<font color=red>Kaufman Bros., L.P. Morning Notes
September 12, 2000
NETOPIA, INC. (NTPA $23 3/8)
RATING: BUY
PRICE TARGET: $70
COVAD ANNOUNCEMENTS SHOULD BENEFIT NETOPIA AND EFFICIENT
Yesterday, Covad Communications announced it is on-track to beat guidance for subscriber adds in the current quarter by over 30%. The company will have over 200,000 DSL subscribers by the end of September, a sequential increase of 62,000 lines from the end of June. Guidance had been for the DSL service provider to add less than 50,000 during the current period, a number that would have been relatively flat with the prior quarterís subscriber additions. This announcement underscores the continuing ramp of DSL services, despite the overwhelming concerns in the industry.
COVAD ALSO RECEIVES EQUITY INVESTMENT FROM SBC
Yesterday afternoon, Covad announced the company has signed a marketing agreement with SBC Communications (SBC $45 15/16) under which Covad will be an in-region and out-of-region provider of DSL services for SBC. Under the terms of the agreement, Covad will resell SBCís DSL lines to residential customers for at least $600 million over six years and, in turn, SBC will begin offering incentives to its sales force to sell Covadís business-class DSL lines. In addition, SBC will take a $150 million equity stake in Covad, worth about 6% of the company. The two companies also plan to jointly develop an OSS system that will work on either network and will likely ease the provisioning process. SBC has also agreed to allow Covad access to its neighborhood gateways as part of Project Pronto. Please note that the two entities, Covad and ASI (the DSL division of SBC) will continue to compete within in-region territories.
The two companies that are impacted the most from these two announcements are Netopia and Efficient Networks. Approximately 20% of Efficientís business came from Covad last quarter and Netopia got about 24% of its total sales, representing in absolute terms roughly $20 million and $7 million in product, respectively. After Covad lowered its guidance for subscriber additions for 2000 and 2001, investors became increasingly cautious with respect to Efficientís and Netopiaís growth prospects at this particular account. Accordingly, many investors had expected revenues from Covad for both Efficient and Netopia to be sequentially down, if not flat at best.
For Efficient, the upside associated with the revised guidance should help offset the slowdown at SBC and help margins as the higher priced DSL routers that are sold to Covad (the old Flowpoint business) carry higher gross margins. The agreement between SBC and Covad also bodes well for Efficient as SBC will look to rollout Covadís residential services in out-of-region territories. The majority of Covadís residential DSL service is deployed using Efficientís CPE. We reiterate our STRONG BUY rating on shares of Efficient with a $130 price target.
For Netopia, the announcement raising guidance seems to contradict our recent downgrade on concerns over linearity and visibility in the current quarter. This announcement is encouraging as the Covad account represented about 42% of Netopiaís DSL sales in the June quarter. We continue to believe, nonetheless, that Netopia entered the third month of its quarter slightly behind schedule. Having said that, we are extremely bullish on the prospects of the SBC and Covad agreement and the opportunities it offers Netopia. Foremost, a major incumbent with a huge balance sheet now plans to resell Covadís services. For Netopia, this will include business class services both in-region and out-of-region. With NorthPoint (NPNT $10 5/8) partnering with Verizon (VZ $45 1/16) and Covad with SBC, we believe DSL subscriber additions in the small business market will likely accelerate going forward. Netopia is well positioned to capture a large chunk of this acceleration. We recommend investors use the recent concerns and the resulting drop in share price as an opportunity to BUY shares of Netopia. |
