Video vendors see big gains from large telco deployments

Though it is still somewhat early in the quarterly earnings report cycle, vendors whose future depends to a large extent on telco video deployments are making some bold predictions about 2005 results. However, for many, the actual paydays may not come until later in the year or early 2006.

Last week, for example, headend vendor Tut Systems reported revenue of $7 million and a net loss of $2.5 million for the fourth quarter of 2004. Total revenue for 2004 was $25 million with a net loss of $13.5 million. That compares to 2003 revenue of $32.2 million and a net loss of $5.5 million. At the same time, the company is projecting significantly higher revenues for future quarters, without being specific about the sources for that revenue.

“We've been surprised by the level of activity we've been seeing in the last quarter, and even in the last week,” said Sal D'Auria, chairman, president and CEO of Tut Systems.

“If we add up the dollar value of the responses [to requests for proposals] that we've made in the last 45 days, our responses would total more than $200 million potential business. That number is separate from our traditional IOC business [opportunity], which has been growing and is over $100 million,” he said.

Without talking specific customers, many vendors believe Verizon Communications, BellSouth and SBC Communications, as well as large European and Asian incumbents, all will begin taking significant shipments of equipment this year.

“They are definitely serious about entering the telco TV business,” D'Auria said. “Before the end of year, we'll have large telcos. We think that that will be a Q4 or maybe even Q3 activity.”

SkyStream Networks, one of Tut's most direct competitors, likewise anticipates significant revenue jumps, though it is slightly more muted in its predictions. Because the company is not public, it won't reveal specific revenue figures, but Jim Olson, SkyStream president and CEO, said 2004 represented the eighth consecutive year of revenue growth, and that most of Q4's growth came from telcos with six U.S. carrier wins.

“One thing we share with Tut is that this is a market with great opportunity,” he said. “We see telco TV subscribers up to 3 million this year, 6 million next year and doubling every year after that.”

Like Tut, SkyStream is relying on the bigger incumbents, though it has a strategically significant agreement to provide Alcatel with headend equipment and software as part of an end-to-end network. The company currently is bidding on 12 deals with Alcatel around the world.

“We expect to win at least two RBOCs and more PTTs this year,” Olson said. “They're going to start buying equipment in mid to late '05.”

Indeed, virtually everyone with a stake in telco video is pointing to the fourth quarter as a significant milepost. In some cases, the results will come in even sooner. In reporting its fourth-quarter numbers, Tellabs said it expects to see a 5 to 10% revenue jump in part because of its AFC acquisition, which gave it the primary supplier role for Verizon's fiber-to-the-premises rollout.

“Looking forward in 2005, clearly we're going from [being] a billion-dollar player to a two billion-dollar player, especially as we fully integrate the access opportunities,” Tellabs President and CEO Krish Prabhu told analysts last week.

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