Posts filed under ‘Wireless’
Ceragon Purchase Boosts Takeover Potential
Wednesday it was announced that Ceragon Networks (NASDAQ: CRNT) has reached an agreement to acquire Nera Networks of Norway. Both are in the backhaul sector of the wireless business. As frequent readers know, I have long been a bull on Ceragon for a number of reasons:
Large customer base and high growth- Low cost structure
- Excellent management team
- Outstanding market niche
As mobile networks grow, the interconnections between towers and switching hubs (backhaul) requires faster and faster connections. Putting in microwave solutions such as those Ceragon (and Nera) provide is signficantly cheaper than replacing pokey copper T-1′s with optical fiber. And in the parts of the world where growth is fastest (China, India, etc.) there isn’t even any copper to replace. Moreover, in many regions (e.g Africa, South America) the topology precludes wired backhaul.
Ceragon, with its roots in the Israeli military, has long been the technology leader in this segment. The addition of Nera’s complementary product line and customer set (particularly in South America) will provide a significant boost to its prospects. It also reduces reliance on Nokia-Siemens, Ceragon’s biggest customer.
But the biggest advantage coming from this consolidation is that it will ultimately make Ceragon a much more attractive takeover candidate than it already is. Potential acquirers are the large, diversified telecoms like Alcatel-Lucent, Nokia-Siemens, NEC, or Ericsson.
This has been a long-term buy-and-hold recommendation of mine for years, and that’s even more so now (though I’d probably wait a quarter or two for a lower price as Ceragon absorbs some losses from the acquisition and rationalizes Nera’s cost structure).
I would expect it’s even more likely to see Ceragon taken out itself, perhaps within 2 years or so. I plan on holding shares when it is.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
The Ship is Sinking
Well, you can’t say I didn’t see this one coming.
Recently I noted how badly Clearwire’s numbers looked (NASDAQ: CLWR). But long before that, I made the point that WiMax was overhyped and that founder Craig McCaw had a history of building up large wireless enterprises and exiting at the top–with as much coin as possible.
I got flamed from many for both opinions, largely from non-technologists who seemed more in love with their portfolio than they were well-versed in wireless telecom.
Today it was announced McCaw is practically sneaking out the back door, right after CLWR announced large layoffs amid doubts about its survival, and more important, right after a large $1.1B debt offering.
The smartest rat seems to have just jumped overboard.
Anybody wanna buy a deck chair on this puppy?
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Can You Spell “Vindication”?
I was just reviewing one of my predictions about the Wireless space from some months ago. I took a lot of flack from some readers at Seeking Alpha for my suggestion that Clearwire (NASDAQ: CLWR) had issues, and that Dragonwave (NASDAQ: DRWI) had risen a bit too fast.
Yet over that period, the S&P has dropped about 8%, while CLWR has fallen more than double that amount.
Moreover, there were those that scoffed at my idea of a pair trade on the equipment suppliers: buy Ceragon Networks (NASDAQ: CRNT) and sell Dragonwave. It’s pleasing to note, however, that had any of them done so, there would have been a nice little pot of gold at the end of the rainbow.
Ceragon has lost 32% over the period, but that pales in comparison to DRWI’s drop of 47%.
Each time I’ve suggested Ceragon is a solid company with a bright future in a growing space, people have pooh-poohed the suggestion–for one reason or another.
I may be wrong someday but I’m still waiting. In the meantime, vindication sure feels good.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Clear: Still Foggy, Then Stormy
It’s been quite awhile since I looked in on Clearwire (NASDAQ: CLWR), and their big bet on WiMax. Frankly, not much has changed. I believed back then—and do even now—that WiMax is a technology solution that’s somewhat overhyped.
Clearwire is still spending money. Intel is still touting it. So is Google. Meanwhile, WiMax is enjoying adoption primarily in emerging markets that have little entrenched infrastructure. In the U.S.? Not so much. The recent macroeconomic environment can’t have been good for CLWR, as it needs capital to maintain any lead it has on incumbent cellular providers. Meanwhile, LTE is starting to come on board with the latter, and large-scale deployments are not far behind.
WiMax may find its niche—at least in the U.S. — as more of a backhaul technology for wireless clouds (LTE or WiFi) owned by the large incumbent wireless carriers than anything else. We’ll see.
