Ah Hitesh the problem with WS is Garzarelli said she likes the Telcom sector. Now look what the trains conductor says.
22-Jan-97
USRX: Strong 1Q results in line with estimates. The X2 train is about to
pull out of the station.
Steven D. Levy
Sender Z. Cohen
Rating: BUY
USRX-OTC (1/21/97): $73 5/8 Dividend: Nil
52-week range: $105 1/2-41 5/8 Yield: Nil
Shares Outstanding: 96 Million Fiscal Year Ends: September
Market Capitalization: $7.1 Billion Debt-to-Capital: 11.6%
Earnings per Share: P/E Ratio:
FY 1995 $1.05 FY 1995 70.1X
FY 1996 $2.36 FY 1996 31.2X
FY 1997E $3.45* FY 1997E 21.3X
FY 1998E $4.70 FY 1998E 15.7X
(*) Revised downward from $3.50 for 1997
Oppenheimer & Co., Inc., or one of its affiliated companies, makes a market
in the securities of this company. Oppenheimer & Co., Inc., or one of its
affiliated companies, managed or co-managed a public offering of securities
for this company within the last three years.
Quarter ending March 31 EPS estimated at $0.78 vs $0.55.
Company Description: U.S. Robotics is the leading designer, manufacturer
and marketer of dial-up connectivity products, systems, and software, used
for remote access to information networks.
INVESTMENT CONCLUSION: In what was clearly the company's most challenging
quarter in recent memory, USRobotics came through with excellent 1Q results
that were right in line with our forecast and easily ahead of the pessimism
that had been putting pressure on the stock in recent weeks. We believe
these results are further proof of USRobotics' worldwide leadership position
in the remote access market and set the company up for a tremendous period
of growth ahead. As we have discussed in our research reports over the past
few months, our near-term investment thesis on USRobotics hinges on the
timely delivery and marketing of its X2 56 kpbs technology. The December
quarter's results are critical because the indicate, in our opinion, that
when X2 products and systems do begin shipping, USRobotics' will have built
up a head of steam that could lead to even more profits that we currently
expect. We continue to urge investors to jump on board the USRobotics X2
train before it pulls out of the station.
Why Do We Think The Train Is About To Leave The Station?
The quick answer to this question is that we believe that USRobotics is
within two weeks of its most important set of product rollouts in years and
all indications point to a significant time-to-market advantage over its
competitors. Of course, we are referring to X2 56 kpbs modems and software
for the company's remote access systems. We continue to believe that (1) X2
modems are on schedule for shipment to the distribution channel by the end
of January, (2) they will be priced at a meaningful and profitable premium
to their 33.6 kpbs equivalent modems, (30 major Internet service provider
rollouts of X2 service will begin in February, and (4) USRobotics is at
least three months ahead of its competition in delivering end-to-end 56 kpbs
remote access solutions.
The long answer to this question is much more complicated and involves a
detailed discussion of USRobotics' technological competencies, the value of
its leading and growing market share, and our view of the general trends in
the carrier equipment and remote information access markets. suffice it to
say that we are convinced that the company is exceedingly well positioned to
deliver almost any type of client communications device---higher speed
analog modem products, ISDN (Integrated Digital Services Network) terminal
adapters, xDSL (Digital Subscriber Line) modems, and high speed
communications devices to be used over CATV coaxial networks--and
USRobotics' installed base of software-based systems sold to on-line vendor
of choice to deliver whichever communications technology is most in demand
for access servers.
First Quarter Results; More Market Share Gains.
Revenues in the period ending December 29, 1996 were $645.4 million, a 77%
year-over-year increase and slightly ahead of our $644.1 million forecast.
In addition to a strong top line performance, USRobotics also reported its
strongest gross margins in years, 42.8% compared to 41.8% in our model and
the year ago quarter. Balancing off this positive variance were sales and
marketing expenses which exceeded our forecast by 6%, or more than $6
million, and interest and other expenses which were almost $800,000 higher
than our figure. The net impact on the bottom line was an earnings per
share figure of $0.72, a 60% yearly gain and right in line with our estimate.
