Hope this helps:
01:02pm EST 23-Jan-98 Nesbitt Burns (Moro) EMLX NESBI Near Doubling of Earnings Driven by Margin Expansion
[FirstCall Notes 01/23]
Nesbitt Burns Securities Inc.
Emulex Corp. THOMAS A. MORO
(EMLX - NASDAQ) (312) 460-8336
January 23, 1998 Chicago, Illinois
Near Doubling of Earnings Driven by Margin Expansion
Price(1/22)& EPS (FY-Jun) P/E Mkt Div/ Rating/
52-Week Range 1997A 1998E 1999E 1998E 1999E Cap Yield Target
$13.88 $0.36 $0.82 $1.50 16.9 9.3 $87.7mm $0.00 5
$21.25-$13.25 0.0% $27.00
Event
Emulex reported FQ298 operating EPS of $0.15 (versus $0.08 last year and $0.10
last quarter), in line with our estimate. Additionally, the company announced
a Fibre Channel agreement with IBM.
Impact
We are reiterating our 5 rating, EPS estimates of $0.82 this year (versus $0.36
last year) and $1.50 for 1999, and our price target of $27.
Details
Emulex reported EPS of $0.18, including $0.03 from a non-recurring tax gain.
Excluding the gain, EPS was $0.15, in line with our estimate, while increasing
87.5% from last year and 50% sequentially. Revenues were $15.5 million (versus
$16 million last year and $15 million last quarter) and just under $1 million
below our estimate (roughly 6%). The shortfall was centered on the Fibre
Channel Hub side, which decreased approximately 50% on a sequential basis.
Fibre Channel Adapters, which are the core products for the company's Fibre
Channel family (roughly 90% of revenues), increased close to 15% on a
sequential basis and well over 100% year- to-year. Overall, Fibre Channel
revenue was up 132% from last year while decreasing approximately 6%
sequentially. We expect Hub revenue to improve from last quarter as it was
primarily dependent on one large customer. Revenue should be diversified going
forward as other OEMs that have been signed begin to take product.
Based on our same growth assumptions, our revenue estimates do drop slightly.
Our 1998 year-end number decreases from $73.9 million to $71.1 million, with
Fibre Channel revenue dropping (mostly in the current quarter) from $30.3
million to $27.5 million versus $11.4 million last year. However, this decrease
is offset by an upward adjustment to our gross margins. We continue to believe
that this line item offers upside potential for the coming quarters---we are
estimating levels below last quarter to guard against any pricing pressure
(which is not apparent currently) and mix shifts. Our revenue estimate for
Network Access (26% of revenues) and printer servers (39% of revenues) also
adjusts slightly (down for network access and up for printer servers, basically
canceling each other out).
Gross margin expansion was the key driver for the bottom line, jumping 740 b.p.
from last year and 330 b.p. from last quarter. The margins were helped
primarily by mix as Adapter cards, which carry margins in excess of 500 b.p.
over Hubs, generated a higher portion of revenues. Operating expenses were up
significantly from last quarter (140 b.p.) as the company continues to invest
heavily in R&D. R&D spending increased to 18.1% of sales from 15.9% last
quarter (and 13.7% last year), 72% of which was for Fibre Channel (primarily
headcount additions). We believe Emulex will continue to spend aggressively
for product development and we look for further sequential increases on a
monetary basis.
On the new customer\product front, Emulex announced a Fibre Channel agreement
with IBM, which will encompass the company's recently released LP7000
("superfly") adapter card. This card provides 11,000 I/Os per second, roughly
a 15% to 20% improvement over the earlier generation LP6000. We believe the
IBM agreement will commence toward the second half of this year, and although
financial terms were not disclosed, the agreement may offer upside for fiscal
1999. Digital Equipment and Data General contracts should begin in the
current quarter. Currently the company has 36 active Fibre Channel wins.
Tier I OEM Agreements Announced (Fibre Channel Only)
Sequent Systems
Data General
Digital Equipment
IBM
Hitachi Data Systems
NEC
Unisys
Siemens Nixdorf
Fujitsu
Groupe Bull
We are reiterating our 5 rating, estimates and price target, and consider
Emulex the premiere play for investors in the burgeoning Fibre Channel arena.
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