BIGBAND NETWORKS INC BBND
September 29, 2010 - 4:09pm EST by
fiftycent501
2010 2011
Price: 2.83 EPS nm nm
Shares Out. (in M): 69 P/E nm nm
Market Cap (in M): 192 P/FCF nm nm
Net Debt (in M): -163 EBIT -25 -10
TEV: 29 TEV/EBIT nm nm

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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.

Price

 

$2.80

Shares

 

68.7

Market Cap

 

192.4

     

Cash

 

33.1

Marketable Securities

130.0

Debt

 

0

     

EV

 

29.3

     

Cash burn

 

15

EV2

 

44.3

 

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.

 

1Q'08

2Q'08

3Q'08

4Q'08

1Q'09

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

2.9

3.2

3.3

3

 

13.4

12.8

12.4

Total COGS

15.5

17.7

19.7

20.1

18.3

14

11.1

15

17.2

12.4

 

89.7

73

58.4

                             

Products

19.7

19.5

21.5

27.5

18.8

11.3

4.4

13.2

11

7.2

 

68.4

88.2

47.7

Services

4.7

5.8

7

6.6

6.8

13.7

6.7

6.3

4.1

6.8

 

18.4

24.1

33.5

Total GP

24.4

25.3

28.5

34.1

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

11.5

11.1

11.7

12.1

13.5

13.1

 

51.9

54

46.4

S&M

7.9

7

7.1

6.9

6.4

5.9

6

5.9

6.1

6

 

39.9

28.9

24.2

G&A

4.8

5.4

5.4

5.3

4.5

5

4.6

4.8

4.5

4

 

16.3

20.9

18.9

Restructuring

0.3

1.2

0.7

-0.1

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

0.7

0

Gain on sale

0

0

0

-1.8

0

0

0

0

0

0

 

0

-1.8

0

Litigation charges

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

23.8

22.5

22.3

22.8

24.1

24.1

 

111.7

106.3

91.4

                             

EBIT

-3.1

-1.2

2

8.3

1.8

2.5

-11.2

-3.3

-9

-10.1

 

-24.9

6

-10.2

EBIT adj

-2.8

0.0

2.7

7.9

3.2

3

-11.2

-3.3

-9

-9.1

 

-21.9

7.8

-8.3

DA

2.5

2.7

2.6

2.7

2.1

2.2

2.3

2.3

2

2

 

8.9

10.5

8.9

EBITDA

-0.3

2.7

5.3

10.6

5.3

5.2

-8.9

-1

-7

-7.1

 

-13

18.3

0.6

SBC

3.2

2.4

3

3.2

3

3.5

3.8

3.9

3.8

3.6

 

10.7

11.7

14.2

EBITDA adj

2.9

5.1

8.3

13.8

8.3

8.7

-5.1

2.9

-3.2

-3.5

 

-2.3

30

14.8

                             

EBT

-1.5

1.5

3.1

9.1

2.5

3.4

-10.6

-3.1

-8.6

-10

 

-24.1

12.2

-7.8

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

NI

-2

1.3

3.1

7.4

2.3

3.1

-10.8

-1.3

-8.8

-9.7

 

-25.3

9.8

-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

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    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.

    Price

     

    $2.80

    Shares

     

    68.7

    Market Cap

     

    192.4

         

    Cash

     

    33.1

    Marketable Securities

    130.0

    Debt

     

    0

         

    EV

     

    29.3

         

    Cash burn

     

    15

    EV2

     

    44.3

     

    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.

     

    1Q'08

    2Q'08

    3Q'08

    4Q'08

    1Q'09

    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

    2.9

    3.2

    3.3

    3

     

    13.4

    12.8

    12.4

    Total COGS

    15.5

    17.7

    19.7

    20.1

    18.3

    14

    11.1

    15

    17.2

    12.4

     

    89.7

    73

    58.4

                                 

    Products

    19.7

    19.5

    21.5

    27.5

    18.8

    11.3

    4.4

    13.2

    11

    7.2

     

    68.4

    88.2

    47.7

    Services

    4.7

    5.8

    7

    6.6

    6.8

    13.7

    6.7

    6.3

    4.1

    6.8

     

