HEre is the first upgrade from conservative DLJ
2Q97 results exceed expectations by $0.01; Upgrading to Outperform on solid voice messaging growth ú 2Q97 EPS of $0.24 are down 33%, but exceed estimate by a penny ú Migration away from reliance on paging-infrastructure revenue progressing ú Revenues from voice messaging unit up a staggering 159% year-over-year ú EPS estimates changed only to reflect 2Q97 results, but our confidence is clearly increased ú Management indicates no takeover on the horizon ú Increasing our rating to Outperform with a price target of $23
Glenayre reported 2Q97 EPS of $0.24, down 33% year-over-year, but a penny ahead of our expectations on impressively strong revenue growth in the Integrated Networks segment (voice messaging). The strong revenue growth in the voice messaging products was able to successfully offset the continued slowdown in the paging infrastructure business as revenues in that segment were down both sequentially and year-over-year. On a positive note, management indicated that it believes the decline in the paging infrastructure business has moderated based on order and shipment activity in the second quarter. At this time, we are upgrading our rating to Outperform from Market Perform on the thesis that better-than-expected results in the non-paging business will enhance investor confidence in Glenayre's earnings potential and result in multiple expansion for the stock. We are raising our 1997 EPS estimate to $0.96 only to reflect the penny upside in 2Q97 and leaving our 1998 estimate unchanged at $1.15, although we believe there is likely upside in the 1998 number. Our 12-month target price is $23, or 20x our 1998 estimate of $1.15. Stellar revenue growth in wireless messaging offsets paging weakness. Thanks to strong revenue growth in voice messaging (up 159%), revenue for the quarter was up 5% in total despite lower revenues in the core Integrated Networks segment (down 9%) and modest growth in the Wireless Interconnect segment (up 8%). The Integrated Networks segment benefited in the quarter from continued deployments of the Glenayre voice messaging platform by wireless carriers, new installations by wireline CLECs (competitive local exchange carrier) and a sharp increase in shipments to international providers. Glenayre remains cautious on just how fast this business will continue to grow, but we believe the dramatic increase in the international sales indicates that it will be sustainable for some time. Based on the strong growth and developing potential, we increasingly believe the Integrated Networks segment may deliver upside surprises to our 1998 earnings estimates.Revenue in Glenayre's Wireless Interconnect segment was up only 8% in the quarter and was down sequentially, but for the six month period, sales were still up a much more robust 35%. In our estimation the lower revenue in the second quarter is not unusual as Glenayre has seen down quarters in the past from this business segment but it has still managed to grow revenues strongly on a year-over- year basis. In the absence of emerging competition as indicated by management, our expectation remains that the Wireless Interconnect segment will see higher revenues in the second half of 1997 than the first half. The gross margin in the quarter benefited from the strong showing by Integrated Networks and a reduction in the amount of international turn-key business, climbing to 54.1% from 52.2% in the first quarter. The gross margin was down year-over-year from 56.4%, but we note this represents Glenayre's most difficult comparison from all of 1996. We expect the gross margin to fall by roughly 110 basis points in the next two quarters as the amount of lower margin international turn-key business increases again, but looking to 1998, we believe the gross margin will rebound again as fast-growing sales of the higher margin Integrated Networks products representa greater proportion of revenue. Other expenses for SG&A, research and development, and depreciation fell within our expectations for the quarter.Investment opinion and valuation. We are upgrading our rating on Glenayre shares to Outperform from Market Perform as our confidence in future earnings estimates has been significantly heightened. While Glenayre appears to be less of a takeover candidate and our 1998 EPS estimate remains at $1.15, we now believe upside surprises could emerge on continued better-than-expected voice messaging results and/or international paging shipments. |
