[Bear Sterns and USRX}
Bill,
USRX has them sold. What are your thoughts?
<< May 8 1997 9:16PM EST
Reply #3166 of 3250
Scan of today's Bear Sterns Report. Read it and weep...if you're short. Sorry for the
typos and missed data. Emphasis and a comment or two added - couldn't help myself.
8-May-97 Bear Stearns (Blachno. E/Lam, B 212/972-4227) COMS USRX
COMS/USRX: Gearing Up for Major Offensive in Remote Access Concentrators
Eric Elachno (212) 272-4227 May 8, 1997
Bob Lam (212) 272-7670
Subject: Company Update
Industry: Data Networking
BEAR, STEARNS & CO INC.
EQUITY RESEARCH
3COM Corn. (CONS-37 1/8) - BUY
U.S. Robotics Corporation (USRX -63 7/8) - BUY
Gearing Up for Major Offensive in Remote Access Concentrators
Reiterating Buy Rating
***During today's analyst meeting in Las Veqas, Ross Manire, the
head of USRX's system business and the likely leader of the
Service Provider Division in the combined COMS/USRX entity
updated us on Robotics' systems strategy.
***We think USRX is mounting a major offensive aimed at
accelerating market share gains and ultimately attaining
dominance and hurting competition in the remote access
concentrator market.
In our view, remote access concentrators constitute the most
attractive market opportunity in the networking industry over the
next 3 years: a) Market should grow from $l.5Billion to $6-
7Billion in 1999, with some forecasters putting the 1999 size at
$l0B; b) High and increasing software content could prevent
significant margin erosion from today's 65% level. It appears
to us that the company has developed all the necessary
ingredients for success in this endeavor.
(1) The company showed its new, high density remote access
concentrator (Total Control Hub) which it targets for the
service provider market. The product features port density (one
of the top three purchase decision criteria, with the others
being functionality and price) as much as 130% higher than that
currently available in leading product from Ascend, the TNT. We
think the company will formally announce the product in June and
ship in volume in the July/August time frame. That's not 30%,
but 130%, over double the port density of the Ascend TNT!)
(2) USRX unveiled a stackable version of the new Total Control
Hub targeted for the enterprise market. We also think the
company will formally announce the product in June and begin
volume shinments in the July/August time frame. USRX should be
able to effectively use 3Com' s enterprise sales force, channels
and presence to penetrate the target market quickly with this
product.
3) Both products will use USRX internally developed technology
which initially implements functionality of two modems on a
single general purpose, merchant DSP (Digital Signal Processor)
Lost data?
modem functionality is included.
(3) We expect minimal product transition risk because the new
modem boards will fit into both the old and the new chassis.
(4) Since the new multi-modem-on-a-single-DSP-chip' technology
has been implemented entirely in software, the hardware
configuration of the old modules is identical to that of the new
ones. Therefore, the dramatically higher port density should be
coupled with a commensurate drop in cost, e.g. with the two
modems on a chip, the relevant per port cost should drop by 50%.
(5) The dramatic reduction in cost per port would allow USRX to
drop prices precipitously without sacrificing margins.
(Although the company has yet to set prices, it alluded that per-
port price could be as low as $300-350}: today, street per-port
price with 28.8KB speed hover around $500; the new product will
feature the higher 56KB speed.
(6) We believe that competition which does not own core modem
technology and relies on suppliers (e.g. Rockwell) will again
operate in a catch-up mode for several months before it delivers
products with a similar capability.
So what else is new? :-)
(7) In addition to the significant cost advantaqe (afforded by
the multi-modem-on-a-chip' technology), USRX has built several
other sources of gross margin dollars which it could use as a
weapon in its quest for market share:
a) As much as $40 per x2 modem sold (after 2 months of x2
availability, x2 modems comprise about 20% of USRX modem
shipments: we expect the x2 mix to ramp up quickly) represent a
pure gross margin boost.
b) USRX is developing a sizable 'free' gross and operating margin
DSP-based x2 royalty business. For example, we estimate that the
recent Packard Bell competitive modem win (from Rockwell) alone
will generate $40-50MM in 'free' gross margin dollars in FY1998. (Wow!)
c) x2 upgrade software for remote access servers represent almost
a 100% gross margin business.
Please note that we have already had a taste of the tremendous
gross margin leverage: USRX gross maruin increased by 630 basis
points in the last quarter from the previous quarter even though
the company was shippinq x2 modems for only 5 weeks during the
quarter, it did not recognize any revenues from the x2 software
upgrade for Total Control Hub installed base, and the new major
wins in the DSP royalty business. e.g. Packard Bell, did not
kick in until April.
B) Investors are used to USRX's financial model which calls for
gross marpins in the low forties. The company's chief
competitors, Ascend and Cisco (which we think will quickly become
a major contender given its whopping 40% sequential revenue
growth during the last quarter in the concentrator business)
operate with 65% gross margin models, which reduces their
flexibility even if they had the same cost basis.
9) Who will pay for the 56KB hardware upgrades to the installed
(LOST DATA, but we know what is says - it's been said here often enough!)
ever shipped; competition has to upgrade via a hardware swap.)
We think the manufacturers will have to absorb at least a portion
of the hardware uporade cost, which will further reduce their
flexibility.
*** All in all, with its new products, time-to-market lead with
56KB capability and a tremendous pricing flexibility, we think
that USRX will be in a position to dramatically change the
dynamics of the remote access concentrator market. We think the
company could actually dramatically change the pricing structure
while maintaining its margins, rapidly accelerate market share
gains, and at the same time significantly hurt competition,
because the competition will likely have relatively insignificant
room to maneuver.
Or, USRX could significantly boost its gross margins (along with
those of the combined COMS/USRX entity).
We think that the former scenario would maximize shareholder
value in the long term, as it would increase the probability of
USRX's attaining dominance in this burgeoning market (while
erecting formidable barriers to entry, thus deterring new
entrants, e.g. those from the computer industry).
***We are reiterating our Buy rating on COMS/USRX.>>
Bob |
