Mike...you threw me for a loop saying SFA was buying set-tops! Wow I thought...never mind. I am digging a little deeper to see if there is more news concerning the SFA vs. GMST litigation.
Here is an interesting article on the set-top market:
Good luck,
Eric
Friday July 28, 1:10 pm Eastern Time
MotleyFool.com - Fool Plate Special
Scientific-Atlanta On the (Set-) Top of the World
By Brian Graney
Set-top box and cable transmission products maker Scientific-Atlanta (NYSE: SFA) capped off a smoking fiscal 2000 last night with Q4 EPS of $0.35,up 25% from a year ago and comfortably ahead of the First Call mean estimate of $0.27. For the year, the company's sequential net earnings growth (which is preferable in this case to EPS growth considering the firm's sharecount has moved around quite a bit) reached a compound rate of 24%. With such giddy growth, it's hard to believe that this is the same company that was struggling amid two consecutive quarters of year-over-year earnings declines less than 18 months ago.
"Ground floor, going up"
Since the spring of 1999, however, Scientific-Atlanta's business fortunes have drastically turned around and the stock price has never looked back. The firm ended-up turning in a 145% share price gain last year. That performance has been topped by a 175% return so far in 2000, making the company one of the biggest year-to-date gainers in the S&P 500. (Actually it was tied for 1st place with Broadcom!)
The magic behind the rapid rise in earnings and, in turn, the firm's share price is not really magic at all, but rather a great example of a company surfing a successful, early stage technology for all it's worth.
The main technology driver for Scientific-Atlanta over the past year has been its Explorer line of digital set-top boxes, which it can't get into its cable system customers' hands fast enough. According to the company, virtually every Explorer built during the quarter was also shipped, yet the company was still only able to fulfill about 84% of all orders placed. In Q4, Explorer shipments totaled 835,000 units, up 63% sequentially. The firm's backlog has been stretched to 1.5 million units, all of which are expected to ship in the next two quarters. Just to illustrate how popular the firm's set-tops are, the current backlog is about three times greater than the number of Explorers shipped in all of fiscal 1999.
Certainly, investors in high-growth areas such as Infrastructure networking and optical components have grown accustomed to seeing companies in similar capacity-constrained, "if only we could ship more" situations. The set-top market is somewhat unique, though. Not only has volume growth been driving the top-line for Scientific-Atlanta, but rising average unit selling prices (or ASPs) have recently acted like a turbo-charger on top of that.
Rising prices -- It's a good thing
Without giving out too much detail, management did disclose on their conference call last night that ASPs for the entire Explorer line (mostly the 2000 and 3000 models) were in the $302 per unit neighborhood. That's more or less flat with Q3's ASPs, but it's night and day compared to the $150 per unit ASPs Scientific-Atlanta used to receive from its advanced analog set-tops just five years ago.
Moreover, set-top ASPs are actually poised to go higher in the future, not lower as is the case in most mature technology sectors. With its Exporer 6000 set-top and future generations taking on more "home gateway" characteristics by supporting a broad array of interactive applications, the ASP curve could shift higher yet again as the devices start to compete on the same plain as today's early Internet appliances and even low-cost PCs. Future ASPs in the $600 to $700 range are not out of the question, according to management's beliefs.
A reversion to the technological mean?
The rising ASP trend bucks the typical economic framework for mature technologies, which is marked by declining prices and improving quality as markets develop and users embrace new technologies en masse. (For an illuminating overview of how this framework played out again and again in the 20th century and led directly to higher standards of living in the U.S., check out this excellent report from the Federal Reserve Bank of Dallas. Ref: dallasfed.org ) As a result, a great value creation opportunity has opened up for Scientific-Atlanta, producing its recent outsized stock price gains.
Exactly when and for what reason this trend reverts back to the historical norm is the key question here. Eventually, the technology barriers providing today's notable pricing advantage will give way as the market expands and more competitors siphon off the profit opportunities. But in the interim, Scientific-Atlanta's current economics offer a valuable lesson for growth-oriented investors that is relevant to other emerging technology areas besides the interactive set-top market.
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