The efforts of Sprint (NYSE: S) and CLWR is all that’s kept WiMax afloat here. It still looks a bit like Clearwire sold a self-serving bill of goods to Sprint, who has long been desperate for a magic bullet to solve its subscriber defection problems.
Here, you try it. No way, I’m not gonna try it, you try it. Hey, let’s give it to Mikey. He won’t adopt WiMax, he hates everything. Hey Mikey! He likes it!
Check out the chart on the right, courtesy of Gridstone Research.
Since eloping with Sprint’s network business, Clearwire has managed revenue growth of 19% year-over-year, based on 2008 pro forma numbers and 2009 actuals. However, in that same span costs have swollen by 27%. As a result operating income has dropped by 29% (from a negative number, mind you). Just the spectrum fees that Clearwire pays amount to 95% of its revenue.
Wait, let me guess. They’re going to make it up on volume.
So besides shorting CLWR, is there any way to play this puppy? As a matter of fact, there is. No matter what happens between WiMax and the other competing technologies, cellular firms will need increasing capacity on their backhaul links. The iPhone and Android have seen to that. For some, fiber will come to the rescue. For others, a wireless solution is the only one that makes sense to boost backhaul bandwidth. (Holy alliteration, Batman!)
And the clear leader in wireless backhaul is one of my favorites, Ceragon Networks (NASDAQ: CRNT), who coincidently just announced a new solution at the CTIA conference on March 23rd. Sure, competitor Dragonwave (NASDAQ: DRWI) has come on strong in the last year, but they’re still too strongly tied to Clearwire, who is responsible for the lion’s share of DRWI’s business. Ceragon is more balanced, having a number of large customers–including last year’s addition of Hutchison 3.
In fact, despite the recent relative falloff in Dragonwave’s relative price, the pair trade of long CRNT and short DRWI may still have legs.
Either way, marrying Clearwire to Sprint is like a perfect storm. A technology with limited utility serving as the foundation for a network with limited subscribers.
Disclosure: I hold no position, either long or short, in any stocks mentioned here. However, I do receive limited free service from Gridstone Research, in return for mentioning them when I use data from their site.
Escape from Alcatraz
In a recent Wall Street Journal there was an interesting article on jailbreaking iPhones. It seems many people–more than I originally thought–may be using software to “break” the restrictions on an iPhone, allowing the installation of applications that have not been purchased through the App Store, or certified by Apple (NASDAQ: AAPL).
The article quoted Jay Freeman, developer of Cydia, as saying 1.7M have downloaded it–implying a like number of jailbroken iPhones. Even if he’s exaggerating, it’s probably fair to say the total worldwide number of jailbroken iPhones could be in the millions now.
In terms of sheer volume, this doesn’t present much of a threat to App Store revenue. Though certainly the availability of applications that are not blessed by closed Apple ecosystem will appeal to many.
Awhile back, I suggested that the most widespread app for the iPhone in 2009 would be a virus. Subsequently, I was roundly flamed by the ever-sensitive Apple fanboys, who claimed that the App Store system is practically (if not completely) virus-proof.
Above all, there’s the dreaded “Kill Switch”, which lets Apple disable an application on every iPhone in the world, once its discovered to be malicious or defective in a way that allows the spread of a virus.
[The presence of that kill switch has become a lightning rod for those critical of the amount of control Apple has retained over its ecosystem. Google's (NASDAQ: GOOG) Android OS for mobile phones promises a great deal of freedom and diversity. Apple provides a more limited functionality, but users get stability, increased virus security, and a world-class user experience. The liberty vs. security trade-off seems universal.]
I’ll admit to a bit of hyperbole in my original post. And I certainly got more of an education in iPhone security than I ever wanted. So perhaps a virus won’t be the MOST downloaded app. Or happen this year. But I stand by my original sentiment.
Imagine the following: One day, some unexpected data finds its way into your computer. Some time later, tens or even hundreds of copies of the data leave your machine and end up on the hard drives of other people’s PCs. And the process repeats until hundreds of thousands of computers have been infiltrated by copies of this data.
A virus, you say? No, just a joke email. But I think you get my point.
