Paul: I listened to my first BAY CC until 3 a.m. our time. First, I must thank you for your report - I am in awe of its accuracy and the very quick analysis you have developed from it.
House was embarrassed about his miscalculation in his last "phone call" a month ago. He enumerated the errors in his judgment. He highlighted one factor which he had overlooked, altogether. This was the way in which most competitors brought their new generation products to market at about the same time causing a vicious price cutting exercise in some product lines. House explained that while this kind of price cutting will re-appear from time to time as new generations are introduced, it is not a continuous thing and can be expected to be absent from the June and September quarters. He said that BAY had "dug itself into a deeper hole" than they had expected and that it would not get back to its original target for the June quarter $645 million level in one jump, that it may take a couple of quarters. But he insisted several times that revenue growth, quarter to quarter would be in the range of 10%. He sounded uncomfortable when pressed on this and eventually explained his discomfort by saying he did not want to give a figure because all the analysts would coalesce around a specific figure and he would prefer that they develop a broader range than that. I read into this his regret that he had been so specific with the $645 figure for the June quarter. I found his stonewalling unconvincing. However, his CFO stepped in several times and he answered more convincingly demonstrating in some detail how they could justify the expectation of a 10% increase and including in the negative factors involved in the expected decrease in shared media and other product revenues. My guess is that they expect more than a 10% increase, more like 15%
Several analysts were conerned and perhaps alarmed at the fall off in revenues in some product lines and struggled to understand how BAY would replace them with revenues from new products. I thought House was not very effective in answering these questions but by the sheer weight of repetition and with the help of the CFO they did get answered although a great deal was left to faith in the expected success of Accelar and some other new products which were shipping towards the end of the March quarter but which did not contribute to revenues. They will contribute from the beginning in the June quarter.
I would agree with Paul that the great weight of the CC was on the future. The March results were referenced mainly as the baseline for what they called a "re-set" of future expectations. The long-term business plan is still intact, but within that the revenue expectations are re-set from the March figures - the effect of this might be to shift the original plan back a portion of a quarter or a whole quarter.
Given his embarrassment about his recent wrong projections, I was impressd at House's confidence about revenues from Accelar. He put himself on the line repeatedly.
If I had to guess, I would think that analysts will be a bit shaken by the March results, and their confidence in House's credibility will be affected somewhat, but the very strong emphasis on new products and the growing percentage of revenues which are derived from them (55% this quarter), the superiority of BAY's technology and its advantages of time on CISCO and 3 COMS in some product lines, and the confidence of the CEO and CFO in achieving at least 10% revenue growth in the June quarter, will prevent them from indulging in drastic downgrades and might cause them to make cautious, conditional upgrades, especially if the share price falls a point or two first. I would expect current STRONG BUYS and some BUYS to be downgraded but it is possible that some current HOLDS might become ACCUMULATES or MARKET PERFORMS or BUYS.
House said that this quarter was a bump in the road and that at Intel he had learned not to be deflected by such events. He was suspicious of statements by other companies that the growth in networking was anywhere up to 37% because he felt it was very slow, at the moment, as it was in related sub-industries, but he spoke very enthusiastically of the intermediate and longer term growth prospects and incorporated in his view the expansion of computers including low-cost versions. (However, his CFO went on to say that it was not a bump but a fundamental "re-set"). House said he was confident that he and his team could manage out of the difficulties.
For what it is worth, my opinion is that the share price will not melt down, but may bounce about until it stabilises in a tradign range of between 25-28 in May, if not sooner.
I'm going to concentrate on companies that sell bread, from now on.
Victor |
