A Tale of Two Conference Calls
By Jim Seymour
Special to TheStreet.com
2/15/01 10:04 AM ET
Tuesday evening saw two conference calls that went against the grain in more ways than one. Optical networker Sycamore Networks' (SCMR:Nasdaq - news - boards) earnings per share for Q2 came in a penny better than the consensus; more importantly, SCMR ("Schemer") execs on the call were generally more positive and confident, looking forward, than we've heard on most tech earnings calls lately -- especially on calls in the tel-tech constellation.
The next day, SCMR earned two downgrades from name-brand analysts. And it closed up 16%.
Meanwhile, at about the same time, old faithful semiconductor-equipment maker Applied Materials (AMAT:Nasdaq - news - boards) came in a little better than expected, 4 cents over the consensus estimate; but company officials on its call painted a dreary and often confused picture for the rest of the year.
Applied Materials got at least one upgrade Wednesday. And closed up 13% and change.
Sycamore's call was prudent but encouraging; Applied Materials' was confusing and often frustrating. Sycamore was downgraded but traded up; Applied Materials was upgraded and also closed up.
End of similarities. What's going on here?
Sycamore benefited -- relatively, as in "In the land of the blind, the one-eyed-man is king" -- from the dismal outlook for its group. As the well-publicized telco capex contractions have rolled out, all the players in the market selling gear to the telcos have been hurt. Sycamore, the company built around the idea of more intelligent optical switches, looks like it will escape some of the pain ... but only some.
Schemer's managers said they weren't pulling down their earlier guidance, from their Q1 call, for a flattish remainder of this year. More importantly, they provided some good news on specific product lines. Sycamore's SN3000 and SN4000 edge devices are doing well, despite hot competition from Redback (RBAK:Nasdaq - news - boards) and Cisco Systems (CSCO:Nasdaq - news - boards). Sycamore's SN8000 metro box, its cash cow, is doing OK.
More importantly, the SN16000, Sycamore's big bet for the future, is getting rave reviews in its current trials, and with its high port density, is aimed right at what will shortly be the fat part of the market.
I think Sycamore has good reason to be guardedly optimistic for the rest of this fiscal year and probably beyond, despite the limited visibility the company reported Tuesday. Sycamore is a great example of having the right product line now and coming on in the form of upgrades and new releases, almost all aimed at the right part of the market to provide fatter margins.
I think Wednesday's downgrades were overblown, and the market's response -- up $3.75 at the close Wednesday -- was realistic. More importantly, I think SCMR is as close to a safe optical investment as we see in the market now. With a market cap of around $7 billion, and a stock price just an eighth of its 52-week high, it's one of the few realistic tech buys around now. Yes, the price-to-earnings ratio is still unconscionably high, at 140 -- but hey, this is optical, where P/Es all look silly to worse.
And Applied Materials? Though I've made a lot of money in AMAT in the past, it's hard to see a near-term bright future for the company. With admittedly poor visibility, company executives' guidance for the current quarter (ending in April) -- down to 32 cents to 37 cents a share from a consensus of 49 cents -- is probably accurate ... and depressing.
(And remember that this is the second round of warnings from AMAT in two weeks: On Jan. 30, it warned down, and analysts reset their expectations, with the consensus dropping from 63 cents to 47 cents. It was that already-reduced consensus that the company "beat" -- if only barely -- Tuesday.)
Applied Materials smells like dead money for a while here, notwithstanding Wednesday's close at almost $47, up about $5.50. With the semis flat or worse, AMAT's market is not going to pick up soon. Even Intel's (INTC:Nasdaq - news - boards) flurry of fab-building, against the grain in this market, isn't going to turn supplier AMAT around fast.
Down how long? A couple of quarters, maybe.
Can't talk about these two calls -- or the other high-profile ones this week, from JDS Uniphase (JDSU:Nasdaq - news - boards) on Monday to Thursday's Dell Computer (DELL:Nasdaq - news - boards) report -- without dealing with the tone and mood of company executives on conference calls.
We take at face value so much of what we hear from company executives on these calls that I've often wanted to invent a "fudge factor" for analysis, reflecting how much executive spin I think we're hearing above and beyond the actual numbers.
I give Applied Materials good marks, for example -- and a fudge-factor rating of 0 -- for their straightforward if gloomy discussion Tuesday. Sycamore might get a minus 2 -- on that same scale, that is. I wonder if we should shave our expectations a little to counteract a clearly rehearsed positive spin from Sycamore execs?
I'm not the first one to point out that some CEOs and CFOs "give good conference call."
That is, they march into a call with a bullish attitude, and probably produce a better result among analysts and press on the call than the numbers themselves might justify. Cisco's John Chambers is certainly in these ranks; former Microsoft (MSFT:Nasdaq - news - boards) CFO Greg Maffei (now president and CEO of 360Networks (TSIX:Nasdaq - news - boards)) is, too. So is Qwest's (Q:NYSE - news - boards) Joe Nacchio.
Hard to separate the spin-and-grin stuff from the reality sometimes.
thestreet.com
Just an article FWIW.
Jack |
