ML:Spring Tide's Packet Switching the Next Wave
Excerpts from Merrill Lynch Report:
Packet Switching the Next Wave
In pre-announcing weaker than expected revenue growth
over the next several quarters, Lucent management pointed
to the transition from traditional circuit switching to packet
switching as being one of the culprits. Tuesday, Lucent
announced that it was acquiring privately held Spring Tide
Networks for 27 million shares or about $1.3 billion,
which excludes the 4% Lucent already owns. The deal,
which should close September 30, 2000, will be accounted
for as a purchase, which we expect will be dilutive by
about $0.01 in FY01.
Spring Tide fills a gap in Lucent’s product line, and
evolves their current position in remote access
concentrators (RAC). The IP Switch 5000 provides
concentration for VPN and higher layer services such as
firewalls and can interconnect with wireless, broadband
DSL, cable and traditional wireline. LU leads the RAC
market through its dominance in dial-up modems.
Furthermore, Spring Tide’s 5000 complements the systems
acquired through Xedia and interoperates with LU
products such as Stinger for DSL.
This acquisition should help Lucent compete as operators
migrate circuit switching to the next wave of packet
switched networks. The market opportunity for this type of
product is expected to be significant. Industry experts
forecast the market at $660 million in 2000, and expect it
to grow to over $5 billion in 2003.
Spring Tide has established itself as an early leader in this
market, which includes competitors such as Nortel’s
Shasta unit. Spring Tide won four contracts through an LU
OEM agreement including AT&T, Vanion, ionex, and
Broadslate. The contract with AT&T may be worth more
than $50 million. The company has about 200 employees,
which also gives Lucent some much needed IP expertise.
Other Changes on the Horizon
With all of the company’s current difficulties, investors
may be asking “why now?” We think the pace of
technology change and the emergence of the VPN market
would not allow Lucent to stand still, despite current
challenges. The spinoff of Avaya and
the announced plans to spin-off the Microelectronics
Group are just first steps to streamlining and focusing the
“core” businesses.
Table 1: Lucent Segmentation ($ in millions)
FY00
Rev.
FY01
Rev.
YoY
Growth
% FY00
Rev.
% FY01
Rev.
Wireless 6,600 7,689 17% 19% 19%
Optical Systems 5,500 7,563 38% 16% 18%
CO Switch 6,700 6,667 0% 20% 16%
Carrier Data & Access 5,300 7,235 37% 15% 18%
Software 950 1,088 15% 3% 3%
Services 3,400 3,826 13% 10% 9%
Remaining Micro (e.g.
Power Sys.)
1,395 1,388 -1% 4% 3%
Other 108 - -100% 0% 0%
Total (minus ME) 29,953 35,455 18%
ME (Semi & Opt El.) 4,336 5,720 32% 13% 14%
Total (w/ ME) 34,289 41,175 20%
Source: Merrill Lynch Estimates |
