Perceived demand for video-on-demand isn't what it used to be.
Shares of video-on-demand players
plummeted Friday following Concurrent's lowered revenue forecast.
The stocks' quick fall, which echoes a similar decline after
a post-Christmas warning from Concurrent, reflects the classic tension between long-term hopes and short-term setbacks for companies trying to introduce any new technology. On the one hand, Concurrent, SeaChange and the analysts who follow them remain bullish about the eventual triumph of VOD, which lets TV viewers pick movies and other programming from a menu to watch at any time of day they choose. On the other hand, the stocks can get hammered by factors such as Concurrent's articulated pessimism about economic conditions affecting VOD system sales to cable television operators over the next three to six months.
On Friday, Concurrent's shares sank $3.30, or 38%, to close at $5.50. SeaChange's shares dropped $3.92 to $16.12, off 20% for the day.
Concurrent's gloomy forecast came Thursday evening as the company reported good news, partly in the form of better-than-expected results for the fiscal third quarter ended March 31. Off revenues of $22.1 million, the company reported net income of $802,000, or a penny a share, ahead of the analysts' consensus of break-even, as reported by
Thomson Financial/First Call.
The quarter marked the first time in two years that the company has reported an operating profit, and was the biggest revenue quarter for Concurrent in three years. In addition, earlier on Thursday, cable operator
( COX) said it was launching a new video-on-demand service that would employ Concurrent hardware and software.
Unfortunately, Concurrent's outlook for its video-on-demand operations -- the part of the company's business on which investors have pinned expectations for growth and long-term economic success -- wasn't as reassuring. The company estimates video-on-demand revenue for the fourth quarter ending June 30 at $6 million, down from the $12 million previously expected. Video-on-demand revenue for the fiscal year ending June 2002 will be about $38 million at most, the company says -- well short of prior estimates such as the $83.5 million that
analyst Joseph Bellace had expected for fiscal 2002. Bellace lowered his rating on Concurrent from accumulate to hold; Jefferies hasn't done underwriting for Concurrent.
On the company's Thursday conference call with analysts, Concurrent President and CEO Jack Bryant spotlighted two issues, which he called "frankly beyond our direct influence and control," that were hurting cable operators' deployment of video-on-demand. One was what he called the "apparent standoff" between cable operators and Hollywood studios, which aren't releasing movies for video-on-demand as the operators had hoped they would. "The lack of good content is keeping a number of cable operators from committing to widescale deployment in the short term," Bryant said.
In fact, the unnamed cable operator that caused Concurrent's December preannouncement by postponing an expected order didn't place the order in the March quarter for the same reason, Bryant said: difficulties getting content for the service. That firm -- which Concurrent said in December it hoped would place its order in the March quarter -- now tells Concurrent it could take another three to six months to iron out its content disagreements with movie studios.
In addition, said Bryant, video-on-demand suppliers are competing for limited capital expenditure budgets among cable operators, who are spending very conservatively to meet "aggressive" cash-flow-growth objectives.
Analysts following the video-on-demand market are counseling patience in the face of Thursday's news.
Darren vonBehren of
Hoak Breedlove Wesneski
lowered his price target on Concurrent from $25 to $15, but kept his buy rating on the company. "A longer-term approach is the only way, in our opinion, to play the continued lumpy revenue stream associated with the current video-on-demand market," he wrote in a note before the market opened Friday. His firm hasn't done banking for Concurrent.
VonBehren wrote that he anticipated Concurrent's shares falling as investors absorbed the company's new guidance, "which will give longer-term investors an opportunity to buy shares of a leading VOD industry player at less expensive levels." Concurrent's shares have ranged between $3.88 and $21.75 over the past 52 weeks.
"While timing of entry is critical in this stock," vonBehren wrote, "we believe the adoption of VOD by
cable system operators and the scope of the interest surrounding it by the viewing public will drive continued buy interest in CCUR's shares."
Concurrent is "probably being way too conservative," says David Lee Smith of
Dain Rauscher Wessels.
He says Concurrent created a worst-case scenario to prevent future bad news, but painted such a bleak picture that it created the negative surprise it was trying to avoid. "I think they made a sow's ear out of a silk purse," he says. Smith has a strong buy on Concurrent and a buy on SeaChange; his firm hasn't done underwriting for either.