Copper Mountain: A Broadband Superstar is Born--The Need for Speed
by Chris Connor
Broadband Jun 8 2000 9:57AM CST
Took a Different Path
Copper Mountain Networks {CMTN} is a comprehensive DSL equipment supplier that focuses on the big four flavors of DSL: ADSL, SDSL, IDSL, and G.Lite. Early on, the company focused strictly on SDSL or symmetric DSL, while most of the other DSL vendors focused on ADSL, because SDSL is better suited for businesses. SDSL is best suited for business applications because its upload and download speeds are equal, or symmetric, while ADSL has substantially faster download speeds than upload speeds. Since businesses communicate back and forth, download and upload speeds should be equal. In contrast, ADSL is better for consumers dealing with the Internet because they download substantially more information than they upload. Investors should note that SDSL is still Copper Mountain's primary focus. This flavor of DSL is especially important for Voice over DSL - a big aspect of DSL's future growth, because of voice transmission's two-way nature.
Leader in Business DSL
Copper Mountain's focus on SDSL is one of the key factors contributing to Copper Mountain's lead in DSL for businesses. According to the Dell'Oro Group, CopperMountain ranks number one in business DSL in terms of revenue, with a 42.5 percent market share. Copper Mountain serves businesses primarily through the data-focused competitive local exchange carriers (CLECs) mentioned in the overview of the DSL industry. In fact, one of those CLECs, NorthPoint Communications {NPNT}, accounts for about 60 percent of sales while Rhythms {RTHM} accounts for about 18 percent of sales. These percentages should decrease considerably as the company increases its presence in the OEM (original equipment manufacturer) and multi-tenant unit markets. Multi-tenant units are buildings such as skyscrapers, college campuses, office parks, apartment buildings, and hotels.
Adaptive Fragmentation
Copper Mountain just introduced a new technology in May, called Adaptive Fragmentation, that greatly enhances the potential for Voice over DSL services. Several companies such as Adtran {ADTN}, Efficient Networks, and Ramp Network {RAMP} are already incorporating Adaptive Fragmentation into their products. Adaptive Fragmentation reduces the jitters and latency of voice over SDSL and IDSL, which significantly improves the quality of voice over DSL. To fully understand Adaptive Fragmentation and the benefits it provides, lets take a closer look at how it works.
Lets say a DSL service provider offers a combined data and voice service. In this service, there will be both voice and data packets (pieces of messages). Voice quality is impaired somewhat if large data packets block the path of voice packets. Fragmenting these large data packets limits delays in the transmission of voice. However, the fragmenting of the large packets wastes bandwidth (the amount of data that can be transmitted in a fixed time) so non-adaptive fragmentation which is used by ATM (Asynchronous Transfer Mode - a widely used networking technology) is not an optimal solution because it always fragments packets into certain specific sizes. On the other hand, Adaptive Fragmentation fragments large data packets into smaller data packets only when voice is on the line. If voice is not on the line, bandwidth is maximized because there is no need to fragment the large data packets. Adaptive Fragmentation uses a look-ahead buffer to spot voice traffic coming, and then fragments the data into different-sized packets.
Instead of fragmenting all the packets the way ATM does, Adaptive Fragmentation bases the amount of fragmentation on the speed of the DSL connection. In other words, very little fragmentation is needed at higher speeds, while lower speeds require several fragments for each large data packet because faster connections are better able to handle voice than slower ones. In a nutshell, investors should remember that Adaptive Fragmentation improves voice quality in a bandwidth efficient manner over DSL connections. With that being said, Adaptive Fragmentation increases the amount of voice and data services that can be offered on a DSL connection, which is a boon to carriers because they can realize additional potential revenue.
Explosive Performer Out of the Gate
Although a majority of DSL pure-play stocks, including leaders like GlobeSpan {GSPN}, Virata {VRTA}, and Efficient Networks {EFNT}, are not profitable yet, Copper Mountain has generated both dynamic revenue and earnings growth. As far as revenues are concerned, Copper Mountain has generated four straight quarters of impressive sequential revenue growth at an average of 47 percent per quarter. Moreover, the company 's revenues have grown every quarter except one since it began reporting revenues in the first quarter of 1998. Year-over-year revenue growth is even more impressive with Copper Mountain generating year-over-year revenue growth in excess of 200 percent for five straight quarters. Even though Copper Mountain is a young company, year-over-year growth above 200 percent is explosive for any company in any industry.
Copper Mountain began to report earnings in the second quarter of 1999, when revenues began to accelerate on a meaningful basis (over $10 million). In its last four quarters, Copper Mountain has reported earnings per share (EPS) of $.045, $.08, $.09, and $.24 from the second quarter of 1999 to the first quarter of 2000. With that being said, Copper Mountain has registered sequential EPS first-to-second quarter growth of 78 percent, second-to-third quarter growth of 12.5 percent, and third-to-fourth quarter growth of 167 percent. Furthermore, the company has blown away earnings estimates in its last three quarters by 33 percent, 22 percent, and 82 percent, respectively. Looking forward, analysts project that Copper Mountain can grow its earnings at a rate of 45.8 percent per year over the next five years.
Copper Mountain has been able to transfer its revenue growth to its bottom line so quickly because of superior margins. A high gross margin usually points to low material costs, while a high net profit margin usually indicates an efficiently run company - with streamlined manufacturing processes, sales forces, administration, and even financing facilities. In point of fact, the communications equipment industry has an average gross margin (top line) of 45.61 percent, while Copper Mountain boasts a gross margin of 53.4 percent. For net profit margin (bottom line), the average for the communications equipment industry is negative, while Copper Mountain charts a stellar net profit margin of about 17 percent. Simply put, Copper Mountain receives 17 cents for every dollar it generates in sales.
Bottom Line
All investors interested in participating in the immense potential of DSL should take a look at Copper Mountain because of its innovative technology like Adaptive Fragmentation, leadership in business DSL, operating efficiencies, and stellar growth. Despite the fact that Cisco {CSCO} has entered the DSL equipment market with a major deal with leading DSL service provider SBC Communications {SBC}, Copper Mountain should maintain a leadership position in the DSL market for as long as DSL is a prominent means of delivering broadband. Cisco is a threat to any company in any market that it enters, but Copper Mountain has a nice early lead and it has established important partnerships with major technology companies such as 3Com {COMS}, Intel {INTC}, Conexant {CNXT}, and Lucent {LU}. In fact, partnerships are a major part of Copper Mountain's overall strategy. Instead of focusing on proprietary solutions, the company has instituted an interoperability program called CopperCompatible that makes sure that its products interoperate with equipment from other DSL equipment makers. In conclusion, the other pure-play DSL stocks simply do not have all the ingredients for success (leadership, rapid growth, key partners, innovation, superior margins) in place that Copper Mountain does.
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