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What Went Wrong At BigBand Networks


If you invest in small cap tech stocks you have to realize that revenue shortfalls/stock declines (sometimes large), are going to occur from time to time.

I've received some questions about the recent issues with BigBand Networks (BBND), which I'll be happy to address.

First, I need to try and figure out if this is mainly a timing issue or a more serious problem at BBND specifically.

The release by the company didn't give a whole lot of help as it talked of timing issues, but also threw in other issues like an inventory work down and business softness. This is pretty much a kitchen-sink type of preannouncement. I'll try to get more specific details from the company but there is no guarantee it'll provide any more clarity than it released in its statement.

The one thing I will say is this doesn't change my view of the industry or cable equipment suppliers. But if you invest in small cap tech stocks you have to realize that revenue shortfalls/stock declines (sometimes large), are going to occur from time to time. Usually this is due to customer concentration issues and is a primary reason why these companies are so much more volatile.

Small companies that sell to very large customers face all sorts of short term issues that affect their ability to recognize revenue. Some of them are very legitimate (i.e. not serious long term) and are short-term timing related. This means revenue lost one quarter is gained back the next.

For example, this just happened to Optium (OPTM). Before its most recent quarter OPTM preannounced and explained why, which was mainly timing-related. It just reported quarterly results and the lost revenues last quarter are coming back and the stock has since recovered (though only partially). Other revenue shortfall issues can be more serious, having to do with competitive issues, contract disputes or large customers squeezing the company on price and other various terms.

Bottom line, I do think BBND's issues are more company specific and not an industry issue. Harmonic (HLIT) just gave bullish commentary at a recent conference. Ciena's (CIEN) CN4200 has had very strong sales into the MSO's. Arris Group (ARRS) just announced a merger and this follows LM Ericsson (ERIC) buying Tandberg by outbidding ARRS in that deal. So you have larger companies in the group adding assets and capacity going into the next cable network investment cycle.

Comcast (CMCSA) also presented recently and talked about increasing competition from the likes of Verizon (VZ). It addresses this by spending money on its network to keep its offerings competitive with VZ's Fios service as well as other competing products. However, all these examples are part of a longer term thesis and that does not mean the bandwidth suppliers in the space are going to have sequential revenue growth (or strong stock performance) every quarter for the next couple of years. There will be some lumpiness in the quarterly results from time to time.

Lastly, the BBND miss brings out an important point to examine. If you believe in an industry trend or thesis, you should not expect to buy one company in the group and have a high probability of investment success (especially if the company is not the industry leader like a Cisco (CSCO). My belief is to own a basket of stocks in the group and let earnings results and stock action show you the winners. Then over time you ride your winners, cut your losers and enjoy the benefits if the industry thesis is correct.
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Position in CIEN, HLIT, OPTM, ARRS and BBND.

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