Thread: A few additional snippets from the CC (the morning after the night before). No particular order.......
1. House really warmed to his "attack" on Cisco: claimed that Accelar was penetrating the Cisco customer base: claimed that Cisco was reacting to BAY, that Cisco had changed its story three times in the first quarter from (a)you don't need what BAY's offering in new products and if you do get to need it we will tell you (b) all you need is one of our little cards to beef up what you already have from Cisco (c) we have competitive products coming soon, please wait for them. House claimed that Cisco's products were "too little, too late" and that BAY's lead in product delivery, expanded manufacturing base, time to work out glitches and improve the products with feedback from those customers with the evaluation models and fundamental superiority in speed and adaptability would keep BAY ahead of Cisco in Accelar and related products.
2. Spoke once, in the whole CC, of "improving shareholder value" but it went by so quick do not know in what context he mentioned it.
3. Claimed to have close to $1 billion in cash. The only depletion of the cash since last quarter was for acquistion purposes. ( If revenues for next quarter pan out, cash should exceed $1 billion comfortably for the first time - assuming no new acquiitions).
4. Promised unspecified new products this quarter. Also invited analysts to take a look at the new voice/fax product developed with Netspeak . Claimed that through this acquisition BAY had the leading edge technology. Looked forward to the InterOP (is that what they call it?)
5. Was reluctant to answer a question about whether BAY's sharp drop in revenues from routers and some other products signified a loss of market share or was down to lower volume in a depressed market and price cutting. Gave his reason that he did not know the Cisco, Coms and Cabletron numbers and would await independent market surveys.
6. Implicitly (and explicitly) conceded that a BAY weakness has been the lack of a complete enough product range to "convert" those who are graduating from shared media products. Constantly asserted that BAY must convert these customers to new BAY products so as not to lose their revenues. I suspect that that is a strong current directive with BAY. The issue was raised twice by analysts.
7. Gross margins dropped from 51% to 46%. Gave a breakdown of causes of the drop. Lower volume and price cuts figured large as did a revised accounting of inventories in the channel. However, could only offer incremental improvement for the June quarter and postponed by a "quarter or two" originally stated target to get back to 55%. I felt that the drop in gross margins was a significant factor but only two or three of the analysts touched upon it and then only to understand the component causes of the drop.
8. In a number of measures, not the least in the scaling back of expectations for June revenues, appeared to be biting the bullet now to re-establish a conservative baseline. Actually said that they wished to be conservative and spoke of two plans, one conservative the other more optimistic (which, neverthelss, they expected to be able to complete). Of course, this is only necessary because House's previous projections were wrong and leaves open the question whether the new conservatism is actually conservative or still too liberal due to further miscalculation.
9. Would not give a breakdown of sales by product - was cross-examined a few times on actual Accelar numbers. Heard him refer to "hundreds" of evaluation models already in place, and that many of them had been targeted on "Cisco situations"; nobody cross-examined him on previous promise that they would be shipped last quarter in their thousands: but did confirm that revenue targets for Accelar had been met: also confirmed that some of these Cisco customers had actually bought Accelar. As I suggested in a previous post, expects the evaluation process to become shorter and some customers to buy without on-site evaluation. Accelar is to be improved with enhancements developed from the feedback from the existing evaluation situations. However, fundamental upgrading through the manufacture of new silicon components will be left to the next generation.
10. Emphasised the corporate re-organisatin of the "14" separate manufacturing companies that had been brought together over the last few years to create BAY. The aim was to create a more cost-effective manufacturing capability and shorter product development cycle.
11. As Paul Fine mentioned, when answering Oppenheimer's question whether a figure could be put on Accelar conversions from evalaution to sales "say of 50% or 75%" House said "yes, that sort of range 50-75%, very high, very good". I think this still left open the possibility that the 25-50% which had not converted includes those who had not yet reponded to the 90 day deadline - but maybe Paul could comment on that.
12. Emphasised that his error in prediction was between the 10% shortfall of his phone call a month ago and the actual 15%. Also emphasised that revenues improved 7% year on year. Mentioned that this was the first bad expereince he had had since coming to BAY and that previous quarters had beaten the growth rate for the industry. Several times refereed to his "two decades" experience at Intel. I got the impression that he was trying to instil confidence but felt embarrassed.
13. Nobody asked about a takeover, nothing was said relevant to that.
However, the whole analysis was screaming for the question to be put. A company with good products (House called that "taking care of the basics" that the future is going to be based on good products etc) with $5 of a takeover price already available to the acquirer in the BAY cash hoard, a company relying for almost 100% of its sales in certain overseas markets on its major partners such as Lucent, Siemens etc, a company irrationally held back by the superior marketing power of Cisco with its reputedly inferior products, in a sub-industry converging on telecommunciations with its very large installed base.
14. I am firmly of the opinion that shareholder value is to be found in consolidation. If BAY is not capable of making a large enough acquisition or merger then it must agree to being acquired. My reason tells me that takeover specualtion will become very strong now and will intensify (if a takeover has not taken place) in the August-October period. More than a year ago $35 would have been the top price for an acquisition of BAY. A year later, a much better company with enhanced product line, it could still be bought for $35.
15. Shortfalls in revenues were proportionally even across products and geographies. However, Asia had notimpacted in the December quarter but BAY felt the full impact of both the economic slowdown and the currency issues in the March quarter.
As you all know I have a large holding in BAY based on a rational analysis of the information provided to shareholders by the company. I feel cheated by the errors of management and in particular the errors of House. However, the purpose of investment is to make money. Paradoxically, I think there may be more money to be made in the next little while than might have been the case. Movements of $2-4 in a volatile market in the stock can be more profitable than waiting months for it to get to some rational value level.
On a personal note, I bought 15,000 new shares in the two days before earnings. But I suddenly felt a premonition just before the close yesterday - it was something to do with the share price movement, some of House's refernces in the two interviews about the "bad patch", and something about the risk-reward ratio of what I was doing:I sold the 15,000 at 15.59 hours and got out with a loss on those 15,000 of about $2,000. I still have my relativley large core holding. I will probably buy and sell Bay on a trading base in the next litttle while.
Victor |
