August 6, 1999
Dialing Up Earnings
By Monica Rivituso
smartmoney.lycos.com
IT'S AMAZING, the power of little products. PCs --
they're pretty small, and still an OK business to be in.
Laptops? Smaller still, and selling at a faster rate than
PCs. But think even tinier -- like the little whatzit on the
side of a laptop that lets you connect to the Internet or a
local-area network. It just so happens those whatzits, or
interface cards, can be pretty big business.
They sure are for Xircom (XIRC), which makes
integrated PC cards and PC card products. In 1998,
these credit-card-sized gizmos were the driver behind
Xircom's 49% jump in revenue. This year, analysts are
expecting 47% year-over-year growth. Earnings are
also impressive. After the company halted production
in 1997 to drain excess inventory, revenue was cut in
half and Xircom lost 46 cents a share. But the company
emerged tighter and leaner, earning 78 cents a share
the following year. "We took some short-term pain for
long-term gain," says Xircom's chief financial officer,
Steve DeGennaro. This year, the company is expected to increase earnings by a
staggering 127%. In 2000, analysts expect Xircom to see a 20% improvement.
And that's just according to the consensus numbers. While DeGennaro says that he's "very
comfortable" with the Street's expectations, analysts and investors have grown
accustomed to Xircom beating Wall Street estimates. "Every quarter for the last four
quarters I've had to raise estimates," says William Becklean, an analyst with SunTrust
Equitable Securities. For this reason, we picked Xircom for this week's Earnings Revision
Screen. After sifting through companies that had market values greater than $200 million,
four quarters of year-over-year earnings improvements and an upward revision of earnings
estimates, we came up with Xircom.
In the third quarter (the most recent), the company beat Street expectations by a nickel and
earned 48 cents a share on $12.1 million in net income. That was 28 cents more than a
year ago, and six cents better than in the second quarter. Revenue was $103.1 million, a
45% increase from $71.3 million a year ago and a 5.5% rise from $97.7 million in the
previous quarter.
"These guys are very, very good at what they do, and that's
connecting portable devices to networks," says Advest analyst
Michael Whitney.
The Thousand Oaks, Calif.-based company is riding two strong
waves: the growing popularity of notebooks and the increasing
rate at which these machines are connected to networks.
According to market-research firm Dataquest, shipments in the
mobile market (which includes laptops) are expected to grow
13% in 2000 and then climb steadily by 14% a year for two years
after that. Analysts peg year-over-year unit growth for notebooks
alone at 20% to 25%. "Even if you have corporations
downsizing, increasingly, companies are realizing that
notebooks are an efficiency tool," says Xircom's DeGennaro.
And that's where their PC cards come in. Xircom isn't going after Joe Consumer who's
shopping at Staples. Rather, it's focusing on companies like Price Waterhouse, which has
an IT manager who runs a fleet of about 5,000 laptops, explains SunTrust's Becklean. And
standardizing equipment like modems for portable PCs has become a necessity for large
companies, including Arthur Andersen, AT&T (T) and Disney (DIS) -- all of which are
Xircom's clients.
The company's latest product, the RealPort, is one of the reasons the company is
consistently beating the Street's earnings estimates. Introduced about a year ago, RealPort
is a PC card that analysts say is a huge improvement for notebook users. RealPort
eliminates the extra wire and adapter for connecting to a phone jack. Instead, users can
just plug the phone wire right into their laptops. "You would end up in a hotel in Denver, and
you'd realize you left the [wire] in Omaha," says Becklean. In the third quarter, RealPort
represented 55% of Xircom's revenue, up from 5% a year ago. RealPort also helped boost
gross margins by 10% during the most recent quarter.
Xircom also has a robust business selling its products to original equipment manufacturers
(OEMs), such as IBM (IBM), Toshiba (sorry, no snapshot available), Hewlett-Packard
(HWP) and Compaq Computer (CPQ). These companies repackage Xircom PC cards
and products as their own. In addition, the company has developed a strategic relationship
with Intel (INTC). Last year, the chipmaker took a 12.5% equity stake in Xircom. Another
plus: The pricing environment for products Xircom makes has become more stable in the
past year and a half, says DeGennaro. And while Wall Street bemoans the erosion of
average selling prices in the desktop PC market, portable PCs haven't seen such a dire
drop.
Xircom's biggest competitor, 3Com (COMS), isn't solely focused on the PC card market
the way Xircom is. 3Com competes in a variety of markets, and PC cards aren't even its
biggest business. For Xircom, "it's a nice position to be in," says Advest's Whitney.
And what about the prospect of wireless Internet access? Xircom's DeGennaro professes
to be unconcerned. The RealPort product line already offers some wireless access. And as
wireless -- which still operates at painfully slow speeds -- takes off, Xircom is expected to
be along for the ride. "A lot of the advancements in technology will come in wireless, and
we play right into that," says Xircom's DeGennaro.
Analysts also say Xircom has a slew of new products on the horizon. First, it will roll out an
upgrade of the RealPort product line. It's also expected to have a broadband connectivity
product as well. "So, they'll be ahead of the game," says CIBC World Markets analyst
Martin Pyykkonen. DeGennaro says Xircom will likely team up with a company such as
Broadcom (BRCM), and then scale down the product for mobile use.
For investors who are getting itchy for some fundamentals to back up the nosebleed prices
of Net stocks, Xircom offers earnings and revenue growth and a reasonable price, says
Pyykkonen. With a target price that's just 20 times next year's earnings, it's not as pricey as
some of those other highfliers (the recent Nasdaq correction notwithstanding). Says
Pyykkonen: "This is a more reasonable way to play the Internet." |
