Since BigBand Networks (BBND) is part of our model portfolio, I feel compelled to comment on the devastating news released after the close last Thursday.
The company announced that it would encounter a revenue shortfall and be unprofitable in the third quarter. BigBand now expects to report revenue for the third quarter in the range of $35 to $39 million, which is below the company's previous guidance of $54 to $58 million. The lower revenue outlook is due to several factors. BigBand has been deploying switched digital video across an expanding number of customers and configurations. Some of these ongoing deployments have required more software customization and integration than originally expected. In other words, the company underestimated the effort and the timeline. This has impacted their ability to book revenue for some of these deployments in the third quarter. The company also said it experienced a slowdown in Telco-TV revenue, as its "major customer" worked through some previously purchased inventory. The major customer is said to be Verizon.
A flurry of analyst downgrades immediately followed the announcement and the stock lost 25% in Friday's trade. Investors like me were blindsided and had no chance to get out.
This just confirms that selling to the telcos is a bad business to be in lately. We have seen Nortel (NT), Tellabs (TLAB) and Alcatel-Lucent (ALU) making the same kind of announcement. Alcatel-Lucent has offered three profit warnings in a row. Being a smaller player, like BigBand, just makes it that much harder.
Our expectation was that BigBand would not be a rocket stock but over the long term would prove itself and perhaps be bought out by a company like Cisco Systems (CSCO). It is clear that the long term just got longer.
Disclosure: author owns shares in BBND and CSCO
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- BigBand announces big revenue miss
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