15-Oct-99 Bernstein (Paul Sagawa }LU: NEW PRODUCTS TO EXTEND LEADERSHIP IN CARRIER DATA
Stock Rating Price YTD Perf 1998 1999E 2000E 1999(x)2000(x)
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LU(Sept) O $62 16% $0.86 $1.24 $1.61 48.5 37.1
S&P 500 $1,283 7% $44.05 $49.00 $52.50 26.8 25.0
O - Outperform, M - Marketperform, U - Underperform
Highlights
* Lucent is the #1 provider of carrier class data networking equipment with
sales of approximately $2.5B in FY 99 growing more than 50% YoY. Strong new
products in core IP, ATM, and multi-service access will sustain Lucent's strong
momentum. Moreover, LU will gain further advantage by integrating these
technologies with its leading optical and wireless infrastructure solutions.
This is a key factor driving our expectations of 20% top-line growth and above
consensus earnings ($1.61 in FY00 vs. $1.51). We rate Lucent outperform with a
target of $100.
* Lucent's Nexabit core IP router is much further along than we had suspected.
The hardware design, scaleable to 6.4 Tbps, more than a 100 times faster than
offerings from Cisco or Juniper, features numerous breakthrough innovations
that will leapfrog even the next generation competitive offerings. The
software is undergoing a tortuous final testing process to eliminate even the
smallest incompatibility with Cisco's dominant BGP implementation. Within 6-9
months, we believe LU will be the first to deliver a completely compatible
terabit class Internet router.
* Lucent's ATM business continues to exceed even aggressive expectations with
triple digit YOY growth. LU now has nearly 70% of the core ATM market
including a new but unannounced order from Deutsche Telecom for hundreds of
GX550s to support its rollout of xDSL services. We expect LU to introduce a
new 360 Gbps OC-192 capable switch in 12-15 months, while adding IP hardware to
its ATM products in the same time frame.
* Lucent's new Pathstar product is finding an enthusiastic market. Combining
multi-service access, hi-speed IP routing and class 5 telephony, the Pathstar
is a CLEC in a single compact box. We believe sales of this product will
exceed $600 million in 2000 - more than 3x original estimates - and topping
$1.2B in 2001.
* All of Lucent's new core data products will be tightly integrated with its
optical portfolio, a significant advantage vs. rivals like Cisco, Juniper, and
Newbridge, which lack mature optical product lines.
* We believe Lucent's strength in data networking will give it considerable
advantages in 3G data capable wireless equipment. Key infrastructure players
Ericsson and Nokia have never built a carrier class data network outside of the
laboratory, raising considerable risk of incompatibilities and delays. Lucent
can point to its leadership in CDMA (the radio technology of 3G), and ATM, as
well as the aforementioned development in IP.
* Research Conclusions
Lucent is uniquely positioned in carrier data, commanding 36% share of the
rapidly growing $7.5B market (we expect overall market growth of greater than
40% CAGR over the next 3 years). We believe that LU will maintain its momentum
in carrier data bolstered, in part, by triple digit growth in the company's
ATM business. Our long-term positive outlook is also based on the speed,
scalability, and rapid development of the Nexabit terabit IP router as well as
the growing demand for Lucent's new Pathstar product. Additionally, we believe
that Lucent will be able to leverage its technology leadership in optical
networking by tightly integrating its core data products to sustain competitive
advantage over data networking rivals. Finally, Lucent's experience in data
networking, combined with its leadership in CDMA technology, should also
position the company for large share gains as carriers begin to deploy their
third generation wireless networks.
We believe that the positive developments in Lucent's carrier data business,
coupled with its strong positions in switching, optical networking, and
communications software will enable the company to maintain its dominance in
the overall carrier class market. Furthermore, we expect Lucent's strength in
the carrier class market to significantly contribute to above consensus overall
sales growth (20%+) and EPS ($1.61 in FY00 vs. $1.51 consensus) in FY00. We
rate Lucent outperform with a target of $100. |
