Downgrade is the news!!! If this guy is right we will see low 20's...
09:21am EST 1-Apr-98 SoundView Financial Group (Michael
Karfopoulos 203-462-7 Bay Networks (BAY) Downgrade
[HN 04/01]
Bay Networks (BAY) Hold/Hold 4/01/98
(FYE June) F97 F98E F99E Curr. Last Yr. Ago
Revenue ($M) 2.097 2.441 3.010 570 645 513
EPS .59 .77 1.20 .10 .26 .10
Consensus .82 1.29 .12
Old revenue 2.476 3.090 585
Old EPS .83 1.25 .13
NEW CY98 CY99 OLD CY98 CY99
Rev 2.585 3.425 Rev 2.680 3.470
EPS .80 1.45 EPS .90 1.50
We are lowering our short-term rating on Bay to hold. We believe that the
shortfall in revenues in the March quarter is likely worse than pre-announced,
indicating a weakness of the company to compete against Cisco. While we have not
talked to the company, we are lowering estimates for the quarter again as we
think that revenues will be lower than December's by more than 10%. New
estimates for the quarter are $570M and $0.10, down from $585M and $0.13. F98
estimates are $2,441M and $0.77, down from $2,476 and $0.83. This is the result
of a continuous price pressure at the low-end (350), a very long sales cycle,
and a successful market stall by Cisco at the high-end: Bay with the Accelar
Gigabit switch has been trying to establish a market advantage before Cisco's
Gigabit products become available but is not succeeding. We believe that
management is still optimistic on June quarter performance but our fears stated
in previous updates seem to be true: the Accelar product has very long sale
cycles as customers are forced to choose between ATM and non-standard Gigabit
Ethernet technologies.
Cisco will soon be announcing the first Gigabit functionality module offering at
the same time as the possible alternative technologies i.e. 100 meg Ethernet
and ATM exist. Furthermore, we are seeing in the field that Cisco is competing
very effectively against Bay, especially in major deals. Bay's new products at
the low-end, new switching modules for the 5000 platform and the recent
acquisition New Oak Technologies will offset some of the Accelar short fall. As
mentioned above we believe that the fundamental weakness of Bay's business is
in the core business not only in the new products. STOCK: With our new lower
estimates (which carry some additional risk) we do not believe that the stock
has any short-term upside at this point other than in the case of an
acquisition.
Discussion
* We did not talk to the company as it is quiet period.
* Field checks indicate bigger shortfall than company pre-announced
* The most important item is that we are doubting the company's optimism on the
June quarter because:
* Accelar will see less than expected sales due to ambivalence of the market on
Gigabit vs. ATM and lack of an alternative ATM solution from Bay.
Cisco will announce soon the first product with Gigabit functionality and later
in June/July will announce a fully functional product. Cisco's competitive
advantage is widening across the board from high-end to low-end. The sales and
marketing power along with a complete product line makes it difficult for
corporate customers to reject the "end-to-end solution" by a single vendor like
Cisco.
Reminder of recent pre-announcement:
Conference Call:
* Company stated that revenue will be 10% lower than Dec. Q (about 585)
* Reasons: Weak demand across all products and geographies plus pricing action
at low level 350-switch family. More specifically company stated: a) seasonality
and b) Industry in transition due to confusion on Gigabit Ethernet vs. ATM,
modem standards, hubs vs. switches and routers vs. routing switches
* GM: Negative impact by about 2 points due to revenue shortfall and price
protection in the channel after the 350 price cut in January. Also stated some
product mix issue. The price protection effect was about 1 point.
* Expect recovery in June Q.
* Channel inventories flat Q/Q
* DSO's will be at lo-50's Vs lo-40's in Dec. Q; DSO's will be reduced back to
lo-40's in the June Q.
* B/B at 1 at best, probably below 1. Accelar's B/B substantially above 1.
* June Q: Company is optimistic that revenues will be up from Dec. Q, due to
positive seasonality, Accelar sales should grow as customers convert evaluation
units to purchases and add more. Furthermore, the New Oak acquisition will give
the Extranet Access Switch, an access and security product.
* Company claims many competitive wins but did not want to specify.
* Our Comments: Company did not give any revenue breakdown on the March Q,
claiming that there is still about 2 weeks of business. On Accelar, company
claimed some manufacturing constraints, but later in the conference call they
specified that the evaluation cycle is longer than they thought.
On competition they claimed that Cisco is not a technology company but a
marketing company (so is MSFT) and that the answer to Accelar will be easy to
compete against.
We think that Cisco's product will be good enough for about 80% of their
customers.
Bay's difficulties are to be expected: the networking market is growing only at
about 25-35% currently and until the carrier market opens up wide every body
will have to fight against Cisco. We believe that Bay, by year-end will have a
very strong product portfolio, equivalent only to Cisco's.
That's why we strongly believe that companies like Lucent, Northern Telecom,
Alcatel, Siemens, Ericsson, Nokia, Fujitsu and others will be starving for
product and sales expertise in data networking making BAY the most attractive
property along with Ascend. |
