ORCTF: Reports 1Q 1999 Results
Bankers Trust Research/BT Alex. Brown Research
Christopher Crespi,Alexander Williamson
April 19, 1999
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ORCKIT COMMUNICATIONS LTD. [ORCTF] "BUY"
Reports 1Q 1999 Results
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Date: 04/19/1999 EPS 1998A 1999E 2000E
Price: 22.25 1Q (0.13) (0.38)A NE
52-Wk Range: 38 - 9 2Q (0.22) (0.35) NE
Ann Dividend: 0.0 3Q (0.27) (0.27) NE
Ann Div Yld: 0.00% 4Q (0.35) 0.08 NE
Mkt Cap (mm): 376 FY(Dec.) (0.99) (0.92) 0.70
3-Yr Growth: 40% FY P/EPS NM NM 31.8X
CY EPS (0.99) (0.92) 0.70
Est. Changed Yes CY P/EPS NM NM 31.8X
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HIGHLIGHTS:
-- Located in Tel Aviv, Israel, Orckit Communications focuses on
designing and developing digital subscriber line products for sale to
telecommunications carriers around the world. Orckit has emerged as a
leader in the HDSL market outside of the U.S. winning tenders at
France Telecom, Telecom Italia, and PTTs in China. Fujitsu, which
owns 30% of the SONET transmission market in the U.S., is Orckit's
exclusive partner in the North America.
-- Orckit reported 1Q 1999 revenue of $14.6 million and a loss per share
of $0.38. Our estimates were revenue of $14.2 million and a loss per
share of $0.39. First Call consensus was a loss per share of $0.39.
Orckit beat our revenue estimate by $400K and narrowed the loss per
share by a penny.
-- We expect ADSL sales to Deutsche Telekom to ramp up towards the end of
1999. To reflect forward pricing on the expected Deutsche Telekom
contracts, we have lowered our per share estimates for the remainder
of the year, while keeping our revenue estimates unchanged. We
maintain our $0.70 EPS estimate for year 2000 and expect to see
significant gross margin improvement once Orckit's new ADSL chip set
begins shipping in volume quantities toward the end of 1999 into 2000.
-- We maintain our "buy" investment rating on the stock.
DETAILS:
Orckit reported 1Q 1999 revenue of $14.6 million and a loss per share of
$0.38. Our estimates were revenue of $14.2 million and a loss per share of
$0.39. First Call consensus was a loss per share of $0.39. Orckit beat
our revenue estimate by $400K due to better than expected HDSL sales.
The following table compares the reported quarter with our estimates and
the year-ago quarter. Variance refers to the difference between the
reported quarter and our estimates.
($Mil, except per share data) 1Q99 Our Est. 1Q98 Variance
Revenue $14.6 $14.2 $6.5 $0.4
Gross Profit $0.8 ($0.6) $1.5 $1.4
Gross Margin 5.6% (4.2%) 24.0% 9.8%
Operating Profit ($6.9) ($6.5) ($2.2) ($0.4)
Operating Margin (47.2%) (49.2%) (33.0%) 2.0%
Net Income ($6.5) ($6.5) ($1.9) $0.0
Net Margin (44.5%) (45.7%) (28.4%) 1.2%
EPS ($0.38) ($0.39) ($0.13) $0.01
Shares Outstanding (MM) 16.9 16.9 14.7 0.0
Source: Company data and BT Alex. Brown Incorporated.
Gross margin for the quarter decreased sequentially to 5.6% from 6.0% in
4Q98 as a result of a greater percentage of ADSL sales in the over all
product mix. We expect gross margin to show improvement toward the second
half of 1999, due to a ramp up in sales of the Company's higher margin,
higher density ADSL chipset. Management commented that the chipset is
available now with shipments to GTE and Deutsche Telekom beginning in 3Q
1999.
BALANCE SHEET
Cash decreased by $7.2 million to $34.6 million from $41.8 million as a
result of the loss reported in the quarter.