The problem with those who defend Apple is they have far too limited a definition of a virus. No one says it has to be malicious, or take control of your hardware. Hackers are first and foremost pranksters, who often spread mayhem but are also driven by the challenge–seeking recognition in their own way and in their own circles.
And people make mistakes. That includes both the developers of legitimate iPhone applications, as well as Apple itself. Perhaps an innocent error could sneak through the certification process and be exploited by a creative youth with time on his hands. It needn’t be a malicious attack that takes over peoples’ iPhones.
On the other hand, imagine if you could claim bragging rights by forcing Steve Jobs to actually use that kill switch, disabling a popular application on every iPhone in the world.
That would make a hell of a “virus”, wouldn’t it?
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Close to the Edge
With the New Year upon us, and a possible rally (well, sometime this year we hope), it may be time to think about dipping your toes back into the market. But how to put your money to work?
For technology stocks, I think it’s important to have an “edge”.
Over the past few years, I’ve been following a trend that–while not new–still has plenty of legs. Particularly coming out of this bear market. It’s not a stock screen, but it helps me see which technologies could be viable investment candidates, and which might instead require swimming against the current.
Things like control, intelligence, and value creation have long been shifting away from the center. Moving from large, centralized bodies towards the edge. The edge of markets, networks, locales. There are exceptions, of course, but this movement is still happening.
So I always check first to see whether any new technology–or its market–supports this trend towards decentralization and democratization.
“Uh, gee Scott, that’s great. I have no idea what the hell you’re getting at.” Fair enough. Let’s look at a few examples.
Healthcare
Lots of innovation here. Doctors interacting with patients and each other at a distance. Sending X-Rays to specialists abroad for review. Doctor-patient consultations over videophone instead of in the office. Glucose testers and home dialysis kits let measurements occur at home, not the hospital. Portable ultrasound machines and defibrillators allow diagnosis and treatment in remote areas.
Consumers are rating doctors, sharing treatment experiences, and finding health information via social networks and the Internet. Doctors themselves are forming “expert” networks to vet new research and treatments according to the wisdom of crowds thesis.
All of this is related to distributing power or value creation away from traditional central facilities and control.
Companies such as Sonosite (NASDAQ: SONO), HealthGrades (NASDAQ: HGRD), WebMD (NASDAQ: WBMD), Vital Images (NASDAQ: VTAL), and American Well (private) are among many in this space.
Manufacturing
Here’s a favorite.
Computer Aided Design (CAD) made it easier for companies to decentralize or even outsource much of their product design. But now they’re actually outsourcing the fabrication, and in some cases the end product manufacture can be done outside of a factory.
3D Printing (often more formally termed Rapid Prototyping or Rapid Manufacturing) has come of age, with machines that can take computer files and fabricate plastic or metal objects from nothing more than raw material and software. Before, even simple prototypes had to be fabricated over the course of weeks. Now, companies can turn a design into a marketing concept model within hours, and make needed changes much quicker, shortening design cycles. They also can avoid expensive tooling, since short-run items can be “printed” instead of made with traditional manufacturing processes.
Companies like Stratasys (NASDAQ: SSYS) and 3D Systems (NASDAQ: TDSC) make large industrial grade fabricators, as well as less expensive versions suitable for office use. Soon, they (and others like Desktop Factory–private) will make consumer versions cost effective.
Why have a replacement part for that lawn mower or kitchen mixer shipped from the factory, when you could simply download the file and print it at home?
Municipal Networks
While many think this is an idea that went bust, there’s still a huge demand for municipal networks. FCC statistics on broadband penetration are quite misleading, and plenty of Americans have either pokey DSL-like speeds, or no broadband at all. Towns and public utilities, often in partnership with private enterprise, are filling the gap.
True, many of these projects have not fared well–but that was usually due to faulty business models, not the underlying tech. Many ideas have been tried, and people are getting much smarter. There are many thriving wireless and Fiber-to-the-Home projects.
Instead of one giant centralized “mother of all” (Ma) Bell owning your phone or Internet connection, the end piece is owned locally. And its often faster, with more capacity, than many parts of the Internet. This is recapitulating what happened years ago to television in underserved areas, as Community Antenna Television (CATV) gave birth to today’s cable networks.
