Sector News

This section continues current news stories selected by Terrapin for their relevance to the BCT sector.

Terrapin Note- Very much in line with our commentary coming out of the Microsoft/Nokia deal, a cash rich NOK (long 1) now essentially NSN, is reported by Reuters to be considering acquiring all or part of ALU (long 2).  Given NSN’s singular focus on mobile broadband infrastructure, we view an acquisition of all of ALU as unlikely.  A sale of the wireless business is more likely, given ALU’s stated focus on IP networking and optical from a growth standpoint, with wireless and wireline access managed for cash.


We view any potential sale as largely incremental to ALU’s share price which even considering the recent run continues to reflect zero value for the company’s wireless assets.  With a current enterprise value around $9B, we see $3B or so of value over and above the company’s IP networking unit.  Considering the undersea optical and enterprise units are for sale and likely worth $1-$2B combined, this leaves $1.3B for everything else, including terrestrial optics, wireline, wireless and patents.  With a likely value of $2-$3B a deal could add as much as $1 per share or over 30% to ALU’s share price.


This has become a familiar pattern, first with NOK itself selling a wireless unit valued at zero for over $2 per share and then (and currently) with OCLR selling assets valued at zero for non zero numbers.  We see other candidates in this category, that is with key units that are valued at zero, though neither with imminent sales or monetization events in our view.  With an enterprise value under $200M and an optical unit worth 3-5X that given our view of traction with Verizon at 100G we continue to believe this is the next name to see a major upward revaluation on either a fundamental or strategic basis.


A final and somewhat surprising member of this group is Broadcom.  We will go into considerably more detail in our upcoming quarterly review, in addition to reviewing a strong Q3 driven in large part by sum of parts stories such as this, as to why we believe that the company’s mobile and wireless chip unit is valued at or near zero at current levels.



Exclusive: Nokia weighs Alcatel tie-up after Microsoft deal – sources

Wed Sep 25, 2013 10:06pm EDT
The flagship store of Finnish mobile phone manufacturer Nokia is pictured in Helsinki September 7, 2012. REUTERS/Sari Gustafsson/Lehtikuva
1 of 1Full Size

By Nadia Damouni and Ritsuko Ando

NEW YORK/HELSINKI (Reuters) – Nokia is discussing internally whether to approach French rival Alcatel-Lucent about a tie-up, part of the Finnish company’s review of how it can grow after the planned sale of its handset business to Microsoft Corp, several people close to the matter said.

No formal talks are underway with Alcatel-Lucent, the sources said. One of the people close to the matter said Nokia held “on again, off again” discussions about buying Alcatel’s wireless business as recently as late 2012 and that the two companies could still come back to the table.

Speculation over a combination between Nokia and Alcatel-Lucent goes back several years, as both have struggled to compete with market leader Ericsson and low-cost Asian network equipment rivals Huawei and ZTE.

Microsoft announced on September 3 that it will buy Nokia’s phone business and license its patents for 5.44 billion euros ($7.3 billion). Nokia has said it will evaluate strategy for its remaining operations before the deal closes. Those businesses include a mapping software unit called HERE and a portfolio of patents.

The Finnish phone maker once dominated the global market but has had its mobile business ravaged by nimbler rivals Apple Inc and Samsung Electronics.

Nokia, under the leadership of interim CEO Risto Siilasmaa, has already begun internal discussions on future strategy, the sources said, adding that a decision could be months away.

All the sources asked not to be identified because they were not authorized to speak with the media.

Representatives for Nokia, its network equipment unit, Nokia Solutions and Networks, and Alcatel-Lucent declined to comment.   Continued…

Terrapin Note- A WSJ report this AM previews ALU strategic update tomorrow AM from new CEO Combes, with a focus in line with our expectations.  The report states that nothing dramatic is planned in terms of business exits or spin offs and the focus will be on basic cost cutting and focus on newer products.  The major positive from our point of view is the exit of CFO Paul Tufano, who is our view has done a consistently poor job of working capital management and was likely a driving force behind the secured loan refinancing that the story also indicates new management would like to repay and unwind.  We don't infer anything around near term financial results from the CFO's reported exit, and also note the reported addition of a new COO. ALU's main challenge remains not in the area of technology or products but in the area of confidence, both customer and investor.  This looks to be an early step in the right direction and we maintain our long 3 view.


