Here's the knife from DLJ... they manage to gut BAY again
(note the DMG article was tame in relation to this...)
08:05am EST 21-Jan-98 DLJ Securities (Stephen G. Koffler) BAY
WFLT SNPX BAY NETWORKS: 2Q98 a bit less than meets the
eye. 3Q will slow way d
[FirstCall Notes 01/21]
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
January 21, 1998 Stephen G. Koffler (212) 892-4203
Peter Giglio (212) 892-8946
BAY NETWORKS (BAY: $29.5) #
2Q98 a bit less than meets the eye. 3Q will slow way down.
Range: Earnings Per Share 1998 vs 1997 % Chg
40-15 Old New P/E Ratios F1Q $0.22 vs 0.25 -12%
(FY:June) 1999E $1.55 $1.50 19.7 F2Q 0.27 vs 0.10 +170%
1998E 1.08 1.06 27.8 F3Q 0.26 vs 0.10 +160%
1997A 0.60 49.2 F4Q 0.30 vs 0.15 +100%
Yield: % Market Cap.: $6.8 Billion 5-Yr. Growth Rate: 20%
Dividend: $ Avg. Trading Vol.(000): 2300 Book Value: $6.02
RATING: Market Perf. Change: None 12-Mo. Target: $31
Investment Summary
Bay Networks' fiscal 2Q98 results were in line with consensus expectations, but
a few of elements in the quarter form what we would call a "wrinkle" when taken
together. Also, we expect a significant fall-off in sequential revenue growth in
3Q98 as poor seasonality combines with an increasingly difficult product
transition. Revenues of $645 million were in line with consensus expectations
and significantly above our forecast of $630, but a few "kickers" probably
contributed $10 - $15 million. Fully diluted EPS of $0.27 was one penny above
consensus. The highlights of the quarter were 14% sequential growth in
switching, 7% sequential growth in routers, and 29% sequential growth in remote
access. We estimate that the Accelar switch contributed $12 - $15 million in the
quarter, and the scenario for strong sequential growth in 3Q98 is very good.
Among less "rosy" elements, hubs declined 5% sequentially, book to bill was
slightly below one, channel inventories increased slightly and North America was
down slightly. The scenario for improved gross and operating margins remains
unchanged. The turn-around at Bay under the new management remains in full
force, and the management gets high marks for execution. However, we remain
concerned about the product transition that the company faces as well as the
seasonally slow third fiscal quarter, and are trimming estimates for 3Q from
$0.28 to $0.26 and for 4Q from $0.32 to $0.30. Also lowering FY99 from $1.55 to
$1.50 to reflect slightly lower revenue assumptions. Maintaining market
performance rating.
"Kickers" helped make consensus revenue: Revenues of $645 million were in line
with consensus expectations and significantly above our forecast of $630, but a
few "kickers" probably contributed $10 - $15 million. These were service
revenue, which at $64 million and 20% sequential growth was nearly triple the
overall sequential growth rate, book to bill being slightly below one, and a
slight increase in channel inventories. Also, the fact that North American
revenues declined slightly sequentially while Wescon, Bay's largest North
American channel partner, represented 10% of total revenue begs the question
whether Bay needed Wescon to take a big in order to make the quarter.
Accelar doing well but could exacerbate product transition. Based on information
provided in the conference call, we estimate that Accelar generated roughly $12
to $15 million in the quarter. This product was on allocation in December, and
now production capabilities have ramped to meet demand in the March quarter
which seems quite substantial. However, shared media hubs declined over 5% in
the quarter and will probably continue that trend. Also, although routers grew
in the quarter, Accelar has the potential to provoke more flattish trends in the
router business as the switch can be used as a router replacement. We are
modeling both legacy technologies more conservatively coming off of this
earnings report.
Look for very low sequential growth in 3Q. The March quarter is seasonally slow
for Bay because budgets are often not yet set early in the calendar year for
large networking projects. This combined with the tough product transition is
prompting us to carry very low sequential revenue assumptions ( $655 million, or
less than 2% sequential). We are also lowering the fourth quarter, as well as
fiscal 1999 to account for more conservative assumptions on routers and hubs.
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