begin their IPTV builds. I think it is conservative to assume that BBND burns another $15 million of cash before things turnaround in a substantive way. YTD the burn has been $11 million, which should improve a little from cost cutting, even before revenue starts growing again.
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1Q'08
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2Q'08
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3Q'08
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4Q'08
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1Q'09
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2Q'09
|
3Q'09
|
4Q'09
|
1Q'10
|
2Q'10
|
|
2007
|
2008
|
2009
|
|
Products
|
32
|
33.9
|
38.3
|
44.2
|
33.9
|
22.2
|
12.6
|
25
|
24.9
|
16.6
|
|
144.7
|
148.4
|
93.7
|
|
Services
|
7.9
|
9.1
|
9.9
|
10
|
10
|
16.8
|
9.6
|
9.5
|
7.4
|
9.8
|
|
31.8
|
36.9
|
45.9
|
|
Total rev
|
39.9
|
43
|
48.2
|
54.2
|
43.9
|
39
|
22.2
|
34.5
|
32.3
|
26.4
|
|
176.5
|
185.3
|
139.6
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
12.3
|
14.4
|
16.8
|
16.7
|
15.1
|
10.9
|
8.2
|
11.8
|
13.9
|
9.4
|
|
76.3
|
60.2
|
46
|
|
Services
|
3.2
|
3.3
|
2.9
|
3.4
|
3.2
|
3.1
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2.9
|
3.2
|
3.3
|
3
|
|
13.4
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12.8
|
12.4
|
|
Total COGS
|
15.5
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17.7
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19.7
|
20.1
|
18.3
|
14
|
11.1
|
15
|
17.2
|
12.4
|
|
89.7
|
73
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58.4
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
19.7
|
19.5
|
21.5
|
27.5
|
18.8
|
11.3
|
4.4
|
13.2
|
11
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7.2
|
|
68.4
|
88.2
|
47.7
|
|
Services
|
4.7
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5.8
|
7
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6.6
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6.8
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13.7
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6.7
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6.3
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4.1
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6.8
|
|
18.4
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24.1
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33.5
|
|
Total GP
|
24.4
|
25.3
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28.5
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34.1
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25.6
|
25
|
11.1
|
19.5
|
15.1
|
14
|
|
86.8
|
112.3
|
81.2
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D
|
14.4
|
12.8
|
13.2
|
13.6
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11.5
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11.1
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11.7
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12.1
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13.5
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13.1
|
|
51.9
|
54
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46.4
|
|
S&M
|
7.9
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7
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7.1
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6.9
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6.4
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5.9
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6
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5.9
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6.1
|
6
|
|
39.9
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28.9
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24.2
|
|
G&A
|
4.8
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5.4
|
5.4
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5.3
|
4.5
|
5
|
4.6
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4.8
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4.5
|
4
|
|
16.3
|
20.9
|
18.9
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|
Restructuring
|
0.3
|
1.2
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0.7
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-0.1
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1.4
|
0
|
0
|
0
|
0
|
1
|
|
3
|
2.1
|
1.4
|
|
Amort of intang
|
0.1
|
0.1
|
0.1
|
0.4
|
0
|
0
|
0
|
0
|
0
|
0
|
|
0.6
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0.7
|
0
|
|
Gain on sale
|
0
|
0
|
0
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-1.8
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0
|
0
|
0
|
0
|
0
|
0
|
|
0
|
-1.8
|
0
|
|
Litigation charges
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0
|
0
|
0
|
1.5
|
0
|
0.5
|
0
|
0
|
0
|
0
|
|
0
|
1.5
|
0.5
|
|
Opx
|
27.5
|
26.5
|
26.5
|
25.8
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23.8
|
22.5
|
22.3
|
22.8
|
24.1
|
24.1
|
|
111.7
|
106.3
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91.4
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| |
|
|
|
|
|
|
|
|
|
|
|
|
|
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EBIT
|
-3.1
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-1.2
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2
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8.3
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1.8
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2.5
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-11.2
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-3.3
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-9
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-10.1
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|
-24.9
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6
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-10.2
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EBIT adj
|
-2.8
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0.0
|
2.7
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7.9
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3.2
|
3
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-11.2
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-3.3
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-9
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-9.1
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|
-21.9
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7.8
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-8.3
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|
DA
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2.5
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2.7
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2.6
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2.7
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2.1
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2.2
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2.3
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2.3
|
2
|
2
|
|
8.9
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10.5
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8.9
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EBITDA
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-0.3
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2.7
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5.3
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10.6
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5.3
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5.2
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-8.9
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-1
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-7
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-7.1
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|
-13
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18.3
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0.6
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|
SBC
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3.2
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2.4
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3
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3.2
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3
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3.5
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3.8
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3.9
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3.8
|
3.6
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|
10.7
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11.7
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14.2
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EBITDA adj
|
2.9
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5.1
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8.3
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13.8
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8.3
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8.7
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-5.1
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2.9
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-3.2
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-3.5
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|
-2.3
|
30
|
14.8
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBT
|
-1.5
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1.5
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3.1
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9.1
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2.5
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3.4
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-10.6
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-3.1
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-8.6
|
-10
|
|
-24.1
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12.2
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-7.8
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|
Tax
|
0.5
|
0.2
|
0
|
1.7
|
0.2
|
0.3
|
0.2
|
-1.8
|
0.2
|
-0.3
|
|
1.2
|
2.4
|
-1.1
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|
NI
|
-2
|
1.3
|
3.1
|
7.4
|
2.3
|
3.1
|
-10.8
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-1.3
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-8.8
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-9.7
|
|
-25.3
|
9.8
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-6.7
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFFO
|
-0.6
|
8.5
|
7.9
|
7.7
|
-7.2
|
6
|
-9.8
|
11.3
|
-5.6
|
-2
|
|
20.7
|
23.5
|
0.3
|
|
FCF
|
-6.3
|
6.9
|
6.4
|
5.4
|
-8.1
|
3.5
|
-11.9
|
9.7
|
-6.7
|
-3.3
|
|
8.4
|
12.4
|
-6.8
|
BBND clearly has good technology, but has struggled to show that it can operate profitably enough as a standalone niche player, so I believe that stakeholders would be better served if the company were acquired by a larger company with a broader suite of products that might be able to earn a satisfactory return on capital.
The cable equipment market has historically not been the best industry to be involved in for various reasons. Pricing can get very competitive a generation or two after a product is introduced. BBND has been experiencing this in the edge QAM market particularly. There are a limited number of large scale MSO's, so customer concentration is also usually an issue. Last quarter BBND had two 10+% customers: TWC 36% and VZ 22%, while its top 5 customers were 79% of revenues. These issues cause revenues in the space to be very cyclical and ROIC to not be very good over time.
BBND has some mildly troubling governance issues, as well. In my opinion, management is overpaid, considering performance and the size of the company. They are also attempting to reset stock option strike prices lower at the upcoming annual meeting, all the while there has been some insider selling from 10b5-1 programs, which I would like to see be terminated at this valuation, especially if they are going to reset options. Valueact Smallcap Management now owns almost 15% of the stock though and has a representative on the board, so hopefully this provides some adult supervision.
Despite the negatives, at this valuation there are a lot of ways for this investment to work out and with a good margin of safety, since BBND is suffering from a hiccup in SDV spending and has yet to benefit from the ramp of IPTV.
Catalyst