Alcatel Aims to Overhaul Finances (6/20/13) 

Telecom-Gear Maker Forges Plan to Repay $2.67 Billion in Secured Debt 


Alcatel-Lucent SA on Wednesday plans to announce steps aimed at increasing its financial flexibility and the efficiency of its loss-plagued operations, according to people familiar with the matter. 

The telecommunications-gear maker's new chief executive on Wednesday plans to unveil a fresh push to revamp the company's balance sheet, slash costs, shake up management and direct resources away from older products, these people said. 

The company plans to signal that it will soon seek to raise new debt financing—possibly in the form of high-yield or convertible bonds—to begin repaying about €2 billion ($2.67 billion) of secured debt it agreed to borrow in January, one of the people said. 

The loan package, secured by patents and other assets, became a sensitive matter in France, where politicians argued it would lead to the loss of valuable French intellectual property—hence the urgency to repay it. The goal would be to repay the package in two steps over time. 

The new debt also would have longer maturities than the debt it is replacing, this person said. The debt plan, internally dubbed Project Shift, could be followed in the next year or two by a rights issue, a type of share sale common in Europe, of roughly €2 billion, the proceeds of which could be used to help pay off debt, the person said. 

The company is also likely to reiterate a prior asset-sale goal, but new Chief Executive Michel Combes, who has been honing his new strategy for several months, isn't planning a major spinoff or an exit from an entire big business, such as fixed-line networks, the people say. 

An Alcatel-Lucent spokesman declined to comment. 

The bar is high for Mr. Combes. Since the former Vodafone Group PLC executive known for cost-cutting took over Alcatel-Lucent on April 1, the company's stock has risen 34%, as investors have anticipated his new plan of action. But the company's financial position remains weak. In the first quarter of 2013 alone, Alcatel-Lucent burned through €533 million in cash. 

Created in 2006 by the merger of France's Alcatel and New Jersey's Lucent Technologies, Alcatel-Lucent competes in many lines of business. It makes products as diverse as submarine cables, cellphone antennas and the software to calculate monthly phone bills

"The current situation is hardly sustainable in the long term," Mr. Combes told the company's shareholders last month. 

The coming changes include roughly €1 billion of new cost cuts aimed at Alcatel's general and commercial expenses, likely including some job cuts—along with a plan to shift resources away from old products that might be profitable but for which revenue is shrinking, according to people familiar with the matter. That means leaning even more on Alcatel-Lucent's successful Internet Protocol routing business, and accelerating the shift of research spending on wireless and fixed broadband equipment, those people said. 

Some of Mr. Combes's biggest shifts will come near the top of the totem pole. Paul Tufano, who has been Alcatel's chief financial officer since 2008 and chief operating officer since last fall, will be leaving the company to return to the U.S., said people familiar with the matter. Mr. Combes plans to bring in Philippe Guillemot, former chief of car-rental group Europcar, as operating chief, and a search is on for a new CFO, one of the people said. 

Mr. Tufano didn't reply to a request for comment. Mr. Guillemot's potential appointment was earlier reported in French newspaper Le Figaro. Mr. Guillemot couldn't immediately be reached for comment. 

Asset sales remain on the road map as well, the people familiar with the matter said, but aren't likely to be disclosed Wednesday. One of the people said no sale process was under way yet, but one could start in coming months. In the past, the company has explored the sale of its submarine-cables business, and its business selling office-network equipment. 

Bigger changes, such as hiving off the entire wireless business or the fixed-line business, aren't on the agenda, as they likely couldn't survive alone right now, according to one of the people familiar with the matter, who said the idea could be revisited in two or three years. 

Write to Sam Schechner at and Dana Cimilluca at



Terrapin Note- ChannelAdvisor issued its montly report on e-commerce sales showing continued declines in growth rates at AMZN as well as EBAY.  Ostensibly up $15 in the last few days on the macro market recovery and enthusiasm around the company's attempts to resurrect the WebVan grocery delivery model and write Viacom large checks for SpongeBob cartoons, we continue to find the ECOM- EBAY (which also saw declines in monthly growth rates in the ECOM report)- GOOG (stable results in the quarter and improving growth rates in recent months) vs AMZN pair very attractive.  We finally note the ECOM data represents another source of consumer market intelligence other than NLSN.


