Here's the excellent analysis on ADCT:
Bid & Ask: My Favorite Broadband Stock
By Tom Byrne (9/8/00)
A couple of weeks ago, in my weekend Earnings Watch column, The Kid predicted that ADC Telecommunications (NASDAQ: ADCT - Quotes, News, Boards) would beat third quarter earnings estimates.
The company wound up earning $0.17 per share in the July third quarter, beating estimates of $0.15 per share. ADC posted sales of $891 million, an increase of 67% over the year-ago quarter. Excluding acquisitions, ADC's sales increased 71% to an all-time high of $827 million.
Underneath all the accounting flotsam, ADC had a great quarter. Before non-recurring charges, operating income increased 172% to an all-time high of $190 million in the third quarter. Net income also reached a record high of $127 million, increasing 165% year-over-year.
ADC experienced strong sales growth across every category. Broadband connectivity sales grew 120% to $524 million. Broadband access and transport sales grew 19% and integrated solutions sales were up 35%.
Strong demand for both fiber- and copper-connectivity systems/components supplemented record third quarter sales of wireless components. Sales of fiber-optic systems/components totaled $150 million in the quarter, up 167% from the third quarter of 1999.
During the quarter, ADC introduced its BroadWire 528 ADSL splitter, which was a big seller. This splitter is optimized for DSL/telephony line sharing, thus allowing subscribers to access voice and high-speed data services simultaneously over a single copper twisted pair.
The application is particularly important following the Federal Communications Commission's recent ruling mandating the sharing of copper local loop facilities among incumbent local exchange carriers (ILECs), competitive local exchange carriers (CLECs) and data local exchange carriers (DLECs).
The hot product line from the broadband access and transport division was Homeworx, where sales increased by 341%. Homeworx supports AT&T Broadband's (MediaOne is being renamed under the AT&T brand) cable telephony services.
Looking Ahead:
ADC's Axity system is in trials with WorldCom (NASDAQ: WCOM - Quotes, News, Boards) and BellSouth (NYSE: BLS - Quotes, News, Boards). The Axity system enables communications service providers to offer wireless Internet/data, video and voice services to businesses, small offices, home offices and residences. Three access providers in North America currently deploy the Axity technology.
During the third quarter, ADC and Austar United Communications, Australia's largest pay-TV operator, announced a program to develop two-way transmission facilities for high-speed Internet and telephony services in more than 60 Australian towns and cities. The potential of this contract exceeds $100 million.
In June 2000, Telinor Television, a Mexican wireless pay-TV company, and ADC announced that Telinor plans to test the Axity system for the delivery of two-way broadband data services to businesses.
If all the field trials go well, and the Austar initiative is a success, this could become ADC's top selling product, conceivably doubling ADC's current revenue base.
During the quarter, ADC completed the acquisition of Centigram Communications, another step forward in ADC's mission to develop its broadband products. Centigram makes convergent applications that unify data and voice services over Internet, wireless and wireline networks. Centigram's niche is Internet-enabled call management and wireless access protocol (WAP)-based messaging.
One of ADC's strengths is its ability to invest very wisely, which has given the company a super-strong balance sheet. As of July 31, ADC's strategic investments had a market value of $1.6 billion of which $1.5 billion were carried on the balance sheet as marketable securities. The cost basis of these investments was $313 million, which means ADC has a 379% return on its investments. I wish we all had that kind of track record.
Some of ADC's investments include shares of Redback Networks (NASDAQ: RBAK - Quotes, News, Boards), Efficient Networks (NASDAQ: EFNT - Quotes, News, Boards), ONI Systems (NASDAQ: ONIS - Quotes, News, Boards), GlobeSpan (NASDAQ: GSPN - Quotes, News, Boards), Vyyo (NASDAQ: VYYO - Quotes, News, Boards) and interWAVE Communications (NASDAQ: IWAV - Quotes, News, Boards).
ADC also has investments in 10 privately held companies carried at cost as long-term investments on the balance sheet. These investments include Tdsoft, G-Connect, ANDA Networks, Ensemble Communications, YAFO Networks, Optical Switch and Northstar Photonics. Most of these investments were made through ADC Ventures, a venture capital fund focused on investing in emerging and start-up companies that are developing broadband communications products. The more of these 10 private investments that go public, the stronger ADC's balance sheet gets.
Risks:
Chief executive Bill Cadogan plans to retire next year. Cadogan has definitely been the driving force behind the company's acquisition strategy, its unbelievable investment portfolio and its push into broadband connectivity. He will not be easily replaced.
Sales from fiber optic products are doubling every year, but sales of other products are not growing as rapidly. The new leader of ADC will probably have to jettison these slower-growing product lines, which may cause some internal upheaval. It remains to be seen if ADC can pull this off smoothly.
Bottom Line:
ADC's sales will exceed $1 billion this year, which will make it the world's sixth largest optical components maker behind Lucent (NYSE: LU - Quotes, News, Boards) Nortel (NYSE: NT - Quotes, News, Boards), Alcatel (NYSE: ALA - Quotes, News, Boards), JDS Uniphase (NASDAQ: JDSU - Quotes, News, Boards) and Corning (NYSE: GLW - Quotes, News, Boards). That is pretty nice company to be in, but ADC wants to be number three within two years. If it reaches that goal, earnings will hit at least $2 per share in 2002. At $37, ADC is trading at 19 times that estimate, which is a 60% discount to the rest of its peer group. |
