Hi Mike,
Congrats on buying into STXN. If you bought a few days ago,
you got a great price at a great time. As you know doubt
know, STXN is up in each of the last couple of days (although
that rise has been on somewhat low volume) and I expect to
see further price increases as we approach the earnings
release on 17 January 2001. STXN is the market leader in the
fixed wireless telecom equipment sector because its got the
best and broadest line of products to serve this market.
Competitors such as PCOM, NTRO, ADAP and others have been
losing money for some time while STXN has been showing
strong and growing EPS... those competitors are also
suffering now as customers (in the telecomm services
business) have recently cut back orders. I think these
cutbacks are temporary and that they do not affect STXN
very much because STXN has a much more broad (global)
customer base and product line than these competitors.
Still, STXN has had all-time record orders in each of the
last two quarters and while I expect to see reasonably
strong orders again this quarter... I'd be (pleasantly)
shocked to see STXN report all-time record orders again.
In short, I think STXN has been unfairly tarred with the
same brush as its competitors... someday, I expect that
investors will see how much better STXN is and award
STXN the much higher P/E ratio that it deserves.
Remark: In today's news, WMUX just canceled its deal to
acquire ADAP which recently warned about plunging revenues.
ADAP is down on the news while WMUX is up.
Yes, Altium is enjoying strong sales. Its the top dog
among 155 Mbps fixed wireless products and it offers
unmatched spectral efficiency. Furthermore, STXN has the
manufacturing capacity (and parts availability) to meet
growing market demand. I don't know what gross margin STXN
gets on the Altium product line, but I imagine its over 40%.
As you note, the overall company gross margin is not terribly
high. Two quarters ago, STXN got hit hard because it did not
meet the street's revenue expectations... however, they did
beat the street's EPS expectations (while showing record
orders) because their gross margins were quite high that
quarter. The situation arose because their sales of high-
capacity and high-margin Altium products were strong while
sales of lower-margin and lower-capacity XP-4 (and older
Spectrum II) products were weak. My understanding of what
happened is this: they were having difficulty getting all the
parts they needed to meet demand, so they funneled the parts
they could get to their high-margin Altium products and told
customers they would have to wait for the lower-capacity
products. Although STXN's share price took a big hit at the
time, this parts "shortage" turned out to be a 1-quarter
phenomenon; they now seem to have this problem under control.
These lower-capacity products have more serious competition
in the market... so STXN sees downward pressure on prices
and margins for these lower-capacity products... but these
lower-capacity products still make up a large portion of
STXN's overall sales revenue and, as a result, they tend
to drag down the overall company gross margin. At that
same conference call two quarters ago, STXN said that
their high gross margins for that quarter would return
to historical levels in the next quarter (which they
did) as the "mix" of product sales returned to normal;
but they also said that they expect these margins to
grow over time (albeit slowly). Given their product mix,
I'm actually fairly pleased to see the company gross margins
at these levels and I'm confident that they will improve
steadily. Its easy for a company with one hot niche product
to sport very high gross margins (since their company-wide
gross margin *is* their product gross margin), but STXN
has a broad product line which includes older lower-capacity
and lower-margin products as well as newer high-capcity
and high-margin products. This broad product line makes
them more attractive to their customers as it provides
those customers with more of a "one stop shopping"
experience. Also, by competing vigorously in the
lower-capacity market, STXN takes market share (and cash)
away from competitors who would like to try and leapfrog
past STXN.
The nature of this market is that new products are being
introduced all the time. These new products offer new
advantages, which makes them popular with customers
and allows the maker to charge higher gross margins.
Competitors are usually close behind with competing
products that offer similar advantages... as those
competing products appear, the product price and gross
margin comes under pressure. Thus its always important
for a company like STXN to keep introducing new products
with new advantages. What is sometimes less obvious is
that its equally important to get the product features
right, and to introduce the product at the right time,
to meet market demand... introducing a new product that
has the wrong features, or with the right features but
too early (before market demand develops), squanders
company resources while allowing competitors to "get it
right" and make all the sales.
STXN was once criticized by investors for not bringing
out P-MP products a year or more ago. The P-MP story
was one that investors loved and companies like PCOM
and NTRO enjoyed high share prices as a result. [NTRO
was smart enough to cash in on their high share price
through a secondary offering.] But they were too early.
Customers tried their products and found problems...
and these early P-MP products offered relatively low
capacity... so the sales volume has been slow to grow.
In the interim, STXN concentrated on high-capacity
with high spectral efficiency by bringing out its Altium
product line... its still P-P so its not quite as sexy,
but it was there at the right time to meet market demand
and sales volume has continued to grow rapidly. In short,
STXN correctly judged where the "sweet spot" for demand
would be in the fixed wireless equipment market and they
were there to meet it.
STXN will introduce their new ultra-high capacity "Millennium"
product line in late March 2001. This will again offer high
spectral efficiency in a P-P product and it will meet their
customer's needs as those customers begin their network
build-out for new 3G technology... starting in the latter
half of 2001 and continuing into 2002. Again, STXN is poised
to "catch the wave" in demand and to hit that "sweet spot"
just right.
In the interim, STXN has not ignored the P-MP market. They
have significant investments (and a marketing agreement)
in privately held Ensemble Communications whose P-MP
products have recently been beating competitors like NTRO.
[When I say "beating", I don't mean by winning blue ribbons
from some magazine's product review committee, I mean making
sales to big customers like Lucent.] But these are still
lower-capacity P-MP products like those from PCOM and NTRO.
In their R&D labs, STXN is working on high-capacity P-MP
products... they mentioned this when they gave a timetable
for there Millennium product introductions during a conference
call about a year ago - more recently, their head of
marketing and sales would not talk to me about this as
they did not want to give their competition a heads up.
I'm not certain exactly what they've got up their sleeves...
it could be an acquisition of Ensemble (for lower-capacity
and lower-margin P-MP products that compete with offerings
by NTRO, PCOM, and others) together with a high-capacity
P-MP version of their new Millennium products... but whatever
it is, I trust STXN's sharp management to make the right
moves at the right time.
Another thing that should not be lost in all this is STXN's
development of their proprietary "velocity" chip set. This
is the chip set that is behind the Millennium product line.
What this chip set means to STXN is that their products
will not only enjoy a technological advantage, they will
also enjoy a higher-degree of integration (which means
lower manufacturing cost)... that, in-turn, means higher
gross margins and a better ability to compete (when
needed) on price...
Well, I've got to go now, welcome to the thread.
Rob |