DSOs increased to 87 from 68 in 4Q 1998. DSOs in 4Q 1998 were significantly
lower due to a single large payment received from a customer in the
quarter.
Inventories increased to $18.0 million from $17.3 million in preparation
for the ramp up in sales to Deutsche Telekom. Management noted that the
increase in inventories reflects an increase in materials and not finished
product. The Company has received favorable pricing on recently acquired
components.
Inventory turns decreased to 3.1 from 3.2 in 4Q98.
PRODUCTS
HDSL
HDSL revenues were better than expected in the quarter and reflect higher
sales to Europe and South America. Management continues to focus on
growing HDSL revenues in three important markets: Deutsche Telekom, Eastern
Europe and South America. Deutsche Telekom has committed to minimum HDSL
orders of $20 million in 1999, with the bulk of sales coming in the second
half of 1999. Future HDSL pricing will continue to be dependent on the
timing of customer tenders, with older tenders having better pricing than
more recent ones. Key competitors in Europe for HDSL include ECI Telecom
and Alcatel, and PairGain in South America.
Deutsche Telekom is currently deploying the integrated HDSL-SDH systems of
Orckit and Bosch. This includes Orckit's CopperTrunk HDSL product combined
with Bosch's Synchronous Digital Hierarchy (SDH) multiplexer. The
integrated system takes up less space in the central office, uses less
power and creates less heat. We believe this is significant for Orckit
because it extends the reach of HDSL directly from the SDH backbone to the
end-user, thus lowering carrier costs and deployment time.
ADSL
Deutsche Telekom and GTE should continue to be the growth drivers for ADSL
in 1999. Deutsche Telekom intends to deploy approximately 100,000 ADSL
lines in 1999. Orckit began shipping to Deutsche Telekom in the latter
part of the quarter with sales expected to ramp toward the second half of
the year. We expect the RBOCs and PTTs in Europe to make first and
secondary supplier decisions in the next quarter.
Orckit and Friendly Technologies introduced a new software solution,
FriendlyADSL, which automates and simplifies home installation of ADSL
modems. PC users will be able to automatically configure their PC and
install ADSL modems themselves in 1/10 the time it currently takes a
trained technician. We believe this new software solution will make it
easier for ADSL modem installation and help to accelerate the deployment of
ADSL.
VDSL
VDSL continues to be in the early stages of development. Orckit is
scheduled to introduce a new higher density VDSL chipset this quarter which
should be commercially available by 3Q 1999. Orckit is working directly
with Fujitsu and expects product shipped to Fujitsu customers in the third
quarter.
OUTLOOK
Orckit's profitability continues to depend on the acceptance of ADSL
products that include Orckit's higher density, higher margin ADSL chipset.
GTE and Deutsche Telekom have signed contracts to take this product at
specific prices. Current contracts that do not include the new chipset
have negative gross margins due to negative forward pricing. This has been
the primary reason for the decline in gross margins and Orckit's loss per
share in the past several quarters. The new chip, however, will reverse
the negative gross margins to the 30% level at production quantities. As a
result, we expect to see a significant improvement in gross margin
beginning in the second half of the year as indicated in our model. We
have lowered our per share estimates for 3Q and 4Q 1999 to reflect
sufficient time for GTE and DT to accept the new product (expected to ramp
in 4Q 1999). Our year 2000 EPS estimate remains unchanged. We reiterate
our "buy" investment rating on the shares.
Our revised and quarterly estimates for FY 1999 follow:
Previous Estimates 2Q99 3Q99 4Q99 FY99
Revenue (MM) $18.0 $26.2 $36.2 $94.6
EPS/Loss per share ($0.35) ($0.18) $0.10 ($0.81)
Revised Estimates 2Q99 3Q99 4Q99 FY99
Revenue (MM) $18.0 $26.2 $36.2 $95.0
EPS/Loss per share ($0.35) ($0.27) $0.08 ($0.92)
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