DLJ Notes: September 15, 1998
GLENAYRE TECHNOLOGIES
04:48pm EDT 14-Sep-98 DLJ Securities (Eric C. Buck, C.F.A.) GEMS
GLENAYRE TECHNOLOGIES: Re-initiating Coverage of Glenayre with a BUY
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
September 14, 1998 Eric C. Buck, C.F.A. (212) 892-4264
Sam Kingston (212) 892-4698
GLENAYRE TECHNOLOGIES (GEMS: $7.50)
Re-initiating Coverage of Glenayre with a BUY Rating
Range: Earnings Per Share 1998 vs 1997 % Chg
17-6 Old New P/E Ratios F1Q $0.05 vs 0.22 -77%
(FY:Dec.) 1999E $0.70 $ 10.7 F2Q 0.00 vs 0.24
1998E 0.33 22.7 F3Q 0.10 vs 0.24 -58%
1997A 0.84 8.9 F4Q 0.18 vs 0.15 +20%
Yield: % Market Cap.: $476 5-Yr. Growth Rate: 20%
Dividend: $ Avg. Trading Vol.(000): 371 Book Value: $6.74
RATING: Buy Change: None 12-Mo. Target: $14
VIEWPOINT
We are resuming coverage of Glenayre Technologies, a leading provider
paging equipment and services, with a Buy rating and target price of $14.
After two years of disappointing performance generated by technology
transitions in the US market and economic turmoil in Asia, we believe that
the company is poised to again show improving sales and profitability.
While Asia is not expected to generate any near term recover, we believe
Glenayre has seen the nadir in its international operations with sales
confined to Europe, Latin America and China. Meanwhile, accelerating
deployments of Narrowband PCS advanced messaging infrastructure in the US,
the company's entry into the paging terminal markets and successes in its
voice messaging and network services business as well as tight expense
control should propel a strong earnings recovery beginning in the second
half of 1998. Glenayre's sales in the second half are expected to expand
by nearly 40%. For the year, earnings should reach at least $0.33 per
share, more than half of which will be derived in the fourth quarter. In
1999, we believe the recovery will continue with sales rising 20% to $506
million generating earnings of $0.70 per share. Prior to its recent
disappointments, Glenayre had sold at a multiple ranging from 18 to 37
times forward twelve month estimates. We believe that with a return to
substantial earnings growth, a valuation at the low end of the range should
be a reasonable expectation. Thus, we believe that a doubling in the
shares to $14 is possible over the next twelve months.
IMPORTANT POINTS
The Company: Glenayre is the leading world wide supplier of paging
infrastructure equipment including paging transmitters, receivers,
controllers and switches. The company also provides voice messaging
systems to the cellular, paging and wireline telephone markets, operations
support services and applications platforms and business analysis and
development tools to wireless and wireless operators. Finally, through its
November 1997 acquisition of Wireless Access, is has become a technical
leader in the market for Narrowband PCS advanced messaging terminals.
Paging operator capital spending expected to rise on deployments of
advanced messaging systems. After a sharp curtailment of spending in 1997
and early 1998, the major paging operators are expected to reaccelerate
their spending as they begin deploying infrastructure for the new
Narrowband PCS advanced messaging services including message
acknowledgement, two-way messaging and voice messaging. Budgets for the
top six public operators show an expected 2% increase in spending in the
second half of 1998 versus the first half of 1998. However, we expect
these same companies to increase their second half 1998 spending in
advanced messaging infrastructure by 7% versus the first half. An increase
in total spending of about 10% is expected for all of 1999 versus 1998 as
operators accelerate their buildouts of Narrowband PCS. Major operators
that have started or are expected to build advanced paging systems include
Skytel, PageNet, PageMart, TSR and CONXUS. Other carriers that we believe
are taking a hard look at two way investments include Metrocall,
MobileMedia, Arch and Airtouch. As the leading supplier of paging
infrastructure equipment, we expect Glenayre to capture a substantial share
of this increase in spending. In fact, we believe that Glenayre has, or is
gaining, a disproportionate share of those carriers that are more
aggressively deploying advanced services. As a result, we believe that
Glenayre's sales of domestic paging infrastructure equipment should expand
faster than what is expected for the overall industry.
