Here is the 2nd part of the Oppenheimer report, again thanks to Janice:
11/20 FOP USRX: LONG LINES & FAST MODEM SPEEDS; COMDEX `96 OBSERVATIONS &
SYMBOLS: USRX S/COM S/CUS S/CNA I/TELECM I/DATAPR I/COMPUT
ANALYSIS..P2
Part 2 of 2
Rockwell Is Not Far Behind But...
In its September 10 press release announcing 56 kbps technology Rockwell said
that it expected to "demonstrate 56 Kbps transmission capabilities at the
November 1996 Comdex show". At Comdex Rockwell started aggressively marketing
its K56Plus brand of technology and its presence was evident in many booths.
We are still convinced, however, that the original schedule of sample chip set
delivery in the first calendar quarter of 1997 and initial chip production in
the second quarter is about as early as modem vendors can expect their 56 kbps
chipset. After receiving the chips we also believe it is appropriate to
expect at least a one to two month lag before end-user or ISP products begin
to hit the market. Thus, we do not believe that a Rockwell-based end-to-end
56 kbps solution is likely to become available until mid second quarter, or
approximately three months after x2.
We stopped by the Rockwell booth and saw a "simulated" demo but it was not one
that could dial out of the booth. We were also not allowed to see the
prototype modems, which only increases our skepticism about the near-term
deliverability of the chips. Another factor that is making this product cycle
different from previous speeds is the need for follow-on software upgrades to
the final international standard. Rockwell did indicate to us that its new
K56Plus chip set would be flash memory upgradeable, confirming our view.
Finally, in marketing its K56Plus chips, Rockwell is attempting to paint a
picture that, in our view, is somewhat misleading. Therefore, we feel
compelled to help investors better understand what we believe are the accurate
"facts" and whether they are important or not. For example the paragraph
below is excerpted from a brochure that Rockwell was distributing at Comdex.
"Rockwell engines drive 75% of the world's modems (over 100 million at last
count--the world's largest installed base). In fact, Rockwell-based modems
account for 70% of all connections to the Internet, and Rockwell's central
site partners have the most digital connections to the phone network. So
chances are good you'll be able to connect if you use a Rockwell-based 56 kbps
modem."
Our comments about this are as follows:
Rockwell's installed base of modems only matters if they are easily and cost
effectively upgradeable. We do not believe that the installed base of
Rockwell-based modems are either.
Assuming Rockwell's K56Plus modem chip sets support previous international
standards such as V.34 and V.32, almost any modem in the world should "be able
to connect" to the new modems, although it will not happen at 56 kbps.
We do not agree with Rockwell's assertion that 70% of ISP ports are based on
its modem technology and again, the value of this installed base is
significantly diminished because of its upgrade path. We think that
Rockwell's central site systems customers might be selling to 70% of the ISPs
but we believe the market share of modem ports is much closer to 50%, at the
most.
We believe that USRobotics' current market share of approximately 35% of new
modems shipping is actually much more valuable because, with the exception of
the PC card (Megahertz) product line, all of the company's 28.8 kbps/33.6 kbps
modems are easily upgradeable to x2 56 kbps speeds.
Lucent Announces Interoperability With Rockwell
Lucent Technologies (LU-NYSE $51 3/8) recently announced intention to make its
proprietary V.flex 56 kbps modem chip sets interoperable with Rockwell's
K56Plus is a clear plus for Rockwell and a matter of practical urgency for
Lucent, in our opinion. While Lucent has a meaningful position on the client
side of the modem business its share of chip sets used for central site modems
is small. Thus it seems to be a good move for Lucent to ensure that its modem
manufacturers are able to connect with ISPs at 56 kbps. We would not be
surprised to see Motorola, another contender in the 56 kbps modem technology
race, follow a similar path in order to protect its small modem chipset market
share as well.
Our quarterly EPS estimates are shown below.
1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Year
FY 1994 Actual $0.13 $0.17 $0.14 $0.07 $0.52
FY 1995 Actual $0.17 $0.21 $0.30 $0.37 $1.05
FY 1996 Actual $0.45 $0.55 $0.66 $0.71 $2.36
FY 1997E Prior $0.72E $0.82E $0.93E $1.03E $3.50E
FY 1997E Current $0.72E $0.82E $0.93E $1.03E $3.50E
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