Continuing its recent buying spree, Terayon Communication
Systems Inc. is paying $150 million to significantly expand its business beyond broadband
data into voice and video.
Terayon last week announced the acquisitions of
Israel-based Telegate Ltd. and Radwiz Ltd. Both deals will significantly advance its
strategy for developing next-generation, hybrid headends capable of supporting digital,
data-laden video, Internet-protocol or circuit-switched telephony and high-speed data over
cable or copper telephone lines.
The deals also bolster Terayon's ability to provide
customer premise gear to deliver those services and distribute them throughout a home or
small business.
"It's a synergistic path where I can combine all those
capabilities to build the mother of all headends, the concentration box that allows video,
voice and data to be combined on one chassis," Terayon CEO Zaki Rakib said.
The Telegate and Radwiz deals follow July's $100 million
addition of Imedia Corp. into the Terayon fold. That deal brought Imedia's technology for
integrating data or inserting local advertising into digital-video streams.
Adding the technology and products of Telegate and Radwiz
will support development of further services such as videoconferencing over an
Internet-protocol or circuit-switched communications network, or the delivery of video
services over digital-subscriber-line platforms, with Imedia technology handling the
necessary switching and multiplexing.
Terayon's ability to broaden its current business -- which
is focused on high-speed Internet access over cable -- is crucial. Over the next several
years, cable-modem and headend interoperability standards will begin incorporating the
synchronous code division multiple access (S-CDMA) modulation technology that has helped
set Terayon apart.
The upcoming version 1.2 of the North American cable
industry's Data Over Cable Service Interface Specification (DOCSIS) standard incorporates
Terayon's S-CDMA modulation system to maximize upstream bandwidth. Rakib expects major
competitors such as Cisco Systems Inc. to use that aspect as they develop next-generation
headends capable of providing the multimedia services operators want.
"You're looking at a company that a few months ago was
a cable-modem play. Now they've certainly made some smart acquisitions to enhance their
transition," said Michael Harris, president of the research and consulting firm
Kinetic Strategics Inc. "This enables them to play in more lucrative parts of this
business instead of competing with Samsung on $199 cable modems."
Pointing to the recent merger of General Instrument Corp.
with Motorola Inc. and Cisco Systems Inc.'s work with Sony Corp. of America to provide a
digital-cable platform for Cablevision Systems Corp., Harris said vendors see that to
remain competitive, they must offer many services over multiple platforms.
Terayon agreed to pay $100 million in stock for Telegate, a
provider of S-CDMA-based broadband telephony systems that has worked with Terayon for
several years.
Telegate, whose investors include General Instrument, ECI
Telecom Ltd., GE Capital Corp. and Nomura Securities, provides "Multigate" voice
and data systems to several cable operators in Belgium, China and Germany, complementing
Terayon's own international cable-modem and headend footprint.
Telegate also provides wireless in-home networking
capability using the digital European cordless telecommunications (DECT) platform, which
has been primarily deployed as a "wide-area" cordless or wireless office phone
system.
"That sets the stage for all of our products in the
future to be able to interact and interface with all standards for in-home
networking," Rakib said. "Telegate's system is primarily for access, they're
buying DECT chips, writing the software for them and integrating. Whatever technology
prevails for in-home networking, we can integrate."
Terayon also entered into a partnership with ECI, which
will sell and distribute Terayon's voice and data systems through a sales force covering
145 countries. Terayon and ECI, which makes high-speed synchronous
optical-network/synchronous-digital-hierarchy (SONET/SDH) systems, also plan to jointly
develop end-to-end broadband access solutions that incorporate the capabilities of both
companies.
The $50 million, all-stock acquisition of privately held
Radwiz adds further networking capabilities through its Internet-protocol voice and
data-routing products for the small-office/home-office market.
Equally important is Radwiz's hardware for enabling
digital-subscriber-line systems to use existing copper phone lines for high-speed data,
including central office digital-subscriber-line access multiplexers (DSLAM) and
customer-premise equipment.
Radwiz's DSL technology could be imported to Terayon's
development of a multi-platform broadband chassis, said Rakib, making that possibly more
valuable to the deal than any prospect of making major inroads to the competitive
DSL-equipment market.
"Competition in the DSLAM market is insane,"
Harris said. "But this buys them expertise in the routing and telephony space."
Terayon last week reported that its third-quarter loss, net
of one-time items, declined to $1.7 million from $6.5 million a year earlier. Its revenue
jumped to $23.4 million from $9.4 million.
Accounting for unusual charges, including $11 million
related to the Imedia acquisition, the net loss for the 1999 period was $24.6 million.
For nine months, the net loss excluding unusual charges
declined to $9.4 million from $17.8 million, while revenue rose to $58.3 million from
$18.8 million a year earlier.
Terayon said it shipped 68,500 proprietary-platform modems
and 314 headends during the quarter, raising total shipments to 227,000 and 1,127,
respectively.
Terayon has a cable modem that is certified as
interoperable under the initial 1.0 version of DOCSIS. However, it is basing its
deployment plans primarily on the DOCSIS-based cable modem termination system (CMTS) that
it expects to produce in the first half of next year.
Rakib said the company is not yet shipping DOCSIS modems,
but plans to do so once its DOCSIS-based CMTS is available for CableLabs interoperability
qualification.
