You may be OK with Ortel & HLIT. The title of this thread sure is timeless:
BROADBAND ACCESS EQUIPMENT; TCI LETTER CREATES NEAR-TERM UNCERTAINTY
12:23pm EDT 23-Oct-96 Robertson Stephens & Co. (TIM SAVAGEAUX 415-693-3543) HLI
Robertson, Stephens & Co. 10/23/96
Industry: Telecom Equipment
Tim Savageaux
(415) 693-3543
tim_savageaux@rsco.com
BROADBAND ACCESS EQUIPMENT
TCI Letter Creates Near-Term Uncertainty
KEY POINTS:
* Late last week, TCI (TCOMA $12 15/8), the nation's largest cable operator,
advised suppliers of cable network equipment to that shipments of additional
equipment must be held unless approved by senior purchasing management. TCI
apparently indicated no long-term change to its capital spending or network
upgrade plans, instead characterizing the move as the result of an increased
focus on inventory management. While it is too early to know the impact, if
any, of this change by TCI on vendors, in our view the news creates some
uncertainty in the near-term outlook for vendors with exposure to TCI shipments.
* We believe this action by TCI was most probably motivated by the placement of
TCI's debt on Creditwatch by Standard & Poor's late last week. Furthermore, we
believe this places TCI in jeopardy of losing its investment grade (BBB-) rating
from S&P and has most likely produced a near-term focus on achieving debt to
cash flow levels in the acceptable range (5.0-5.5X versus estimated 5.6) to the
exclusion of other priorities. In addition to significant investment
requirements, TCI's cash flow growth in the third quarter has slowed.
* In our view, the long-term solution to issues of leverage for TCI lies with
expanding revenues and cash flow through the entry of new businesses such as
digital video, high-speed data and cable telephony. We believe entry into these
businesses is dependent upon investment in network upgrades and new
technologies of the sort supplied by our universe of broadband access equipment
suppliers. In addition, cable operators such as TCI are increasingly obliged to
make investments in equipment and technologies to fend off competitive threats
to their core businesses.
* Therefore, we view the likelihood of a lengthy delay in network upgrade
spending as low as market demands are simply too pressing for cable operators
such as TCI in this environment. However, it is possible that TCI will further
sharpen its focus on employing capital, which can be directly linked to revenue
potential or operating efficiency, such as digital set top boxes, cable modems
and the network upgrade components which enable these services. On the other
hand, items where large stocking inventories are sometimes held may see some
* We have already seen some evidence of this trend, with suppliers of items such
as maintenance equipment, connectors, passive components and drop coaxial cable
such as ANTEC (ANTC $15-1/4), Amphenol (APH $19- 5/8) and Oak Industries (OAK
$28-7/8, rated BUY), witnessing some sluggishness in the U.S. market whereas
suppliers of fiber optics and electronics for network upgrades and advanced
subscriber equipment such as General Instrument (GIC $20-1/2, rated MP),
Harmonic Lightwaves (HLIT $23-1/2, rated BUY) and Ortel (ORTL 23-3/8) have seen
stronger sales activity.
* We believe equipment vendors with heavy exposure to TCI may be at risk in the
near term, although given the recent nature of the TCI news the actual impact
remains unclear. The table below outlines the exposure of major industry
vendors to TCI capital spending levels, with ANTEC and TSX deriving the largest
proportion of total revenue from TCI.
* Table 1: Equipment Vendors TCI Exposure
Company Ticker LTM Revs TCI%
ADC Telecom ADCT $747 MM <5%
ANTEC ANTC $652 21%
Amphenol APH $189 20%
C-Cor CCBL $143 <5%
General Instrument GIC $2,601 10%
Oak Industries OAK $308 13%
Scientific-Atlanta SFA $1,048 <5%
TSX Corporation TSXX $93 46%
Note: APH revenue is coaxial cable subsidiary only, total LTM revenue is $767
million
Note: GIC TCI% excludes revenue from PRIMESTAR
Source: RS&Co. estimates and company reports.
* Erratic capital spending by TCI is unfortunately not a new issue for vendors
in the industry. We believe It is this factor, in addition to the highly
leveraged nature of TCI and other major operators such as Comcast, that
contributes to the valuation discount observed between suppliers of equipment to
the cable operators and suppliers to local and long distance telephone
companies, which have historically been better capitalized. While the capital
structures of the major operators has improved (e.g., Cox and US
WEST/Continental have A or better credit ratings), leverage remains an issue for
some in this period of heavy investment and limited revenue visibility.
* Historical analysis of TCI and cable industry capital expenditures indicates
that TCI slowdowns in the fourth quarter of 1994 and third quarter of have been
followed by strong snap-backs in spending and resumed growth. From an industry
standpoint, we have seen varying levels of correlation between TCI and overall
levels of spending. In the current case, we have no indication that other
operators are changing spending patterns and anticipate strong overall industry
spending.
* ($B) TCI Capex US Cable Capex
TCI pct
1Q94 243 1,164 21%
2Q94 356 1,327 27%
3Q94 350 1,373 25%
4Q94 290 1,507 19%
1Q95 346 1,352 26%
2Q95 434 1,526 28%
3Q95 343 1,464 23%
4Q95 542 1,852 29%
1Q96 389 1,579 25%
2Q96 500 1,927 26%
3Q96E 500 1,991 25%
4Q96E 561 2,139 26%
Source: RS&Co. estimates and company reports.
* The front end loading of TCI's capital spending in 1994 lead the company to
retain its number one distributor and equipment vendor, ANTEC, to institute in
early 1995 a materials management program aimed at reducing inventory levels and
smoothing out seasonality in order patterns. We would therefore expect there
to be limited amounts of excess inventory on hand at the four Materials Service
Centers (MSC) established by ANTEC and TCI and believe that any meaningful delay
in shipments would lead to an unacceptable stoppage in critical network
upgrades at TCI.
Robertson, Stephens and Company maintains a market in the shares of Harmonic
Lightwaves, Inc., ADC Telecommunications, and TSX Corporation.
FOR ADDITIONAL INFORMATION, CALL YOUR ROBERTSON, STEPHENS & CO. REPRESENTATIVE
AT (415) 781-9700.
TSX Corp. -2-: Analysts Predicted 2Q Net 23c A Share
EL PASO, Texas (Dow Jones)--TSX Corp. (TSXX) said its operating results for
the second fiscal quarter ending Oct. 26 will be substantially less than
analysts' estimates.
A consensus of four First Call analysts said the company's earnings for the
quarter would be 23 cents a share.
TSX Corp. reported net income of $3,734,000, or 35 cents a share, on sales of
$23,998,000 for the year-ago second quarter.
In a press release, the company attribued its lower expectations to the
inclusion of costs associated with the reduction in scale of the TSX's
advertising insertion business segment, an announcement by its largest customer
stopping shipments for an indefinate period, and the receipt of a substantial
portion of the second quarter's order input late in the quarter, thereby making
it unavailable for shipment in the second quarter.
The hold of shipments by the company's largest customer could cause a
reduction in TSX's earnings in future quarters until the stoppage of shipments
is lifted.
Charges related to the reduction in scope of the company's ad insertion
business relate not only to the ongoing operations of the business but also to
the impairment of certain assets, primarily inventory.
As reported, TSX is in merger talks. The company said the merger talks are
continuing.
TSX, El Paso, Texas. manufactures CATV fiber optic and RF distribution
electronics and electronic advertising insertion equipment.
(END) DOW JONES NEWS 10-23-96 |
