SSB raised EPS after solid qtr; Weakness presents buying opp:
Salomon Smith Barney
Wednesday, July 21, 1999
--OPINION:--
WE CONTINUE TO RECOMMEND LUCENT TECHNOLOGIES WITH A 1-M RATING AND A $100 PRICE TARGET.
We believe yesterday's weakness presents an excellent buying opportunity in one of the premier telecom equipment companies best positioned to help build the next generation wireless and wireline networks for new carriers as well as to assist incumbent local and long distance telephone companies evolve their existing networks.
WE ARE RAISING OUR ESTIMATES FOR THE SEPTEMBER 1999 QUARTER AND RAISING OUR FISCAL 2000 AND FISCAL 2001 ESTIMATES. We are raising our F4Q99 (September) EPS estimate to $0.28 from $0.27 and we are also raising our fiscal 2000 and 2001 estimates to $1.55 and $1.90, respectively from $1.45 and $1.75.
COMMENTS REGRDING THE BALANCE OF THE YEAR MAY HAVE BEEN MISINTERPRETED.
The December quarter at one time represented up to 50% and 85% of Lucent's annual revenue and earnings, respectively. Thus, Lucent has made a concerted effort to pull business into September and push business into March in order to improve the linearity of its results throughout the year. The net result of this successful endeavor is that the December Quarter now only accounts for about 25% of annual revenue and 35% of earnings. However, the dark side of this success is that the December quarter always experiences the slowest growth rate of the year. For example, the rate of growth in revenue for the December quarter was 6% in fiscal 1998 and 10% in fiscal 1997. In our opinion, we do not believe there was a hidden message that there has been a fundamental change on the margin with respect to Lucent's near-term outlook since as mentioned we have raised the September quarter estimates and raised the full year in 2000 and 2001.
EARNINGS PER SHARE. Yesterday morning, before the open, Lucent reported EPS for F3Q99 of $0.26, an increase of 55% YOY from $0.17 and compared with our consensus estimate of $0.23.
REVENUES. Revenues for the quarter were $9.315 billion, a YOY increase of 22% from $7.3 billion. Excluding revenues from Ascend, Lucent's revenues for the quarter were $8.77 billion which compares with our estimate of $8.8 billion. International sales increased 49% YOY and represented approximately 30% of total sales in the quarter. With major contract wins from companies such as Telefonica, Telstra and NTT, we expect Lucent will continue to gain share internationally.
SEGMENT REVENUES. The individual segment revenue numbers include Ascend while our estimates for the quarter were ex-Ascend. Sales to Network Operators increased 27% to $6.09 billion versus our estimate of $5.5 billion. Lucent continues to witness strong demand for its 5ESS switch as well as wirless infrastructure, which was up over 60% YOY in the quarter. Sales for Business Communications increased 4% to $2.1 billion versus our estimate of $2.2 billion. Microelectronic sales increased 23% to $902 million, driven by optical electronics and custom chips, compared with our estimate of $883 million.
PROFITABILITY. Gross and operating margins for the quarter were 48.1% and 14.6%, respectively, compared to 45.6% and 10.8% a year ago and our estimates of 44.9% and 11.7%. SG&A was 21.3% of revenues compared to 21.8% last year and our estimate of 20.6%, while R&D was 12.2% of revenues versus 13.1% in F3Q98 and our estimate of 12.8%.
BALANCE SHEET: Lucent's balance sheet remains strong with $1.5 billion in cash. DSO's declined sequentially for the second quarter in a row. DSO's at the end of the quarter were 92 days vs 95 days at the end of F2Q99. This is particularly impressive given the large increase in international sales, which typically carry longer payment terms. Lucent was also able to stabilize inventory turns during the quarter and expects a positive trend for inventory turns in F4Q99. |