June 10, 2013


May 2013 ChannelAdvisor Same Store Sales (SSS) for eBay, Amazon, Search and CSE

Note: This is a monthly feature published by ChannelAdvisor highlighting the Same Store Sales (SSS) across our wide range of thousands of retailers and billions in GMV.  Details on the SSS including background, methodology, disclaimers and schedule can be found in this post.

Today we are releasing May 2013 data for Marketplaces (eBay/Amazon), Search and Comparison Shopping Engines (CSE) along with supplemental data.  In the world of e-commerce as we look at y/y trends it's important to understand any anomalies in the calendar that can distort (positively or negatively) the data.  May is the middle of the second quarter and gives us a view on how the Spring shaped up as we head into summer and Dads and Grads.

Update from BMA, Catalyst US, Catalyst EU and IRCE

Spring in e-commerce means conference season, and I just wrapped up a very immersive month presenting to or meeting with thousands of retailers/manufacturers and hundreds of partners / fellow e-commerce vendors at four shows:

  • Catalyst US - April 29-May 1 in Vegas (1000 attendees)
  • BMA Blaze - May 29-31 in Chicago (800 attendees)
  • Catalyst EU - June 3 - June 4 in London (600 attendees)
  • Internet Retailer Conference and Exhibition (or IRCE) - June 4-7 in Chicago (10k!! attendees)

What's interesting about so much activity packed into a 5 week window is the similarities.  Regardless of retailer size, B2C or B2B, US or EU, there are six mega trends (I call them Waves of innovation) that everyone is working hard to figure out:

  1. Amazon - B2B folks are intrigued about AmazonSupply and what it means.  B2C manufacturers are increasingly selling direct.  Retailers are working through if Amazon is friend, foe or frenemy.  I've gotten more deep questions about Amazon in the last 5 weeks than in the last 5 years - how does FBA work, details on the marketplace, what's APA, how does ODR work, what's the new POP metric?  Will Amazon dominate the grocery industry?  Why's Amazon launching in India?


Terrapin Note- An interesting story today out of Australia  that highlights some key points in the global wired broadband access markets in which both ADTN and ALU participate on the system level, and BRCM IKAN and NPTN participate on the silicon and optical component level.

The article describes a proposal to move Australia's National Broadband Network (NBN) plan from a focus on Fiber to the Premise towards Fiber to the Node, with expected saving in cost and time of around 50%.  This is similar to the differing choices made by T (FTTN) and VZ (FTTP) in the US, and also highlights the increased competitiveness of FTTN networks with vectored VDSL2 capable of delivering a 100 Mb/s per household connection.  The incoming governing coalition describes the current NBN project as beset by delays and cost overruns.  Though we can't help but note that if Australia were to get with the program and print unlimited amounts of currency this trade off would't be quite as meaningful and its stock market would make new highs hourly versus lagging embarrassingly 25% off of all time highs.

This certainly appears to be the case for the Chinese, who have committed to a FTTP approach by fiat where NPTN' access exposure lies, though can pay for it with actual proceeds from a postive balance of payments.  Thankfully, telecom operators in Europe most notably DT but also several others include early FTTP proponent BT,  have to operate in the real world and with an advent of vectored VDSL2 have more toward leveraging their installed base of copper to deliver ultra broadband speeds

From an systems standpoint, suppliers such as ALU or ADTN are likely indifferent and in fact might benefit from a quicker overall rollout.  The incremental expense in FTTP networks is construction and fiber related, and both ALU and ADTN supply both FTTP and FTTN systems.  ALU has won the current NBN rollout and is also a leader in FTTN, with the real beneficiaries of this shift, outside of ADTN and its focus in Europe through its NSN acqusition, are the VDSL chip and technology suppliers.  This includes market leader BRCM, which is also a leader in FTTP components, VDSL chip pure play IKAN, which  we add at long 1 in this note, and private companies such as Assia,  which issued a press release on the subject Monday

In terms of today's ADTN driven market action in the space, we felt like we saw a bit too much Tier 1 carrier spending enthusiasm in the likes of CIEN and JNPR.  The ADTN results and outlook are foremost about access, with our view that bandwidth and investment in metro/core networks will lag wireline and wireless access investments over the next year or two, and about Europe, where the fruits of the NSN acquisiton are beginning to be felt.  Market melt-up aside, we see more basis for strength in ALU as a result of all of these developments, and continue to like INFN and CSCO as alternatives to CIEN and JNPR, respectively.