And it’s happening with energy generation too.
Others
Here’s a partial list of other innovations that are benefiting from “the edge”:
So how do we wrap our minds around this explosion of innovation? I think of this trend as occurring in 3 distinct ways:
Decentralization–moving utility to the edge
The basis for this first one is hardware, and typically some kind of disintermediation. It’s driven by things like the availability of leading-edge technology, shrinking hardware sizes, falling costs, and the Internet.
Examples–3D printing, TiVo, municipal networks, distributed energy generation
Authoring–tapping users to create
Here the basis is centered more around software, the demand for mass customization, and hobbyists. You know, that class of people with time, passion, interest, and the willingness to work for nothing but recognition and/or personal satisfaction. The availability of software tools, Broadband, and the Long Tail (everyone’s a hobbyist in something) are drivers.
Examples–Blogs, mashups, personalized ad streams, podcasts, YouTube
Emergent Systems–enabling collective/cooperative effort
This last is typically facilitated by an enabling service. Often with the existence of an intermediary to provide a control or filtering function. But while the result mimics a more centralized function, the value is created on the edges–a true “whole is greater than sum of parts”. Here the driver is simply networks of people in easy, rapid communication. I think they call that the Internet. 
Examples–Wikipedia, open-source software, eBay, prediction markets, grid computing
Then according to the man who showed his outstretched arm to space,
He turned around and pointed, revealing all the human race.
I shook my head and smiled a whisper, knowing all about the place.
Yes, “Close to the Edge”
Of course, like all classification systems, the answer you get will depend on which consultant you talk to. The concept is pretty general, and sometimes unwieldy. Regardless, I find the edge idea to have a lot of merit, and hope you do too.
The key is to find companies that create, use, and benefit from the technologies that are fostering these trends. Or the markets that they enable. It might be tool, a marketplace, an ad platform, a device, a network, whatever. Then do your research.
Once you get down to individual companies, it’s caveat emptor. Picking stocks based on trends alone is what cost people so much money investing in the likes of Webvan (another “edge” play) or Pets.com.
I have done research on some companies that are emblematic of this trend–including a few mentioned here–to a greater or lesser extent, some more recent than others. In fact many I covered as an analyst fell into this mold–and not by coincidence. But do your own due diligence before investing, or hire someone to do it for you.
Let me know if you think of other ways this idea might be manifesting in technology markets.
Disclosure: I currently hold no positions, either long or short, in any stocks mentioned here. However, I do consult with companies in some of the markets discussed.
Viral Marketing
Smartphone applications are one of the biggest trends going, one that will only get bigger in 2009. Not exactly unexpected, especially for anyone who’s followed Salesforce.com’s (NYSE: CRM) AppExchange model. But despite how Google’s Android (NASDAQ: GOOG) foreshadowed the market, it’s taken the brilliance of Steve Jobs to get the ball rolling.
On the one hand, the dynamics are similar to ring tones
- Cheap. A few bucks each; some are free
- Easy. Apple (NASDAQ: AAPL) sets the standard for ease-of-use, though with the usual drawbacks that come from its closed system. Android’s market will be a little more “wild west”, but probably more innovative for it.
- Not originated by the service provider. The best services never are, telcos are about as innovative as rocks.
- Customizable. Make your phone personal, whether it’s playing apps or having different ring tones for each caller.
- Cachet. Everyone wants the latest “cool” app, just like they wanted the most popular songs to sound out whenever their phone rings.
On the other hand, the mobile phone app phenomenon is also evolving into an analogue for the gaming industry, with developers writing apps for one of only a few “platforms” (e.g. iPhone, Windows Mobile, Android, etc.). I expect to see developers selling versions of their apps onto multiple platforms, especially for the more popular ones, just as happens with game consoles.
The last, and most ominous similarity, is with Windows. Despite the existence of Android, there’s a chance the iPhone could become the uber platform, with most apps being written for it (at least first), creating a Microsoft-like dominance of phone applications. All of which leads to the following prediction for the New Year:
The most widespread iPhone application in 2009 will be a virus.
