Here's the text of today's H & Q report by Analyst Tim Savageaux. Reading the report, you wouldn't expect a negative pre-announcement from EFNT to be in the cards:
wrhambrecht.com
(It's in PDF format, so you need Adobe Acrobat. I used Acrobat and cut & pasted here with my occasional BOLD font added for emphasis.)
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December 20, 2000
EFFICIENT NETWORKS
NASDAQ: EFNT
RATING: STRONG BUY
INVESTMENT HIGHLIGHTS
Yesterday, December 19, 2000, SBC Communications hosted a conference call for analysts outlining its growth initiatives for 2001. We believe SBC’s outlook represents a net neutral to slight positive for Efficient based on:
•Q4 DSL install rate of 3,500 – 4,000 per day, with total net adds likely to approach 300,000 in the quarter versus 117,000 in Q3
•Very positive commentary regarding consumer demand for ADSL services
•A conservative view on subscriber additions in the first half of 2001, with current daily install pace expected to be maintained in first half of 2001.
•A “measured approach” to DSL rollouts in Ameritech region, resulting in a delay in ADSLdeployment ramp to the second half of 2001.
We believe SBC’s 2001 DSL outlook is conservative, as we believe the Company is not keen to miss another major DSL target. For 2000, the Company’s fourth quarter outlook supports sequential shipment growth for Efficient, although coming in (as expected) just north of 800,000 subscribers versus an initial target of 1 million.
Most of the damage to this run rate was done in Q3 when a variety of operating challenges combined to slow installs to 1,000 per day. SBC appears back on track in Q4, and increasing coverage of residential markets through the deployment of broadband gateways (DSL enabled digital loop carriers), supplied by Alcatel and Advanced Fibre Communications may provide upside potential to subscriber run rates in 2001.
SBC Communications offered 2001 revenue and EPS guidance yesterday that came in at the low end of estimates as the Company expects a softening U.S. economy, regulatory difficulties, and a delay in DSL deployments in the Company’s Ameritech region to slow overall growth. More specifically, revenues are expected to grow 8-9%, compared to expectations of 10%, while EPS growth of 11-14% falls short of the previous estimate of 15%.
On the DSL front, SBC noted that DSL installs are currently 3,500 – 4,000 per day, which translates into roughly 300,000 net adds for Q4 and just over 800,000 estimated total subscribers for 2000. While this number falls short of the targeted 1 million subscriber total for year end, it comes as no surprise given the well articulated installation hiccups that occurred during Q3.
The Company also noted that it does not expect to accelerate DSL deployments in the Ameritech region for the next few quarters due to the delayed installation of broadband gateways and the priority of basic service upgrades. While this is a potential concern for Efficient, we should note that Efficient has not shipped modems into the Ameritech territory, with its SBC business having been concentrated in the Pacific Bell and Southwest Bell regions.
Looking ahead to 2001, SBC expects its run rate to remain flat at 3,500 – 4,000 installs per day for the first half of the year. However, we believe this estimate could prove to be conservative given that SBC continues to see very strong demand for the service. Finally, the Company stated that 2001 capital expenditures would be unchanged from 2000 levels of approximately $13.5 billion.
We believe this overall figure is less relevant for Efficient given the Company’s alignment with a key (perhaps the most important) corporate growth goal at SBC. Efficient continues to be the global leader in ADSL CPE with an estimated 32% market share in the September quarter and is poised to potentially capitalize on the continued deployment of DSL services by not only SBC, its largest customer, but also increasingly significant incumbent carrier customers in the U.S. and abroad.
At less than 1 times calendar 2001 revenues and an amazing 10 times our fully taxed calendar 2001 earnings estimate, we continue to believe Efficient shares are very inexpensive relative to forecasted growth rates in excess of 80%. We believe these valuation levels clearly imply a market view that both our fiscal second quarter and calendar 2001 estimates are unrealistically high given the environment in both communications infrastructure in general and ADSL in particular.
We would point out that this was common sentiment in the September quarter, in which the Company posted very solid results, and believe that the Company’s quarterly earnings and outlook will likely represent upside to current expectations reflected in the share price.
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[BY THE WAY, it appears that the analyst is projecting $0.16/share this quarter!! If you have Adobe Acrobat Reader, look at the estimate for Q2 of FY2001 (Dec 2000) in the spreadsheet model on Page 1 of the report] |