Australia's Coalition party proposes new National Broadband Network plan

April 10, 2013 | By 

Australia's Liberal-National coalition political party has proposed an alternative plan for the country's National Broadband Network (NBN) that would use fiber to the node (FTTN), rather than fiber to the premises (FTTP) to deliver 25 Mbps speeds to the country's residents and businesses.

Opposition Leaders Tony Abbott and Shadow Communications Minister Malcolm Turnbull said their plan will cost only AUD 29 billion (USD 30.5 billion) versus the AUD 44 billion (USD 46.3 billion) to AUD 94 billion (USD 98.9 billion) for the current FTTP plan.

On a per-customer basis, the Coalition's plan will cost AUD 66 (USD 69.50) per month per household versus AUD 90 (USD 95.00).

Initially targeting regions that have little or no broadband options, users will be able to get 25 Mbps to 100 Mbps speeds by the end of 2016, with the minimum speed rising to 50 Mbps by the end of 2019 for 90 percent of existing wireline broadband subscribers.

"At the end of a first term of a Coalition government, there will be minimum download speeds of 25 Mbps. By the end of our second term, the vast majority of households will get access to 50 Mbps," Opposition Leader Tony Abbott said about the Coalition's broadband policy in Sydney on Tuesday. "We will be able to do this because we will build fiber to the node, and that eliminates two-thirds of the cost."

If the Coalition wins the election this upcoming September, it plans to bring FTTP only to 22 percent of Australia's premises, including those already being built by NBN Co., new housing developments, or where the copper plant was too degraded to support 25 Mbps. The other 71 percent of the market would get a FTTN connection via Telsta's (ASX: TLS.AX) existing copper facilities that are connected from the RT cabinet to the home or business.

Although the current NBN network is slated to be completed by June 2021, the Coalition says that the recent construction delays that NBN Co. reported last month due to a lack of qualified workers means that the network might not be completed until 2025.

Turnbull said that the FTTN network would require about 60,000 RT cabinets, adding that they would be able to renegotiate a new deal to gain access to Telstra's copper facilities quickly.

This plan, not surprisingly, was met with opposition from current Communications Minister Stephen Conroy who said that their proposal is "short-sighted."

"They don't think about the applications, the extra connectivity, the extra machines, the extra devices that will be connected up by all of you here, all of our children in the future; they don't think about that," he said.

For more:
- here's the Coalition party's proposal (.pdf)

Read more: Australia's Coalition party proposes new National Broadband Network plan - FierceTelecom
Subscribe at Fierce Pharma

Terrapin Note- Barron's published a bullish feature article on STM (short 3) this weekend that is notable along several lines.  First off, as is somewhat typical accuracy is a challenge for Barron's in this case starting with the first sentence in which STM is described as a maker of smartphone chips.

Second, this description is applied even with the apparent knowledge that the company's main source of smart phone exposure, the ST-Ericsson JV, is in the process of being shut down after losing what should be over $2B during its existence and finding no buyers.  However this is all OK as the misadventure is "behind them" , sort of like say, Cyprus, Greece, Spain, Italy, the fiscal cliff, the debt ceiling, mortgage write offs and the budget deficit are all "behind us" from a macro standpoint.  We find the same question recurring in both cases:  Is it not at least somewhat relevant that the some crowd that created the issues that we needed to "get passed" is currently calling the shots.  Which is to say, as we have noted many times regarding CIEN, track record matters and in our view a poor one should be a multiple compressor not enhancer.  Recall it was only just over a  year ago that a new CEO  joined ST-E, from his post as COO of STM,  with much fanfare declaring "our company has tremendous potential"

