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Strategies & Market Trends : Technical analysis for shorts & longs

SPY 671.91

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Nov 14 4:00 PM EST

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To: Nancy who wrote (15116)	1/24/1998 9:34:00 PM
From: Johnny Canuck	Read Replies (2) of 68008

Nancy, I'll answer you question on SAWS here rather than the ANDW thread. From a fundamental point of view, I can't say SAWS is a company I would invest in. For trading I still tend to stick to stocks I don't mind owning for the long term in case I guess wrong on the timing and this is not a stock that fits my criteria. The barriers to entry into SAW device production is not that difficult as far as I can tell. SAWS doesn't seem to have any patents that are critical to keeping other manufacturers out of their business areas. Some of their competitors such as Thomson have sizable resources if they decide they want to compete. In order to retain customers SAWS needs to provide competitive pricing and better service and turn around time on custom designs. Currrently, there is pricing pressure on their base station filter products and that is expected that to continue according to the company. My contact at NT indicates that they continue to try to reduce cost for the base station designs bacause gross margins on the base stations are quite low in comparsion to other telelcommunications broadband products. This was noted in the last NT conference call too. The need to reduce cost for base stations and the cautious attitude of the cellular service providers is part of the reason for the problems with SPCT. NT customers are specifying the lower cost single carrier amplifiers right now for their base stations. As a result the demand for SPCT's multicarrier products is not progressing as fast as anticipated. The single carrier devices are being specified because the service providers are not anticipating reaching capacity in the near future. The base stations are designed to be retro-fitted with the multi-carrier amplifiers as the systems reach saturation. In short the providers are not ready to spend the money till they see the demand is there. This may indicate that there is some weakness in subscriber recruitment in some markets or a lack of risk capital to build the infrastructure. . The product mix going forward is empahsizing lower margin products for the based station and handset. That should translate into lower gross margins. The R&D expenditures as a percentage of sales seems quite low. I believe this may reflect the slow pace at which new applications are developed for SAWS despite the fact some of the costs are hidden in the NRE (non-recurring engineering) cost that the customers pay for. Overall R&D spending in absolute terms seem quite low too. 22% of sales were to Korean this Q. This could lead to lump demand over the next few Q's for base stations products. Handset product demand should remain good for handsets that are being exported for re-sale in foreign markets. Europe which was 19% of sales should remain strong due to deregulation of the telecommunications industry. 68% of sales come from 5 customers which include Ericsson, Motorola, Qualicomm and Lucent. This is a concern as a delay of an order or a cancellation will effect quarterly results dramatically. Order can be cancelled with 30 to 60 days notice. Being a big customer gives you pricing leverage too, so margins will continue to be squeezed. 83% of sales come from 10 customers. 77% of revenues come from telecommunications products with 47% from CDMA/GSM base station products and 29% from subscriber handset products. Diversity around sectors is necessary for them to achieve greater stability of earnings. The infrastructure cable built out still is quite weak as shown by the HLIT earnings. Spending levels by the cable companies still remain below the levels of previous years. So the emergence of another potentially large market continues to be delayed. On the plus side 63 million in cash and only 2.5 mil in long term debt. They have a low cost plant in Costa Rica. I did not look too closely at the financials as this companies fundamental business does not appeal to me. Harry

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