Think about it. All the elements are already there:
- rocketing platform/device popularity with a growing market share
- viral growth in application number and complexity, providing plenty of ready vectors for the introduction of malicious code
- existence of a large, dedicated, developer base
- a ready black market for both hardware and software–which means plenty of hackers.
Despite assurances to the contrary from its PR department, Apple software is not virus proof. It’s largely benefited from a lack of attention given its small (though growing) share of the desktop/laptop market. But the success of the iPhone changes those dynamics. Already, iphone dev team has unlocked the iPhone 3G, and is even now delivering its yellowsn0w software to the masses.
True, Android will undoubtedly be more vulnerable, given its marketplace model and the lack of a central control. But betting against hackers has always been a sucker play, and it will remain so even for the iPhone. Just ask the Blu-ray folks.
The predators are circling. And it’s only a matter of time.
Disclosure: The author holds no position in any of the stocks mentioned here.
Up And Down Vote
The Wall Street Journal had an article out yesterday that has created a real firestorm of controversy. It’s about how some of the large Internet players (such as GOOG, MSFT, and AMZN) are backpedaling on their previous Net Neutrality stances.
Moreover, they’re variously negotiating with telecablecos to gain “favored nation” or preferred treatment status on their networks.
Holy Turnaround, Batman!
Some writers quickly noted–here, and here–that Google at least is simply caching content closer to customers, just like Akamai (NASDAQ: AKAM) and other CDNs do. And that much of the Journal article reflects the kind of sensationalism many feared would appear once Rupert Murdoch (NYSE: NWS) bought the paper.
[As an aside, when I was doing research a year or two ago on Akamai, top management there vehemently denied my suggestions that they would ever be in competition with Google. Heh.]
If any of this is true, it’s a sad development, but hardly unexpected. As competition heats up for everything from ad serving to video downloads to cloud computing, everybody wants an edge. And they’re willing to pay for it.
Those that can afford to will get better services, better access, better distribution. Which means the little guys get shafted again. If you want to buy from Amazon, you get speedy page refreshes (not to mention faster access to things like S3). Google apps will work faster than, say, Zoho.
The rich do, indeed, get richer.
This plays right into telecableco hands. It’s what they’ve been lobbying for, after all. (I can almost see the big, fat, spider sitting there in the middle of its web inviting them all in. ) The result will be a vertical model, with only a few players controlling the entire value chain, up and down.
If this was just about commerce, I’d be less concerned. But it’s also about access to information. And about control of content. Ultimately, it’s about exclusion and higher costs for everyone. As well as a loss of the kind of innovation that has made this country successful.
Imagine if TV stations were free to broadcast good signals from those advertisers (or news programs) that spent more. Everyone else, they deliver fuzzy pictures with the sound continually dropping out. Pay to play. Eventually, everyone gets their news and entertainment from a few large companies. Welcome to the 50′s. There’s progress for you.
Critics argue: “But as businesses they should be allowed to offer different levels of service”. If there was true competition at the last mile level, I’d be inclined to agree. However, most of the large telecablecos built their networks–and their competitive advantage–on the revenue streams from exclusive franchises and government mandated monopolies.
You and I paid for their broadband networks through our monthly TV and telephone bills, mostly at a time where we had no choices. Or they used the proceeds from bonds whose attractive terms were based on the existence of those same “guaranteed” payment streams, which is basically the same.
Now that the moats around them have been fortified, we shouldn’t think that they’re entitled to operate as normal businesses. Monopolies (or even duopolies) don’t get the same rights as firms in a free marketplace. It’s not that I believe Network Neutrality should be regulated. (I agree about the principle but not the solution.) It’s last mile competition where the natural monopoly lies, and that’s what should be regulated. Until it’s no longer a monopoly, or until the telecablecos no longer have insurmountable market power.
Or until there’s structural separation.
Many thinkers (at least the ones whose salaries don’t depend on the success of telecablecos), have long recognized the most efficient market structure is to go horizontal–one company does the infrastructure, one does the content. Each competes within its own level, but not up and down the stack.
The PC industry helped this country thrive with the same model. Some companies built chips, some sold computers, some provided software. This drove innovation and helped keep costs low and falling. (Even the emergence of intra-level monopolies like Microsoft couldn’t halt the effect–some argue the standardization even helped.)
