Universe Description, January 2001: The Broadband Access Systems universe includes companies that sell equipment enabling the high-speed delivery of voice, video, and data services over broadband access networks. Our research is focused on next-generation wireline access systems and service delivery platforms. December highlights include the following:
• Deceleration In Carrier Spending, Particularly Among CLECs, Creates Challenging Outlook. Reflecting slower growth in carrier capital spending, and significant reductions among many CLECs, we believe as many as seven of the ten companies in our coverage universe are likely to fall short of our fourth quarter 2000 estimates and/or lower guidance for 2001, leaving RADWARE, ADC Telecommunications (January quarter), and Advanced Fibre Communications as the only companies with their fourth quarter 2000 and 2001 outlook intact. In contrast, in the September quarter only three companies in our Broadband Access universe (CACS, CMTN, and TSTN) missed our third quarter estimates and/or reduced guidance. Not surprisingly, we believe the companies with large CLEC exposure to be most at risk of missing our fourth quarter estimates and/or significantly reducing guidance for 2001. We expect Copper Mountain and Turnstone Systems, both of which sell primarily to data CLECs, to be the most likely to reduce their 2001 revenue outlook significantly (perhaps more than 25% from current estimates of $300 million for CMTN and $186 million for TSTN).
• Spending Slowdown Also Affecting Companies With Little CLEC Exposure. Ironically, the two companies in our universe that have recently preannounced fourth quarter 2000 or 2001 revenue and earnings misses both target primarily ILEC customers. On December 8, ADTRAN announced lower-than-expected fourth quarter results driven by lower sales to enterprise customers and lower gross margins, resulting from higher-than-expected sales of first-generation HDSL2 products. On December 22, Sunrise Telecom announced flat revenue growth for 2001—we had been expecting 27% revenue growth—citing “recent industry announcements about slowing down capital spending.” In addition, even ADC Telecommunications, which reported strong results in its fiscal fourth quarter ending October 31, guided revenues for its fiscal first quarter down to $850 million, representing a 17.6% sequential decline, well above ADC’s historical first quarter/fourth quarter seasonal decline of about 8% to 10%.
• Investing Ideas. Given the earnings misses and challenging outlook, Broadband Access stocks (including 13 not in our coverage universe) have taken a beating, down 22% in the month of December and 76% year to date, while the NASDAQ is down 4% month to date and 38% year to date. We believe December’s dips in shares of ADCT (down 5%), RDWR (down 7%), and AFCI (down 30%) present compelling buying opportunities. Each of these companies has a diversified customer base with little or no CLEC (in the case of RADWARE) exposure, and we are confident in our revenue and earnings estimates for these companies. From a deep value perspective, we believe TSTN is interesting given that it has more than $5 per share in cash, should remain profitable in 2001 (even if actual revenues come in at $100 million versus our estimate of $186 million), and has a decent chance of penetrating ILEC accounts during 2001. |