While the initial recovery in Glenayre is expected to be driven by a
rebound in infrastructure spending, the longer term opportunity lies in the
sale of advanced paging terminals. DLJ estimates that by the year 2003
there will be more than 20 million US subscribers to advanced messaging
services versus well under a quarter million in 1998. Assuming the average
selling price falls from $220 to $170 per terminal, this suggests the
annual market for advanced paging terminals will grow from under $100
million in 1998 to nearly $1 billion in 2003. With it acquisition of
Wireless Access in late 1997, Glenayre became an early leader in the design
and manufacturer of advanced pagers. In 1997, the company generated sales
of $5 million with its original AccessLink two-way pager despite very
limited advanced messaging infrastructure deployment. We estimate that
pager sales will reach at least $40 million in 1998 and that it could
expand to better than $70 million or about 25% of the advanced pager market
in 1999. These gains are expected to be driven by wider service
availability and the introduction of several new advanced pager platforms
including the AccessMate and AccessLink II.
International sales are expected to stabilize. While international sales
have typically accounted for half of the company's sales, softness in
international demand for paging infrastructure in the first half of 1997
dropped that number to an estimated 40% representing a better than a 35%
decline in absolute dollar sales outside North America. Europe and Latin
America each represent about 10% of sales while the remaining 20% is now
derived primarily derived from China and Taiwan, the more stable of the
Asian economies.
Glenayre has a substantial level of order backlog that provides a
relatively high level of confidence in our expectations for the next
several quarters. As of June 30, the company's backlog stood at $187
million versus $139 million at year end. Approximately $20 million of the
backlog is for advanced pagers with the remainder consisting primarily of
one way and advanced paging infrastructure. About 70% of the backlog is
scheduled for delivery in the next 6 to 9 months.
Current valuation offers limited downside risk with substantial upside
opportunities. At current prices Glenayre's shares are selling only
slightly above the $6.74 book value per share and $6.50 per share in
trailing 12 month sales. Further, the company has no long term debt and
$21 million in cash. Meanwhile the shares sell for under 23 times our 1998
estimate of $0.33 per share and only 10 times our 1999 projection of $0.70.
From 1993 to 1996 Glenayre sold at an average PE of 27 times forward 12
month earnings estimates and rarely fell below 20 times. Not until the
disappointments of 1997 and early 1998 did the multiple fall into the mid
to low teens. We believe that with a resumption in revenues and earnings
growth spurred by the build out of two way systems, a ramp in advanced
subscriber accounts/pager sales and a stabilization of international sales,
Glenayre can return to valuations levels approaching at least the low end
of its historical average. That implies that shares could return to 20
times our calendar 1999 estimate of $0.70 or $14 per share.
Significant Narrowband PCS Announcements
Nov. 1997 First commercial launch of CONXUS's Pocketalk service utilizing
Glenayre's InFLEXion voice messaging system, CONXUS's Washington
area network consists of the GL3000 Wireless Messaging Switch
(utilizing Glenayre's WMtp protocol), GL3100 RF Director, GL-
C9000 base station controller, GL-T9501 linear transmitter, GL-
R9000 receiver and the GL-N9000 OMC (Operation and Maintenance
Center)
April 1998 Announces receipt of $30 million in purchase orders from
PageMart Wireless for the delivery of Narrowband PCS
infrastructure equipment. The orders are part of a multi-year
volume purchase agreement for the upgrade and migration of
PageMart's nationwide paging network.
May 1998 Signs multi-year volume purchase agreement with PageNet for a
nationwide, two-way Narrowband and PCS paging system. A second
agreement covering Glenayre's AccessMate word-messaging
acknowledgment pager also signed.
June 1998 Announces system trial for wireless voice messaging with the
Fujian Provincial Posts and Telecommunications Administration in
China.
June 1998 TSR Wireless announces the selection of Glenayre to provide
Narrowband PCS infrastructure equipment to build out several
major markets over the next two years. The order covers over 300
transmitters and multiple switches.
July 1998 Glenayre receivesomm Paging Network.
c Donaldson, Lufkin & Jenrette Securities Corporation, 1998
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