don't think I posted this before- NBMO on ORCT:
Orckit: March results in line with expectations; Maintain BUY rating.
- March quarter results in line with expectations.
- Strength in both ADSL and HDSL.
- ADSL revenues up significantly y.o.y.
- HDSL business strong also.
- No change to positive 1999 outlook.
- Balance sheet weakens slightly, but remains within expectations.
- No change in estimates; No change to expectation of profitability in Q499.
Investment Opinion. We continue to rate Orckit shares BUY. March quarter results were in line with our expectations, with a slight upside surprise on the top line. There is no change to either
the fundamental outlook or our estimates going forward, and we would view today's weakness as a buying opportunity.
- March quarter results in line with expectations. March results came in essentially in line with expectations, with higher-than-expected revenues. Revenues in the quarter rose 123% y.o.y. (and 3.1%
sequentially in what has historically been a seasonally weak quarter) to $14.6 million, well above our estimate of $13.0 million. In addition, due to lower-than-expected operating expenses, operating margins were above expected levels, coming in at –47.2% vs. our estimate of –49.7%. Consequently, EPS for the March quarter were in line with estimates at ($0.38).
- Strength in both ADSL and HDSL. The stronger-than-expected revenues were driven by strength in both of the company's core product lines, ADSL and HDSL.
- ADSL revenues up significantly y.o.y. Orckit's ADSL revenues were up significantly y.o.y., rising to $7.2 million this quarter vs. $1.0 million in the year-ago comparison. The company reiterated that
it remains very positive about its expectations for continued strength in this line of business going forward. While ADSL revenues were down sequentially, this was not surprising, as seasonal weakness had been expected, particularly following the strong December quarter. It is also worth noting that initial shipments to Deutsche Telekom began at the end of the March quarter, and DT began large scale deployments on April 1: DT has stated that they will deploy 100k ADSL lines this
year.
- HDSL business strong also. In addition, Orckit stated that its HDSL revenues were particularly strong this quarter, rising 55% y.o.y. to $7.0 million. This was up significantly from the December quarter level of $4.0 million, and the company remains positive regarding continued strength from this line of business going forward, largely due to strong 2H99 expectations for additional HDSL deployments by DT.
- No change to positive 1999 outlook. • We continue to believe that the outlook for the remainder of 1999 remains extremely positive for Orckit. This is due to the following:
- Strengthening ADSL activity. (See industry note, dated 3/30/99). • As we noted several weeks ago, we believe that the recent increases in CLEC funding, combined with the recent success of cable modems, have caused the RBOCs to begin to feel pressure from these competitive access providers, and have begun to respond by stepping up their ADSL activities. We believe that in 1999, the RBOCs will shift their spending focus from long-distance toward efforts to upgrade networks for broadband access.
- Orckit's outlook with GTE is very positive. Orckit's GTE ADSL contract should continue to be a
primary driver of revenue growth for Orckit, as GTE continues to ramp up its ADSL deployments.
- Potential for second source status at RBOCs. In addition, we believe that Orckit is well positioned to win second-source business with the RBOCs in 1999. Alcatel is clearly the largest ADSL provider in the U.S., and this is not expected to change. However, virtually all the RBOCs are expected to name second-source providers at some point in 1999, and we believe that Orckit is particularly well-positioned to benefit. Remember that Orckit is the only ADSL equipment provider
with an ADSL/Frame Relay solution, in addition to an ADSL/ATM solution.
- Balance sheet weakens slightly, but remains within expectations. Some of Orckit's balance sheet metrics weakened in the quarter, including DSO and inventory turns. However, we believe that these metrics remain well within expected ranges, and exhibit significant improvement vs. comparable year-ago figures.
- DSOs up slightly. DSOs rose in the quarter to 88 days vs. 69 days in the December quarter. While this is a significant sequential rise, it is important to keep in mind the following. First, Orckit's DSOs tend to fluctuate with seasonal strength/weakness, and the March quarter tends to see shipments towards the quarter's end. Second, and more importantly, the DSO level seen in the December quarter was unusually low, due to some very large payments coming in that quarter. DSOs are actually flat vs. the September quarter, and remain in line with
expected levels.
- No change in estimates; No change to expectation of profitability in Q499. There is no change to our forward estimates. We continue to believe that Orckit will turn profitable beginning in the second
half of 1999, most likely in the fourth quarter. Conversations with management indicate that the cost reduction program remains on schedule, with the redesigned chip expected to be integrated in Q2 and
shipping in Q3.
Investment Opinion. We continue to rate Orckit shares BUY. March quarter results were in line with our expectations, with a slight upside surprise on the top line. There is no change to either the fundamental outlook or our estimates going forward, and we would view today's weakness as a buying opportunity.
Orckit represents a near pure-play on the expected future deployment of ADSL for faster connections to the internet. The company's outlook with GTE remains extremely strong, and we continue to believe that the possibility exists that Orckit could win additional ADSL business with one or more RBOCs (as a second-source) later this year. Due to the company's significant earnings leverage, we believe that Orckit could earn well over $2.00 in 2001; applying a multiple of 20x to this estimated 2001 earnings power, we arrive at our 12-month price target of $40. |
