Larry Ellison’s nCUBE Corp. is cashing out of the crowded video-on-demand server field, agreeing to be sold to C-COR Inc. for $89.5 million.
C-COR executives said the transaction is as much as a software deal as a video-on-demand server deal: nCUBE will be folded into C-COR’s software business unit, with nCUBE CEO Michael Pohl assuming duties for that unit.
“The strategic play is really on the software side,” said C-COR chief technology officer Ken Wright. “That’s really where we’ve had our sights set and an area where there is a great need in the operator world.”
C-COR is putting up $20 million in cash, $35 million in convertible notes and 4.5 million shares of stock, making the deal worth $89.5 million.
C-COR will still sell and support nCUBE’s VOD servers, as well as its ad insertion business, Wright said. But the company’s software was key to the deal as the VOD business evolves, he said.
“NCUBE has built the most powerful content-on-demand back-office system out there,” Wright said. “They really have a best-of-breed solution.”
CAME IN LATE
NCUBE entered the VOD server market late, following SeaChange International Inc. and Concurrent Computer Corp., which had the lion’s share of deployments in the early part of this decade.
The company has fought to make inroads, and has seen sizable activity at Time Warner Cable, Charter Communications Inc., Mediacom Communications Corp., Bresnan Communications, Shaw Cablesystems Inc. and Adelphia Communications Corp., along with a few systems at Advance/Newhouse Communications, Altrio Communications Inc. and Astound Broadband.
But the company had been shut out at Comcast Corp., Cox Communications Inc., Cablevision Systems Corp. and Insight Communications Co. And with even more VOD sever vendors entering the market, the entire sector was under pressure.
Adding to that pressure were drops in streaming prices, making it more difficult to post solid margins.
NCUBE has deployed 280,000 streams in systems serving 3.5 million digital subscribers, trailing both SeaChange and Concurrent.
SeaChange had 1.2 million streams deployed as of July 31, and has been adding more than 100,000 streams per quarter. It serves close to an estimated 11 million digital homes. Concurrent has shipped 600,000 streams serving 5.5 million digital subscribers.
SERVERS IN OPEN?
Despite statements from C-COR executives, some analysts questioned whether the company would be successful selling servers while pushing an open software architecture.
“While that may sound good in theory, we also know of many examples where it is difficult to try to establish oneself as a credible open-architecture software vendor when one also sells the hardware to go along,” wrote Anton Wahlman, in a report for Needham & Co. “Apple [Computer Inc.] and Palm [Inc.] come to mind. N2 Broadband [Inc.] sells its software standalone, whereas Kasenna [Inc.] and Broadbus [Technologies Inc.] focus on the hardware. SeaChange and Concurrent have integrated the software and hardware and, of those two, perhaps SeaChange will continue to have the market power to keep its lucrative model.”
Wahlman estimated nCUBE lost close to $30 million in 2003.
Pohl and Woodle acknowledged nCUBE, as a private company, was investing to make inroads in the market, but Pohl said losses were “substantially less” than $30 million.
Like Wright, Pohl said nCUBE will stay in the server business, responding to new requests for proposals and working with operators to integrate nCUBE servers with other servers, as is the case with nCUBE and Kasenna in Time Warner Cable’s Los Angeles system.
“We now have a more robust product to integrate,” Pohl said.
He added that nCUBE’s business has increased as MSOs add streams and VOD expands.
Initial concurrency rates of 3% to 5% could easily double, he said.
NCUBE has shipped 100,000 streams in 2004 at a price point well above $100 per stream, Pohl said, disputing a $55 per stream estimate by Wahlman..
Still, software seems to be the center of C-COR’s future, and the addition of nCUBE’s nABLE software platform drives that point home.
During C-COR’s quarterly earnings call last week, CEO David Woodle said the deal “is aimed at the profitable transition to the IP era” for MSOs. “We’ll enable, facilitate and simplify it,” he said.
Wright said operators increasingly want to separate the software functions of VOD — asset management, session management, rights management, billing and reporting — from the actual server. Those functions “become standalone functionalities going forward. Each functionality is critical, and operators want to be able to buy them in a modular fashion.” That software play fits well with C-COR’s other software businesses, Wright said.
He said C-COR divides its operational support systems software business into four areas: the network, the customer, the workforce and the content.
Its purchase of Alopa Networks earlier this year addressed the customer side, Wright said. “They also have a policy management server that speaks to [voice-over-Internet protocol], gaming and interactivity,” he said.
The company strengthened its network management software suite with the acquisition of Stargus Inc. earlier this year. “It’s a nice complement,” Wright said. “They have root cause analysis, the ability to do bandwidth utilization management.” That helps operators determine heavy traffic patterns for high-speed data subscribers and possible peer-to-peer trouble points.
C-COR has deployed its workforce management software solution in several MSOs, and the nCUBE acquisition provides it with the software piece for the content side, Wright said.
On the finance side, nCUBE, should deliver $50 million in sales in the next fiscal year to C-COR, Woodle said, given that it was delivering about $40 million in revenue this year.
ELLISON ON BOARD
Ellison, who is also founder of Oracle Corp., will now be a C-COR stockholder as part of the transaction.
“It’s a great deal” and follows nCUBE’s strategy of placing increasing importance on the software side of the business, Pohl said. Not only are cable operators looking at IP, but U.S. telcos and other international telecom companies are looking at IPTV services that will need server and software solutions.
“VOD spending will continue,” Woodle said. “The installed base continues to grow.” He added that VOD is just one application for servers and software to perform, alongside local ad insertion, gaming and other interactive services.
Over the past year, nCUBE bought Lantern Communications and Optinel Systems Inc., makers of 10 gigabit Ethernet transport devices.
NEW REVENUE MIX
The nCUBE purchase further widens C-COR’s revenue picture. Woodle said that five years ago, the company was almost exclusively an RF amplifier supplier. Now about 40% of the business comes from RF, 40% from optical and 20% from software.
The purchase also helps C-COR’s international business, which currently accounts for 30% of the company’s revenue.
C-COR reported first quarter revenues ending Sept. 24 of $62.1 million compared to $56.8 million in the year earlier period. But charges associated with its purchase of Optinel and Stargus caused the company to post a $1 million net loss, versus net income of $4.8 million in the year earlier period. Woodle expects sales to fall between $62 million and $66 million in C-COR’s next quarter.
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