The only blemish on these results, and one we hope will be resolved before
the end of the current fiscal year, was accounts receivable, which grew to
$631 million, or 79 days outstanding. Above average international sales,
high levels of restocking orders for consumer modems after the Christmas
season, and an extraordinarily back-end loaded quarter for the company's
network systems division all contributed to the less-than-desirable increase
in this important balance sheet item. On the other hand, USRobotics
management stated that inventories of its highest volume products in the
distribution channel were at the same level at the end of the quarter as at
the beginning of the quarter and inventories at the company actually
declined sequentially by $33.7 million to $152.2 million. Unfortunately,
this one blemish is likely to provide USRobotics' skeptics with enough
material to keep them busy until the situation turns around.
Other highlights from the December quarter results included:
International sales increased to 30% of first quarter sales, up almost 100%
from 1Q 1996.
Average selling prices for Sportster brand modems actually increased
slightly, compared to the September quarter, due to the lack of low priced
14.4 kpbs product shipments.
A shift of 4% in revenue back towards PC-related products, such as
modems and Pilot electronic organizers. This shift was not expected,
although given the lumpy nature of USRobotics' network systems revenue, and
its focus on the largest ISPs and carriers it should not be surprising. It
is interesting because it follows a shift of 7% in the previous quarter in
the other direction.
USRobotics' domestic modem market share continued to climb as measured by
two different independent sources and now appears to stand at about 40%.
Initial X2 product revenues were recognized.
Changes To Our Forecasts; Almost None.
After incorporating the actual December quarter results into our revenue and
earrings model we have made only minor adjustments to our estimates. The
most notable change is the assumption of higher sales and marketing expenses
for the foreseeable future. This change alone caused us to lower our March
quarter EPS estimate by $0.04 to $0.78. Because we are even more confident
in our view of the potential impact of X2 on USRobotics' longer-term
results we compensated for this small reduction by slightly increasing the
acceleration rate in sales in the June and September quarters so that our
fiscal 1997 EPS estimate of $3.45 is only $0.05 below our previous forecast.
We have also modestly increased our gross margin assumptions for the second
half of fiscal 1997, to a level slightly above 42%, even though USRobotics'
management's guidance is for a return to the 41% to 42% range. Lastly we
increased our assumption for interest and other expenses given the company's
current cash and debt levels. Our fiscal 1997 EPS estimate remains $4.70.
Our EPS Forecasts Are Still Above The Pack
Investors should note that a critical aspect of our model is the assumption
that the X2 rollout will proceed as planned and lead to a re-acceleration in
sales beginning in March Quarter. In its conference call with investors and
analysts following the release of 1Q results USRobotics' management
explained that there are certain conditions that could cause the rollout, or
at least the positive aspects of the rollout, to be delayed by a month or
two. Specifically, in the case of ISPs such as America Online, the
conservative view might say that current need for basic port capacity
expansions, detailed in our report dated January 17, could supersede the
priority of deploying and marketing 56 kpbs access services based on X2
technology. While we are not ignoring these cautionary comments we feel
much more comfortable being positioned above consensus estimates which we
believe reflect a more conservative view of the market potential of X2 than
our research indicates is likely to occur.
Our quarterly EPS estimates are shown below.
1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
FY 1995 Actual $0.17 $0.20 $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 $0.72A $0.78E $0.90E $1.05E $3.45E
FY 1998E Prior $1.07E $1.14E $1.21E $1.28E $4.70E
FY 1998E Current $1.07E $1.14E $1.21E $1.28E $4.70E
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Oppenheimer & Co., Inc. The information and any statistical data contained
herein have been obtained from sources which we believe to be reliable, but,
we do not represent that it is accurate or complete, and it should not be
relied upon as such. All opinions expressed and data provided herein are
subject to change without notice. Oppenheimer & Co., Inc., its affiliated
companies, or their respective shareholders, directors, officers and/or
employees, may have a long or short position or deal as a principal in the
First we load the passengers, then they throw the switch and we chug on up the track. <g>
All abooard,
Scrapps |
