Digital Microwave - Continues to make progress in its effort to return to
profitability, which could come as soon as the June quarter. (DMIC-$9; Accumulate)
Last year was a tough one for DMC. From 1995 to 1997, the company built an
exceptionally strong business in Asia which accounted for well over a third of the
company's sales when the economic crisis struck this region in late 1997. It is
fair to say that this crisis weighed heavily on the whole sector, but DMC in
particular was hard hit by this region's misfortunes. In response, management has
aggressively restructured the company with an eye toward turning profitable again at
a revenue run rate of about $60 MM. In support of this effort, DMC has launched a
promising new high-capacity Sonet radio called Altium, which began its first
commercial shipments during the quarter. In our view, the stock is not trading on
the current quarter, but rather on the outlook for Altium and the likelihood that
DMC will return to profitability in the June quarter.
We expect DMC to report F4Q99 results in-line with our projected loss per share
of $0.04 cents on $61 MM in sales. Having said this, our visibility on the
fiscal fourth quarter was somewhat low when the company moved into its quiet
period in mid-March. This low visibility is reflected in the $0.05 cent spread
in the First Call consensus for the quarter. We would argue however, that the
stock is not trading on the company's F4Q99 results. Instead, we believe that
investors are focused on both the company's prospects for returning to
profitability in the June quarter (F1Q00) and also on the outlook for
strengthening sales of Altium, which began to ship commercially during the fiscal
fourth quarter.
The early production of Altium is progressing smoothly, and so now the challenge
for DMC is to book some large orders. As stated above, we believe that the
near-term outlook on Altium will factor heavily into how this stock trades in the
near future. We continue to believe that demand for Altium remains high and
expect the company to begin booking some meaningful orders for this new system as
the year progresses.
We believe that DMC's core business began to strengthen this past quarter. In
particular, we believe that the Americas were particularly strong, but note that
Asia is also beginning to firm up a bit for the company. In a recent
conversation with management, we learned that sales of Altium have the potential
to result in collateral sales of the company's narrowband radios such as Spectrum
II and XP-4. As a result, we continue to expect the company's core business to
strengthen as the year progresses.
F4Q99E F4Q98A F3Q99A FY99E FY00E
Revenue (MMs) 61.0 93.8 58.3 237.8 307.5
Gross Margin % 24.5 35.4 20.2 21.1 32.2
EPS ($0.04) $0.12 ($0.11) ($0.46) $0.40
Source: Prudential Securities estimates and company data. |