    18.4

    24.1

    33.5

    Total GP

    24.4

    25.3

    28.5

    34.1

    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

    11.5

    11.1

    11.7

    12.1

    13.5

    13.1

     

    51.9

    54

    46.4

    S&M

    7.9

    7

    7.1

    6.9

    6.4

    5.9

    6

    5.9

    6.1

    6

     

    39.9

    28.9

    24.2

    G&A

    4.8

    5.4

    5.4

    5.3

    4.5

    5

    4.6

    4.8

    4.5

    4

     

    16.3

    20.9

    18.9

    Restructuring

    0.3

    1.2

    0.7

    -0.1

    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

    0.7

    0

    Gain on sale

    0

    0

    0

    -1.8

    0

    0

    0

    0

    0

    0

     

    0

    -1.8

    0

    Litigation charges

    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

    23.8

    22.5

    22.3

    22.8

    24.1

    24.1

     

    111.7

    106.3

    91.4

                                 

    EBIT

    -3.1

    -1.2

    2

    8.3

    1.8

    2.5

    -11.2

    -3.3

    -9

    -10.1

     

    -24.9

    6

    -10.2

    EBIT adj

    -2.8

    0.0

    2.7

    7.9

    3.2

    3

    -11.2

    -3.3

    -9

    -9.1

     

    -21.9

    7.8

    -8.3

    DA

    2.5

    2.7

    2.6

    2.7

    2.1

    2.2

    2.3

    2.3

    2

    2

     

    8.9

    10.5

    8.9

    EBITDA

    -0.3

    2.7

    5.3

    10.6

    5.3

    5.2

    -8.9

    -1

    -7

    -7.1

     

    -13

    18.3

    0.6

    SBC

    3.2

    2.4

    3

    3.2

    3

    3.5

    3.8

    3.9

    3.8

    3.6

     

    10.7

    11.7

    14.2

    EBITDA adj

    2.9

    5.1

    8.3

    13.8

    8.3

    8.7

    -5.1

    2.9

    -3.2

    -3.5

     

    -2.3

    30

    14.8

                                 

    EBT

    -1.5

    1.5

    3.1

    9.1

    2.5

    3.4

    -10.6

    -3.1

    -8.6

    -10

     

    -24.1

    12.2

    -7.8

    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

    NI

    -2

    1.3

    3.1

    7.4

    2.3

    3.1

    -10.8

    -1.3

    -8.8

    -9.7

     

    -25.3

    9.8

    -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

    Messages


    SubjectGood post
    Entry09/30/2010 02:53 PM
    Memberspecialk992
    I have accumulated a decent size position at these levels, it seems like a great risk/reward opportunity. I'm not sure there is a near-term catalyst, although Comcast has filed with the FCC to begin rolling out SDV and if it comes out that BBND has been awarded a sizeable percentage of the business, the stock could get a big bounce.
     
    One key to the story that deserves a bit more elaboration is their MSP product which enables both cable and telco operators to tailor video streams to individual users, including the insertion of individual ads based on customer profile. This is potentially game-changing technolgy and it has been in trial seemingly forever. The company has told me they expect meaningful revenue from it in 2011, but we'll see. It could be a big new product category or the rationale for a strategic acquisition by someone like Cisco, Motorola, Arris or Harmonic.
     
    What's ridiculous about the story is that if BigBand were a private company with little or no revenue, but had a product like MSP in trial with major carriers, VCs would be falling all over themselves to invest money at a $100M to $200M valuation. But public markets only value the company at about a $30M EV, even though the company has an over $100M per year revenue run rate from previous products, other products in trial, public liquidity, a margin of safety due to the cash, etc. I reall think that this thing will more than double within two years.
     
    Another thing to note is that the ValueAct Smallcap portfolio manager who sits on the board is the former CEO of Liberate Technologies, a digital cable software provider. He has been buying the crap out of the shares at higher prices and if anyone is in a position to get an edge on the technology and market potential of the company it's him. I think he is giving the company 2011 to demonstrate it can revive sales growth and if it doesn't happen will push hard for a sale.
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