Third, an improving economy along with a "widely anticipated" up cycle in semiconductors is cited as a key driver along with manageable European exposure at 25% of revenue.  Though we note that 25% is calculated on a "ship to" basis, meaning that 60% of revenue goes to Asia.  This is of course meaningless as those shipments are largely headed to CM's for shipment all over the world, with the company's actual European end market exposure likely far higher in the range of 40%.  Current estimates call for a move from revenues of around $2B to nearly $2.4B by year end and an improvement in EPS from losses to a run rate exceeding $0.70.  Even if that hockey stick were to happen, and the company's plan to reduced opex from $900M per quarter to $600-650M by year end were to come off without a hitch, an improvement t FY14 EPS of $0.60 plus is already priced in here around the $8 level.  The STE shutdown should deliver $125-150M of that quarterly opex savings, though at a $400M cash cost for the year

The question remains what warrants all of this optimism given the company's fairly consistent track record of share loss, against the nimbler likes of BRCM and INVN in set top boxes, networking infrastructure and mobile/gaming device sensors, and the difficulties in restructuring European companies.  This is especially the case in considering STM relative to its French peer ALU, which the market is currently valuing at $3B vs a $6B enterprise value at STM.  This despite expected revenues and EBITDA of $19B and $1.2B for ALU in 2013, compared to $8.6B and $700M for STM, with the EBITDA number representing a 100% increase for STM from 2012 levels.  That's right, ALU is trading at 2.4X EBITDA with nominal balance sheet risk, improving end markets and leading share positions in all key markets save wireless, compared to 8.2X for historical share donor STM. With 27% of actual revenues coming from Europe, ALU's exposure is lower and capex trends in key end markets in the US, China and Europe are clearly turning higher combined to the macro cycle hope that appears to be driving STM. The "French factor" in terms of management and restructuring execution is nullifed with this pair, and indeed revenue per employee at ALU stands at $263,000, not that far south of the $304K at the successfully turned around NSN, compared to $178,000 at STM.

In summary our "French Army Knife" which worked so well in the middle of  last year as both a fundamental short and selective hedge  has been malfunctioning of late.  We find the name very attractive up here on both fronts, with high conviction that the ALU and STM pair trade is likely to produce attractive returns over the next year.


Back in the Chips?


The turnaround story at STMicroelectronics, Europe's largest semiconductor maker, has been helped by management's focus on markets well beyond the euro zone.

STMicroelectronics, which manufactures chips for smartphones, is ringing in some changes of its own.

After several years of lackluster performance, Europe's largest semiconductor maker is getting its house in order. The company is narrowing its focus to fast-growing chip sectors, including sensors and car-infotainment systems, and exiting a joint venture that has hemorrhaged cash since it was created in 2009. STMicro's new target for profitability—lifting operating margins to 10% this year from minus 6.5% in 2012—is ambitious. But investors are so negative on the company now that even a near-miss could lift the stock.

STMicro's New York–listed shares (ticker: STM) fell 17% in the past three years, to $7.71. They could rise as much as 50% in the next 12 months if the company can deliver on its plan.


STMicroelectronics specializes in sensors and automotive electronics. Above, a clean room at its fabrication plant in Crolles, France.

The company's history dates back to the 1987 merger of Italy's SGS Microelettronica and Thomson Semiconducteurs of France. The company, now based in Geneva, long served European manufacturers, from auto makers to cellphone producers such as Nokia (NOK) and Ericsson (ERIC)—once world beaters, now also-rans.


Today STMicro focuses mainly on areas like audio systems and power-conversion chips, where it is the market leader or has competitive advantages. Europe contributed only 25% of last year's $8.49 billion in revenue, while 60% came from Asia. Top customers include Apple (AAPL), Samsung Electronics (005930.Korea), Cisco Systems (CSCO), and Western Digital (WDC).


STMicro is expected to earn $85 million, or 12 cents a share, this year on revenue of $8.7 billion, up from a loss of 33 cents in 2012. Analysts think the company could earn as much as 59 cents in 2014.

Shares have risen 15% since STMicro disclosed its new strategic plan in December. They carry a fat dividend yield of 4.4%. The payout is backed by solid free cash flow and $1.2 billion in net cash on the company's balance sheet.


JUST FOUR YEARS AGO, STMicro and Ericsson, after much fanfare, were into the process of merging their wireless chip businesses, to gain manufacturing synergies and develop a more integrated and efficient product strategy. It didn't work out that way. The two companies pumped an estimated $1.7 billion into ST-Ericsson, which never made a profit, largely due to intense competition in the market for basic cellphones, and troubles at Nokia. Last month, the companies announced that they would terminate ST-Ericsson by the third quarter.


