NBMO - PAIR: March revenues in line; EPS below estimates. Positive ADSL story remains.
- March revenues in line; EPS below estimates.
- Small Subscriber business remains strong.
- More important, the outlook remains solid for the company's Avidia platform, the primary driver of upside for the stock, with (1) product currently in several trials; (2) decisions expected to be made in 2H99; and (3) significant revenues expected this year.
- Lowering 1999 estimates; No change to 2000 estimate.
Investment Opinion. Despite yesterday's lower-than-expected EPS results, the primary driver of upside for the stock (potential for Avidia success) remains unchanged. There is no change to our 2000 EPS estimate of $0.55, which we believe may prove conservative. More important, we believe that if Avidia proves successful, investors will begin to attribute significant value to this asset (note recent and upcoming offerings in the xDSL space), rather than penalize the company for its sunk investment. In this environment, we would continue to expect expansion in the company's valuation multiples and significant stock appreciation over the next 12 months.
- March revenues in line; EPS below estimates. Yesterday, after the close of trading, PairGain reported March quarter revenues that were in line with expectations at $60.9 million (slightly above our estimate of $60.7 million, and essentially flat sequenially). However, gross margin for the quarter that was lower than expected (41.9% vs. our estimate of 44% and slightly below last quarter's 42.0%). This was primarily the result of continued stronger-than-expected pricing pressure in the company's HiGain (HDSL) market, in which ASPs declined 8% sequentially. In addition, operating expenses were above expectations, accounting for 35.5% of revenues vs. 33.3% last quarter.
Consequently, the company's EPS of $0.06 came in below both our estimate of $0.08 and consensus estimate of $0.07.
- However, Small Subscriber business remains strong. PairGain continues to see strength in its Small Subscriber line of business (comprised of the PG Flex/Plus line of products), with revenues from these products up over 15% sequentially to $18.9 million, or 31% of total revenues.
- More important, the outlook for the company's Avidia platform, the primary driver of upside for the stock, remains solid. Despite the current difficulties in the company's core historical market (HDSL), we continue to believe that the outlook remains very positive for the
company's Avidia ADSL DSLAM platform, which we expect will be a primary driver of upside in both earnings and valuation multiples over the coming year.
- Product currently in several trials. The company noted that its Avidia platform is currently in trials with several dozen customers, where the process is in the RFP/RFQ stage. While the company expects that the RBOCs are perhaps ready to enter another cycle of evaluations in the DSLAM business, we expect that the company will continue to focus its efforts on the IXCs and CLECs.
- Decisions expected to be made in 2H99. The company noted that some smaller customers may be able to announce vendor selections in the next quarter, and it remains a possibility that PairGain will be able to announce some successes prior to upcoming conferences. However,
PairGain noted that announcements by larger vendors (including MCI and Sprint) will likely take longer.
- Revenues expected this year. PairGain reiterated that they expect to see revenues from Avidia sales in 1999, noting that the company's targets remain around $20 million in 1999 and more than twice this amount in 2000.
- Lowering 1999 estimates; No change to 2000 estimates. Based on company guidance, we have elected to lower our estimates for the June quarter to $0.06 (flat sequentially) from the prior estimate of $0.10. There is no change to the EPS estimates for the September or December quarters; our new 1999 EPS estimate is therefore $0.35, which is in line with estimates on the Street. In addition, there is no change to our 2000 EPS estimate of $0.55.
Investment Opinion. Despite yesterday's lower-than-expected EPS results, the primary driver of upside for the stock (potential for Avidia success) remains unchanged. The product remains in trials with dozens of potential customers, and interest in Avidia remains strong.
In addition, PairGain remains confident that Avidia's strong feature set (multiple uplinks, flexibility, etc.) should appeal to a broad array of customers, and continues to anticipate significant ADSL revenue growth beginning in 2H99 and extending into 2000.
We continue to believe that significant opportunity exists for upside appreciation in the stock. There is no change to our 2000 EPS estimate of $0.55, which we believe may prove conservative, should either (1) the Avidia surpass current expectations, or (2) unit growth in
PairGain's HDSL business picks up, as pricing pressures should begin to moderate going forward. More important, we believe that if Avidia proves successful, investors will begin to attribute significant value to this asset, rather than penalize the company for its sunk investment. Along these lines, is worth noting the recent appreciation in several ADSL companies shares as well as additional expected offerings in this space. All of these are expected to continue to focus investor attention on the ADSL space. In this environment, we
would continue to expect expansion in the company's valuation multiples and significant stock appreciation. |
