1- Newbridge is pricey relative to it's past performance (surely before you invest in a company you research its past performance; I do and good analysts do as well). NN can also be construed as pricey compared to other competitors who make similar products (ASND,CSCO,NT to name three that come to mind)
Judged by conventional standards, you're right. I look at NN's products, the projected growth rate for the ATM market, and NN's share of that market, [see below] and consider it undervalued. To be honest, I don't know what standards analysts use to determine valuations. Take the Internet stocks. Are they over-valued? I'd say, yes, but if you read analyst upgrades, you'll find they aren't. If you compare NN to CSCO, ASND, and NT and find it over-valued and therefore sell, you may be standing on the sides when the biggest growth begins. You have to decide what sort of risk you're willing to take. C.S. Lewis once said of myths that if you stripped away the story, the truth remained. In other words, they carry a truth deeper than the story that carries them. With Newbridge, you have to strip away the TDM slowdown and UBNetworks write-off, and get to the core truth: carrier class ATM end-to-end solutions for the rapidly growing Internetworking market. To take the analogy further, beware any myth that doesn't have a solid core beneath it.
2- The arguement that the market is moving away from NN can be taken several ways. What I think the analyst was referring to was the shift away from ATM back-bones to Layer 3 Router/Switched back-bones. That was where my comment came from.
Maybe he was referring to NN's diminishing TDM business, which is still significant. Unlike ASND, NN's revenues are not all in emerging, fast growing technology. As the TDM market dies, can NN make up the revenue loss in other products ?
According to the JPMorgan Networking Report, CAGR for backbone ATM is 56.5% and NN has 32% of the market.
Evidence ATM is gaining ground:
zdnet.com
<<<
If the telephone companies and the computer firms, working under the moniker of Universal ADSL [Asymmetric Digital Subscriber Line] Working Group (UAWG) (www.uawg.org), succeed in making access widely available at 1 megabit per second, there will be an immediate need for a higher-bandwidth public data network, and the telephone companies expect to build that network using ATM technology.
. . ."ATM has been a technology in search of a low-cost access method, and ADSL is that access method," says Jeff Waldhutter, executive director of technology and engineering at Bell Atlantic Corp. (www.bellatlantic.com). "As we deploy more [x]DSL, we are going to deploy more and more ATM. The one is going to pull the other."
There is even the possibility that ATM services themselves will become more popular as they become more available and cheaper on an infrastructure being deployed to support faster data access over ADSL.
. . ."Eventually, we'll get to PPP [Point-to-Point Protocol] over ATM, and the process of selecting an ISP will be as easy as selecting a long-distance company today," he says. "The endgame would be where ISPs would have an ATM edge switch that would connect into our network."
Ameritech is keeping its core network options open, expecting to support IP traffic over an ATM network "but maintaining enough flexibility to keep the customer application in mind as we evolve the network," Sullivan says. "I think we'll have a hybrid ATM-IP approach, and the evolution path could include Gigabit routers that could be interconnected at the core with an ATM switch functioning as a programmable cross-connect.">>>
zdnet.com
As far as your NN press releases on their Layer 3 awards, I suggest you visit the latest market share report from Dell'Oro (I can find the URL, but I think you know which one I am refering to.). Newbridge is an ATM vendor with no router market share, a dying TDM business and will have to be bought to survive. The only reason to own this stock is if you feel a buy-out is imminent.
I won't argue the TDM market is declining, but I will argue that NN's installed base is a positive, not a negative. In the conference call following last quarter's earnings, John Lawlor, CFO, said 90% of their 36170 sales were to TDM customers.
TDM migration:
newbridge.com
<<Broadband packet technologies, primarily frame relay and ATM (asynchronous transfer mode), have gained tremendous popularity in many markets recently. The extensive installed base of Newbridge TDM networks can be easily migrated to next generation, packet-based capabilities. Many of the Company's first TDM customers, from as far back as nine years, continue to evolve their Newbridge products, maintaining a blend of traditional technologies and the most recent advances.
This technology transition is possible because Newbridge products use a common architecture that allows circuit switching, frame relay and ATM to coexist in the same network. This architecture also provides a clear migration path to higher capacities in the backbone and at the network edge. Newbridge further simplifies the adoption of new technologies by offering the same sophisticated end-to-end management system across the entire Newbridge product line. >>
From Q3'98 report:
<<<
The strong showing in WAN packet business was driven principally by the industry's flagship ATM system, the MainStreetXpress 36170 Multiservices Switch, which also achieved record revenue, order intake and backlog again this quarter. Both revenue and order intake for this product increased approximately 40% sequentially and were more than triple the revenue and order intake levels in the first quarter of fiscal 1997. There were more than 60 customers for the MainStreetXpress 36170 switch in the first quarter of fiscal 1998 alone, including 12 new customers. The product has now been sold to more than 120 customers throughout the world comprising many of the world's largest service providers.
Sales of frame relay capabilities on the product increased by approximately 30% versus the previous quarter. Newbridge continued to grow its frame relay-over-ATM revenues significantly faster than the overall frame-relay market growth rate. As a result, the Company further increased its market share in the worldwide frame relay market.
"Service providers are migrating their frame relay networks onto a single, unifying ATM platform," said Peter Charbonneau, President and Chief Operating Officer, Newbridge Networks. "Even more significant, service providers are beginning to evolve their disparate array of legacy networks and traffic - including high-growth IP (Internet Protocol) traffic - onto the same unifying ATM fabric.
"Similarly, corporate network managers have identified ATM as their preferred implementation for Layer 3 switching in enterprise backbone networks to address the problems associated with backbone routers," added Mr. Charbonneau. "Backbone routers were well suited when they were introduced to the market a dozen years ago, but today they are crippling performance in enterprise networks which carry increasingly bandwidth-intensive and delay-sensitive multimedia traffic.
"From the time we first began developing ATM for enterprise and wide area networks, in the early 1990s, Newbridge was able to anticipate and plan for these market directions which are becoming so evident today. Our product development has remained in lock-step with the marketplace. The Company has a product lead and a marketplace lead as well. Together with Siemens, we have more R&D resources dedicated to ATM product development than any other organization in the world. We expect to strengthen our product lead and market position.>>>>
Complete description of the NN/Siemens end-to-end Carrier Class solutions:
newbridge.com
Newbridge is an ATM vendor with no router market share, a dying TDM business and will have to be bought to survive. The only reason to own this stock is if you feel a buy-out is imminent. All IMHO, of course.
I thought routers were a declining market and that's why CSCO is running on FastForward trying to bring out ATM switches. If you're referring to Layer3 switches/ terabit routers, NN/Siemens are definitely in that space:
newbridge.com
You mentioned the competition and, again, I don't know where they stand. The JPMorgan report doesn't have anyone listed. Just "N/A."
No emotion this time. Just trying to sort out the facts.
I welcome corrections and comments.
Later --
Pat |