Peter Knox, an analyst at Société Générale, reckons investors don't fully appreciate the fact that STMicro has drawn a line under its investment in ST-Ericsson. "I think the majority of the market sees ST-Ericsson as a continuing part of the group and a burden going forward," says Knox, who rates STMicro a Buy with a $10 price target. Other analysts think the shares could go as high as $12.



STMicro is exiting the venture on favorable terms. It is taking on 950 of ST-Ericsson's 4,350 employees and getting all the businesses other than Long-Term Evolution multimode thin-modem products, which go to Ericsson. The LTE-modem business has exciting potential but requires a huge amount of research-and-development investment.

The move "maximizes our future prospects and growth plan," CEO Carlo Bozotti told Barron's in an e-mail exchange. It will reduce costs, strengthen STMicro's financial position, and eliminate a major distraction.


WITH ST-ERICSSON BEHIND IT, STMicro will be in a stronger position to exploit an upturn in the semiconductor market, which is widely expected this year, given an improving economic outlook. It says the markets it is targeting—sensors and power, automotive products, and embedded processing solutions like set-top boxes and TVs–will be worth $140 billion in 2013, according to the company.


STMicro generated 38% of its revenue last year from the division that produces microelectromechanical sensors such as smartphone microphones, digital compasses, and gyroscopes. With an operating profit margin of 13%, the division is STMicro's most profitable.

The Bottom Line


Now that STMicro is putting a disastrous joint venture behind it, management can focus on markets where it has an edge. Shares could rise 25% to 50% in the next year.


Its automotive unit, which accounted for 18% of revenue in 2012 and had a profit margin of more than 8%, is an industry leader in car-door electronics. It has established partnerships with car makers Audi, part of the sprawling Volkswagen(VOW3.Germany) group, and Hyundai Motor (005380.Korea).


With revenue spread across a variety of sectors and customers, STMicro is less vulnerable to pockets of instability. Its new strategy, focus on costs, and exit from ST-Ericsson mean it is well placed to prosper in 2013, and beyond. "These decisions will drive our growth and enable us to become stronger and much less sensitive to the market variation," says Bozotti.

Investors might want to put a few chips of their own on STMicro.

Another Cable CEO Sees a World Without Set Tops

March 6, 2013

Terrapin Note- Following recent comments from TWC, Charter’s highly respected CEO Tom Rutledge comments about the prospects of moving away from the cable set top box as a means to deliver video services to consumers. This is very much in line with our medium term bearish thesis on ARRS, where we continue to bide our [...]

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Amazon News Flash- AWS Worth $100B in 2018!

February 11, 2013

Terrapin Note- Apparently pulling out all the stops to support a flagging share price and newly minted $335 price targets,  it appears that sell side focus is shifting to the “hidden” value of AWS.  The $100B comes from using a 6X revenue multiple on 2018 revenue of $16.5B or so, implying some pretty significant growth [...]

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Time Warner Cable/Roku Announcement Highlights Risks to Set Top- ARRS

January 7, 2013

Terrapin Note- Today’s announcement from TWC underscores potential threats to the traditional cable set top platform, also note commentary by TWC CEO Britt, who does not appear overly wedded to the traditional set top platform to say the least.     Time Warner Cable to stream 300 cable networks through Roku devices TWC TV app [...]

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FoxConn Invests in AMBA’s Largest Customer GoPro

December 20, 2012

Terrapin Note- FoxConn announced a huge investment in GoPro yesterday valuing the company at over $2B and likely setting the stage for a high profile IPO in the near future. We see this as a positive for AMBA which counts GoPro as its largest customer, we estimate in the range of 15-20% of revenue, and [...]

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Microsoft Launches WinPhone8; Verizon to Carry Lumia 822

October 30, 2012

Terrapin Note- Nokia is getting some pretty strong buzz coming off of yesterday’s Windows Phone 8 launch event held by Microsoft in San Francisco, as well as the continued media and retail blitz (Kelly Clarkson at the new Marin store Saturday) around the broader Windows 8 launch. The announcement of plans by Verizon to carry [...]

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