ELAS wins big.
Looks like ITE has a winner here.
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UBS Warburg - Wall Street Tech
Anton Wahlman 212.713.3630 Jeffrey Susman 212.713.3543
Long Jiang 212.713.3606
ELAS: IT'S A BOY! ELASTIC WINS ITS FIRST RBOC CUSTOMER WITH
VERIZON
Summary:
Elastic has won its first RBOC contract. In our opinion, the poor March
quarter results and generally low visibility are unlikely to overshadow this
very important contract win by Elastic over competitors such as Lucent,
Cisco, Nortel, Copper Mountain and Alcatel in capturing the Verizon Avenue
business, which is being launched in 5 cities in 2001. We expect the stock
to trade up sharply on this development. Due to expense cuts more than
offseting the uncertain revenue outlook, we have increased our EPS estimates
from ($1.08) and $0.04 to ($0.86) and $0.09. We have increased our price
target from $4 to $6 based on 2x our estimated 2002 sales of $110m.
Highlights:
· Elastic had already preannounced its very weak quarter, and the outlook
for the June quarter is for another relatively weak quarter. Despite this,
we believe that Elastic will see very substantial share price appreciation
today. Why? Because Verizon Avenue, a subsidiary of Verizon, has selected
Elastic for its DSL apartment building initiative in five cities: New York,
Washington DC, Atlanta, Phoenix and Denver. While it is too early at this
point to size this opportunity in either dollars or in time, it is clear to
us that this account win puts a significant stamp of approval on Elastic's
burst-mode Ethernet DSL technology.
· This development is consistent with the view we articulated in our First
Call note on January 29, when we wrote Given EtherLoop's spectral
compatibility with all DSL flavors, we believe that the probability of
Elastic's EtherLoop taking root in at least a few meaningful ILECs is
reasonable. We believe that what could drive the stock in the near term
would be a win with an RBOC, which we believe is likely to happen in 2001.
With this win at Verizon, this important step in Elastic's life has now
materialized.
· We believe that Verizon picked Elastic over a wide field of DSL providers,
including Lucent (LU-$11-Hold), Alcatel (ALA-$30-Hold#), Copper Mountain
(CMTN-$3-Hold) and Cisco (CSCO-$15-Hold). We even believe that Elastic's
corporate parent Nortel (NT-$14-Hold) lost out in this bid, having proposed
its Promotory solution. The chief differentiating features that likely won
Elastic the business was its ability to handle video/TV services, which we
believe will be an important tool in Verizon's arsenal starting in 2002. An
Elastic modem has both a USB port and an Ethernet port, so that the USB can
connect to the PC and the Ethernet can connect to a future, separate,
set-top box.
· The Elastic DSLAM serves either 60 dedicated 6 MB/s half-duplex
connections, or up to 240 households sharing the bandwidth, in any given mix
inside the DSLAM. Given the burst-mode traffic patterns, statistical
multiplexing becomes extremely efficient for at least web surfing-type
traffic patterns. By the end of 2001, we believe Elastic will be supplying a
larger and denser chassis, capable of delivering 168 ports of 10 MB/s
half-duplex connections. |
