Consensus among analysts covering Terayon Communication Systems (Nasdaq:TERN) was rare, until Tuesday.
Yesterday Terayon stock leaped 51% on 12 times its usual turnover on Wall Street. Analysts applauded as the broadband access systems firm announced that industry group CableLabs is making patented Terayon S-CDMA technology a key component of the future cable modem standard.
Terayon's management said in a conference call on Tuesday that CableLabs should complete the initial specification process this year.
CableLabs' decision essentially validates Terayon's whole technological direction. It is a huge breakthrough for the company, which saw its reputation suffer after disappointing investors last year.
Deutsche Banc Alex. Brown on Wednesday raised its investment rating on Terayon from Market Perform to Buy. UBS Warburg upgraded the company to a Strong Buy. Lehman Brothers (NYSE:LEH), and WR Hambrecht both opted for Buy. UBS Warburg wrote that the new DOCSIS 2.0 cable modem standard makes Terayon 's OpenPHY processor "potentially the most attractive cable modem in the chip industry".
CableLabs established the DOCSIS (data over cable service interface specification) process to ensure interoperability among cable network equipment.
Until Terayon's announcement, it was not clear whether the DOCSIS 2.0 standard would ever become a reality, or whether Terayon's technology would be part of it.
UBS predicts Terayon will assume central role in cable modems
UBS upgraded its rating from Buy to Strong Buy, although it doesn't foresee profit next year. It predicts that Terayon will lose $1.42 per share, only slightly better than the previous forecast of a $1.48 loss per share.
Be that as it may, UBS analyst Anton Wahlman sees huge future demand for Terayon's OpenPHY processors.
Wahlman estimates that Terayon will begin selling its S-CDMA-based processors during the first quarter of 2002.
Terayon's newest chips can support older standards, such as DOCSIS 1.0 and DOCSIS 1.1, which means that the chips could provide Terayon with a significant edge against its rivals.
UBS foresees that Terayon will split into two companies along the fault-line of its two core fields: chips and cable modems. That is what Orckit Communications (Nasdaq:ORCT) did, when it spun off its chips division to form Tioga Technologies (Nasdaq:TIGA).
Lehman Brothers sees Terayon's edge
Lehman Brothers analyst Andrea Green upgraded Terayon from Market Perform to Buy. Terayon's announcement does not necessarily spell out fresh revenue, she warned, but it certainly gives the Israeli company a competitive edge.
WR Hambrecht analyst Tim Savageaux upgraded Terayon from Neutral to Buy, seeing its advantage not only in selling chips but also in selling its current cable modems, which are based on S-CDMA technology.
Terayon's ability to convert these modems to the new DOCSIS 2.0 standard could generate growth in itself, increasing modem revenue flow.
At the end of the second quarter of this year, Terayon held sway over 11% of the cable-modem market, occupying third place among competitors.