Share price as of Friday's close:

$4.98

Share price now:

$5.32

Change:

6.8%

Volume:

741,836 shares, daily average 46,300 shares

Last time this high:

Nov. 2, 2005

52-week high:

$9.57

52-week low:

$3.63

Forward P/E before announcement:

n/a

Forward P/E after announcement:

n/a

A TINY BROADBAND

specialist's shares found 16 reasons to rally Monday.

In a morning research note titled "16 Reasons to Upgrade Vyyo from Hold to Buy," Needham & Company analyst Anton Waldman claimed the Palo Alto, Calif., maker of high-speed data transfer equipment could be worth as much as $10 a share within a year, benefiting from a major infrastructure upgrade by cable operators. Vyyo shares jumped 39% intraday, but settled for a relatively tame 7% gain to $5.32 by the close of business.

"Vyyo represents, via its Xtend subsidiary, a major gamble on a potential cable TV infrastructure upgrade to add three gigabits per second downstream and two gigabits per second upstream, without disturbing existing services and without installing any new fiber optics," wrote Waldman. "We believe cable operators could start to deploy Xtend for business data purposes... in 2006, but the bigger gambit is the residential market potential."

Vyyo supplies broadband access equipment to companies that provide cable and wireless data connections. Its Xtend Networks division, purchased last year, helps cable operators extend so-called last-mile bandwidth to provide traffic-intensive services like high-definition television and video on demand. Its wireless unit makes products that connect utility companies with remote workers, as well as broadband equipment used by Internet access providers. Cox Communications is the only customer Vyyo has named. It says it works with other customers under nondisclosure agreements.

Like DSL, which gives copper phone lines more capacity, Vyyo's Xtend increases the capacity of existing coaxial cable through a patented technology. That allows cable companies to provide more bandwidth without having to run new cable into homes. Motorola and Scientific Atlanta currently offer products that increase cable bandwidth, but only to one gigahertz, according to Vyyo, not to the three gigahertz it offers.

The company has struggled to find a market for its wireless products. "The wireless business never got going in the U.S.," says Kevin Dede, an analyst at San Francisco investment bank Merriman Curhan Ford. "It tried to take it to China, but it never got going there either. So Vyyo brought it back to the U.S., in a third iteration, to address new applications in the utility market." (Dede doesn't own shares of Vyyo; Merriman Curhan Ford doesn't have an investment-banking relationship with the company.)

Vyyo's trailing 12-month sales total just $2.7 million. The company has yet to turn a profit. In its third quarter it posted a net loss of $8.9 million, or 57 cents a share, vs. a loss of $8.2 million, or 53 cents, a year ago. Sales plummeted 80% year-over-year to $225,000. As of Sept. 30 Vyyo had cash, cash equivalents and short-term investments of $20.6 million. It's currently burning about $6.5 million in cash a quarter.

In the report that sparked Monday's rally Needham's Waldman said Vyyo could become profitable in the fourth quarter of 2007. He also noted that it will need $20 million in additional financing, and that it is "on the cusp of obtaining such financing, on reasonable terms."

The bright outlook, according to Waldman, stems from the intensifying competition between cable TV operators and telecom giants rolling out their own digital services. Verizon Communications recently launched TV services in Texas and Virginia and is planning to stream similar programming into millions of homes elsewhere.

"We believe that a three-gigahertz offering with the Vyyo solution could be the least expensive way to offer an additional 700 megahertz worth of downstream spectrum, offering the possibility of an incremental 233 HDTV channels," wrote Waldman. "The satellite TV operators are also doing the same... to squeeze more HDTV programming into their satellite capacity. Again, the Vyyo solution could be the least expensive tool by which the cable TV operators could meet this increasing competitive requirement." (Waldman doesn't own shares of Vyyo; Needham & Co. doesn't have an investment-banking relationship with the company.)

Quote:
"The cable industry likes to see what will happen before they move," says Jeff Fryling, Vyyo's vice president of business development. "Six months ago when we were out pushing to them that they needed more spectrum to offer advanced services, the cable people just sat there and said 'We've heard that before.' But, in the last quarter, we've gone from pounding on their doors to them asking us out. They have begun to look at this situation and say, 'How do we achieve serious strategic objectives and how do we achieve this product strategy with the spectrum we have?' The one gigahertz gets them by for HDTV on the short term, but we think ours is the only one to make them really competitive. At the end of the day, ours doesn't cost much more, but they get a lot more built-in flexibility."