But now the big players are changing the game, in order to become even bigger. The Internet guys want to differentiate on performance, because they’re finally getting into each others businesses, and have to compete–some for the first time. The pipes guys want a piece of the content pie, because as network usage grows their costs go up, and they face resistance in trying to charge consumers more money for Internet access, especially as they’ve been billing flat rates for so long. But we will pay, one way or another.
Not everywhere, thankfully. Much of the rest of the world actually has competition in the last mile. They’ve created a more horizontal model, with providers competing “across” levels. If we fail to adopt this kind of structural separation in the U.S., we can watch our innovative spark and competitive advantages slowly drain away.
And just as many around the world laughed at us for voting to re-elect George Bush, they’ll laugh at us again, for voting to go “up and down”.
Disclosure: I hold no position in any of the stocks mentioned here.
Alias Mr. Moneybags
Who benefits the most from the recently announced Sprint/Clearwire deal? It may not be who you think.
This massive ($3.2B) infusion of money seems like a lot, but it’s just the beginning for this boondoggle. WiMax is a nice technology that works in some circumstances, with the right business model. But then so will WiFi, and it’s much cheaper. Besides, the mobile providers have a huge head start. Why buy new cards and sign a new contract when I already have what I need from my cell phone (or hotspot) provider?
In terms of becoming a successful business, WiMax is vying for the “most hyped” award with social networks. Expect more bags of money to be tossed into the trough before long.
So who gets what?
Sprint (S) – Removes one monkey from the back of CEO Dan Hesse as he is now free to focus on why Sprint has been shedding customers for so long. Also distracts everyone from noticing the delays in its own WiMax buildout.
Intel (INTC) – Intel has been peddling WiMax like a desperate streetwalker to anyone with an open car window. And its been seen hanging around the Clearwire convertible before. Intel wants to be the undisputed standard for WiMax chips, a role it failed to capture in WiFi. Not to mention selling lots of new processors for next generation laptops and smart phones.
Google (GOOG) – Yes, critical mass for Android will help extend its search and advertising dominance into mobile. And this network might turn out to be actually open. Despite Google’s game playing at the FCC auction, the “open” spectrum Verizon won will–in practice–be anything but. Fundamentally, Google has become a VC firm. A billion here, a billion there, something just might stick. All it takes is one 10-bagger to make it work. This ain’t it.
Time Warner Cable (TWC), Comcast (CMCSA) – the Rosencrantz and Guildenstern of mobile will be exactly as successful here as they were with Pilot, the failed MVNO venture with Sprint. And for the same reasons.
Clearwire (CLWR) – Now we’re getting somewhere. Big cash infusion, lots of media attention. The rights to resell Sprint 3G will allow it to grow its top line, giving it time to progress on the buildout. In the end, though, even with a working network it won’t be enough to either satisfy consumers or to make it a viable competitor to the telecableco ISPs. ( And I’m not alone in my thinking, here.)
But you see, by then Craig McCaw will have made his money.
McCaw has a history of promote, build, and sell. Usually at the top. And always with someone else’s money. He’s going to extract himself from this before long, and come out smelling like a rose.
Or a crisp thousand-dollar bill.
Regardless of what happens, whether the network succeeds, whether or not anyone else makes any money, you can be sure of one thing: McCaw has this all mapped out. There’s your winner.
Disclosure: I hold no position in any of the stocks mentioned here.
Another Nice Ceragon Quarter
Ceragon Networks was out today with 1Q08 results: Revenues $47.2M (up 39% year over year) and pro-forma EPS of $0.13, up 30% from 2007. (Net income rose 63% over 1Q07, but share dilution from last Fall’s secondary offering reduced the bump in EPS.)
Israel’s Ceragon is a favorite of mine, arguably the best “pick and shovel” play on the growth in mobile data. It’s backhaul radios are used in both WiMax and Cellular networks, and are leading edge in technology.
The stock’s been beat down mercilessly, largely due to Hedge fund shorts piling onto a very high price last Fall, as well as the dilutive stock offering. Still undervalued at todays prices, in my view (up 7% today in pre-market trading).
Conference call is just starting, I’ll add more if there’s anything interesting.
Disclosure: I hold no position in Ceragon Networks.
by Michael Mauboussin
