ACCL: PULLBACK IN STOCK LOOKS WAY OVERDONE - REITERATING BUY --
07:19am EDT 31-Jul-00 UBS Warburg (US) (Nikos Theodosopoulos) ACCL
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UBS Warburg July 31, 2000
Nikos Theodosopoulos 212 821 6951 Stephen Chin 212 821 4113
Accelerated Networks Inc. (ACCL - NASDAQ) - Buy
US Communications Technology
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Price: 20.06 Div: Nil Mkt Cap: 999m Est Debt/TC: 579%
Price Tgt: 50.00 Yld: Nil Shrs O/S: 50m ROE: NMF
52 Week: 63.50 - 5 yr EGR: 50% Avg Vol(000): 1572 Ent Val: 927m
20.06 Est BV/Shr: 2.23 Cvt Secs: No
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FISCAL YEAR QUARTERLY ESTIMATES - EPS FISCAL YEAR ESTIMATES - EPS
1stQ 2ndQ 3rdQ 4thQ Prior EPS P/E Rev(M)
12/99 -0.08A -0.09A -0.11A -0.12A F99A -0.41 NMF 8.5
12/00 -0.13A -0.19A -0.17E -0.16E F00E -0.68 NMF 39.1
12/01 -0.16E -0.14E -0.11E -0.06E F01E -0.46 NMF 82.8
12/02 F02E 0.13 NMF 175
ACCL: PULLBACK IN STOCK LOOKS WAY OVERDONE - REITERATING BUY
SUMMARY:
We are reiterating our Buy on Accelerated Networks after what we believe to be
an extreme over-reaction to 2Q results last week. We believe the stock is very
attractive at these levels relative to our price target of $50 as this
represents over 100% upside potential from current prices. We expect to see
positive news throughout this quarter in terms of new customer wins and
expanding field trials both through direct efforts and through the Siemens
channel. We believe this potential positive news and the current low valuation
provide for a great buying opportunity.
HIGHLIGHTS:
ACCL has sold off by over 50% after reporting 2Q00 results last week. We
believe this sell off was due to some confusion on the reported results and some
concern over visibility going into 3Q.
As for the June results, the company reported revenues of $8.8M and an
operating loss from ongoing operations of $8.9M. This compared to our estimates
of $8.0M for revenues and an operating loss from ongoing operations of $8.8M.
Thus, the company reported good results relative to our estimates.
There was confusion as to actual EPS, however. While reported EPS was a loss
of $0.19 vs. our estimate of a loss of $0.17, the difference was in a lower
share count. We were estimating shares to be 48.96M while actual reported
shares were 43.59M. This lower share count accounted for the $0.02 difference
between our estimate and the reported results. The reason shares were lower is
that we were using fully diluted shares including options. Given the company is
operating at a loss right now, reported shares do not include certain options.
Looking forward, our expectation of the company turning profitable, namely 2Q
2002, has not changed. We also raised our revenue estimates for 2000, 2001 and
2001 after the 2Q results.
As for the visibility going into 3Q, there were two main issues from the
earnings call that may have concerned investors. These were the book to bill
ratio and significant drop off of sales to Siemens. We address these issues in
detail below in our note. In summary, however, we expect improving orders in 3Q
and our discussions with Siemens suggest that the relationship between the two
companies is solid and new customer wins should be announced in 3Q and 4Q.
At current prices, the stock only trades at 6x calendar 2002 sales of $175M.
We believe the stock can easily hit our $50 price target reflecting 15x calendar
2002 sales as the company announces more customers through direct and indirect
channels as well as delivering solid results in 3Q and 4Q. We view the weakness
in the stock as an extreme over-reaction and would buyers of the stock at
current prices.
ANALYSIS:
The book to bill was below one in the June quarter. While this is not ideal,
our discussions with the company indicate that there are significant
opportunities pending that are likely to be closed in the current quarter.
These opportunities should allow the company to achieve or exceed its 20%
sequential growth target in revenues while also allowing for a book to bill
ratio of over 1 in the September quarter. Our research does support this view
as there arer large opportunities being considered by IXCs and CLECS that are to
be awarded in 3Q and 4Q of this year.
The other issue from the earnings call was that Siemens fell from 39% of sales
in 1Q to 0% of sales in 2Q. This generated some concern that there was a
weakening of the relationship between the two companies. We have talked with
Siemens since the conference call, and believe that the relationship between the
two companies is stronger than ever. The reason sales fell so significantly in
the June quarter is that sales in the March quarter through Siemens were almost
exclusively to one large customer that is still deploying the equipment
purchased in 1Q. Siemens has several trials and proposals pending both in the
US an in Europe with ACCL. For example, we point out that Siemens is the
largest supplier of DSL equipment to Deutsche Telekom (DT) in Germany. DT has
significant plans to roll out VoDSL services in 2001. Given our very positive
conversations with Siemens last week, we are very confident that the
relationship between the two companies is strong and that new customer wins
should be announced in 3Q and 4Q through the Siemens channel.
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