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The troubles of Terayon

Zaki Rakib's miserable fourth quarter is followed by a sharp earnings warning for Q1 2001

The earnings warning that cable modem manufacturer

Terayon Communication Systems

(Nasdaq:TERN) released in December was but the tip of a particularly large iceberg. The company not only missed its own moderate expectations. Today it appears that that things aren't going to get better in 2001.

Terayon's income for the fourth quarter of 2000 amounted to $62.9 million, in keeping with forcasts ranging from $60 million to $63 million. But its figures are a far down from the third quarter, which resulted in sales of $125 million.

The further down one travels along the financial statement, the grimmer the picture becomes. The bottom line is animated in red, showing a loss of 77 cents a share pro-forma, compared with 12 cents for Q4 1999. It looks as though investors are too disappointed. The stock nosedived 20% in after-bell trading.

Majestically missing its mark

Terayon did warn investors that losses would deepen. But even the most pessimistic analysts were caught off guard.

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Terayon's severe warning issued in December 2000 guided that losses would range from 46 to 49 cents a share. The average earnings estimates on Wall Street were for 41 cents a share. Terayon majestically missed its mark with a loss of 77 cents a share.

As for net losses, Zaki Rakib, CEO and founder of Terayon, estimated a month ago that the company would report a $34 to $36 million loss, compared to net profit of 8.5 million for Q3 and a $3.3 million expected gains for Q4.

The unpleasant surprise was that without one-time expenses, the losses for Q4 were $50.8 million.

Terayon blamed its ills on diminished sales and profits on orders both slowing and canceled. It complains that customers are sitting on inventory and are therefore ordering less. This creates considerable uncertainty for the projected sales growth of 2001.

earnings warning for 2001, losses of 45 cents a share?

Rakib's latest news ia that results for first quarter 2001 are not going to restore investors' confidence either. At this time Terayon estimates that losses for Q1 2001 will reach 45 cents to 50 cents a share, and that income will continue shrinking and will amount to a mere $45 to $50 million. Analysts, who have had to update their estimates after December's warning, were hoping for a less drastic 33 cents loss.

Terayon reiterates the blame belongs to telcos hesitant to spend large amounts on infrastructure. In 2001, Rakib expects a pro forma loss of $120 to $120 million and income of $200 to $230 million. That's very low compared to a five month-old estimate by him that company sales for 2000 would reach $400 million. Now he informs investors that the company will not reach those figures in 2001 either.

During the Nasdaq heydays, Terayon looked good. It seemed to be Israel's standard-bearer in the global cable equipment market. The company took advantage of its good name, raising $500 million in corporate convertible debentures five months ago. Its offering was followed by a buying frenzy. Terayon bought no less that seven smaller Israeli and foreign companies. Among which were Imedia in July 99, Telegate and Radwiz in October 99, ComBox, in February 2000, and Intranet Telecom a month later. The final acquisition, Truechat, was completed all of two weeks ago.