Sal,
There already has been a relativey steep decline in modem prices. Modem margins have erroded signficantly and pure modem companies are suffering. In USRX's case OVERALL margins have been steady and actually improved because of product MIX. It use to be when a new modem first came out it sold for around $400. I paid $389 for my PP9600 modem. Prices have been dropping with the release of each new generation. It use to take quite sometime for the highest speed modems to drop significantly in price eventually settling in at around $200. Now the latest modems, including X2, get INTRODUCED at this price point (i.e. 200) and trend down towards 100 and less as the next generation gets ready to be released. My point is that as competition has heated up prices have dropped dramatically. There already has been one round of price wars with modems.
Your argument seems to be that eventually everything becomes a commodity and therefore it is impossible to sustain growth. I maintain that declining margins can be more than be offset by 1)accelerating increases in volumes and 2)decreasing costs. I believe the growth in volumes (which is tied to the growth of the internet and the growth of the technology revolution) has barely begun. This is especially true non-US geographies (particularly Asia). USRX has been growing at significantly higher than 40% for about 5 years. Last year's growth rate was a record. It is unrealistic to assume that USRX will repeat the 1995-1996 growth rate. The analysts are properly calling for a sharp reduction in growth this year back to the 40% range. While 40% may not be maintainable forever, there are no signs that this is slowing down anytime soon. USR management which has provided extremely accurate financial guidance is comfortable with this year's numbers. They already have one quarter under their belt in which they met expectations. In otherwords, they are on track.
Future growth will be fueled by 1) increased volumes, especially outside the US, 2) an expanding product line (with new technology higher margin products continually repalcing older technology lower margin products as they mature) and 3) potential additional acquisitions.
USRX has many new technologies down the road and the product line continues to diversify.
Now back to MU. The historical dram cycle has been characterized by periods of relative price stability followed by periods of sharp price declines. In MU's case (and other small dram players) these periods of decline have been extremely hard financially. MU was already bailed out once and would have folded had it not been for Simplot bailing them out. Other companies did fold. The key driver for the dram business are the Koreans who have enormous capacity and control industry pricing. USRX on the other hand is the Samsung of modems. Not content, however, to be a one product company (like the dram companies are), they continue to diversify their product line. I'm sorry, I have lived through all the dram cycles and I understand the business quite well. I think your attempt to draw parallels between USRX and the memory makers is a much further stretch than if someone drew a parallel between USRX and Intel. Both are leading edge companies who continue to release high margin new technologies. Both are dominant in their fields with respect to market share (although obviously Intel's is much higher). Both are well managed (industry followers almost unanimously consider MU's management seriously lacking). Both have good brand recognition and customer loyalty which are growing (dram products are undifferentiated by end users). I honestly think that you would be hard pressed to find a worse industry or company to compare USRX to then the memory industry and MU in particular. IMO, an exceptionaly poor example.
FF |
