from BS's Jim Henry:
Concentric Network Corporation* (CNCX-$73 1/8-BUY)
Concentric Posts Strong 1Q99 Results, Revenue Growth Accelerating
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***Concentric Posted 1Q99 Results Highlighted By 20% Sequential
Revenue Growth.
***Raised Revenue Estimates & Deferred Positive EBITDA To Reflect
xDSL Rollout.
***We Reiterate Our BUY Rating With A New Year-End Target Price
Of $85 Per Share.
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Enterprise Value Relative Value
Data Data
Common Stock Price $73.13 1999E Revenue $150.0
Fully-Diluted Shares 24.8 2000E Revenue $250.0
Market $1,813.5 TEV/1999E Revenue 12.2x
Capitalization
Debt & Cap. Leases $323.6 TEV/2000E Revenue 7.3x
Cash & Equivalents $310.7 1Q99 Gross PP&E $115.8
Total Enterprise $1,826.4 TEV/1Q99 Gross 15.8x
Value PP&E
Source: Bear, Stearns & Co. Inc. All data in millions based on
Concentric Network's 1Q99 results and Bear Stearns estimates
except multiples and per share amounts.
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INVESTMENT VIEWPOINT
Concentric's 1Q99 Results Show Strong Momentum. Concentric
Network Corporation posted its 1Q99 results on April 20, 1999.
The quarter was highlighted by financial and operational
performance that largely exceeded our expectations for robust
growth and business development. The company's strong
performance was driven by its enterprise services division, which
generated sequential revenue growth of 25.5%, a noteworthy
acceleration over the division's growth of 23.1% during the prior
quarter. Enterprise revenue contributed 79% of Concentric's
total revenue up from 76% in 4Q98. Based on the strength of the
company's revenue bookings and new marketing initiatives
announced during 1Q99, we expect the enterprise segment to post
increasingly positive results going forward. This quarter's
performance is continued evidence that Concentric's leveraged
distribution model is working successfully. We look forward to
the impact of Concentric's expanded sales channels as it launches
its marketing campaign with SBC and Williams during 2Q99 and
introduces new resale channels of Concentric DSL. Below the
strong growth on the top line, the company's profitability
improved from the prior quarter. Concentric's EBITDA margin
improved sequentially by 570 basis-points from -31.9% to -26.2%.
Concentric posted an EBITDA loss of $7.9 million, modestly short
of our expectation of a $7.5 million EBITDA loss. The wider loss
was due to incremental expenses incurred in order to ramp up the
company's xDSL services and scale its network infrastructure on a
national basis. Based on the momentum illustrated during the
quarter, and management's increasing visibility into the forward
numbers, we are raising our revenue estimates for 1999 and 2000
to $150 million and $250 million, respectively, from $145 million
and $225 million, respectively. In order to reflect the
corresponding expenses necessary to launch an aggressive xDSL
rollout in the top 20 markets by year end, we now expect that
EBITDA breakeven will occur in 1H00 instead of 4Q99. With a
strong quarterly performance, we believe that the outlook for
Concentric is very positive for 1999 and beyond.
Revenue Growth Accelerated Sequentially. Concentric posted 4Q98
revenue of $30.1 million, up 20% sequentially and up 82% on a
year-over-year basis. This quarter's growth was a strong
acceleration over the company's 16.2% sequential growth rate in
4Q98. The company's performance exceeded our estimate of $29.0
million by a comfortable margin, marking the fourth consecutive
quarter that Concentric has met or exceeded our estimates since
we initiated coverage of the company. The company's strong
performance was driven by its enterprise services division, which
generated sequential revenue growth of 25.5% and now contributes
79% of Concentric's total revenue. Sequential revenue growth
within the enterprise services segment was fairly well
distributed among product lines. Virtual private network (VPN)
revenue was up 23% to $12.9 million entirely due to a significant
ramp up in revenue from Microsoft's WebTV Networks. We expect to
see stronger and more evenly balanced growth in this segment
during 2H99. Dedicated Internet access revenue was up 42% and
contributed 24.6% of total revenue. The company's dedicated
access sales continue to accelerate as evidenced by the fact that
Concentric closed out 1Q99 with 2,748 xDSL lines installed. We
expect the company's rate of line installations to continue its
acceleration during the year. Application and web hosting
revenue grew only 4% sequentially to $3.8 million, reflecting the
fact that the company had $0.3 million in one-time revenue in
4Q98. Apples-to-apples sequential growth in this segment was
15%. It is also worth noting that the company's order bookings
were up 67% in the quarter, implying a high degree of visibility
into the future numbers. We recognize the recent steps that
management has taken to strengthen this revenue stream. The
agreements signed with CyberCash in March and April should
enhance the company's e-commerce solutions and will drive
revenues in forthcoming quarters. Consumer dialup revenue
increased only slightly for the quarter from $6.2 million to $6.3
million, reflecting the company's continued effort to leverage
its dialup ports for remote dialup access for VPNs and other
enterprise services.
Expanded Products & High-Speed Access. During the quarter
Concentric again improved the breadth and depth of its product
portfolio and deepened the important broad array of external
relationships that should drive revenue growth in 1999 and
beyond. The company has clearly made a big push to expand on its
core VPN offering with the rollout of high-end services such as
dedicated Internet access, web hosting and application hosting.
Concentric also took significant steps toward expanding its
ability to provide high-speed Internet service by establishing
relationships with alternative providers of broadband local
access services. Last quarter Concentric announced concurrent
with the release of its 4Q98 results that it had established a
strategic relationship with xDSL-centric CLEC Covad
Communications and that it took an equity stake of $10.0 million
in Covad. On the 1Q99 conference call, management revealed the
company's smaller investment of $5.0 million in xDSL-centric CLEC
NorthPoint Communications. The company also committed its
resources and its energies to jointly market xDSL services with
its preferred provider Covad (in a $10 million campaign) and
NorthPoint (in a $5 million campaign). Concentric will
collaborate on marketing and advertising programs with both xDSL
CLECs and product development. Concentric now offers high-speed
Internet services over xDSL to businesses and consumers in
Chicago, Boston, New York City, Washington, D.C., San Francisco,
Los Angeles, San Diego, Philadelphia, and Baltimore. It plans to
offer xDSL services in more than 20 markets by year-end 1999.
Concentric's 2,748 installed xDSL lines grew 74% from its 1,576
xDSL lines installed at year-end 1998. We believe that it could
grow its installed base to nearly 20,000 during 1999. The
availability of new high-speed access technologies such as
Covad's xDSL or WavePath's MMDS wireless will play a major role
in Concentric's ability to grow its business going forward. We
are raising our revenue estimates on the company based on the
initial success of these product areas. As important as these
access services are to the company, we note that the company has
not lost its focus on selling its own value added services.
Solid Financial Position. Concentric posted a 4Q98 EBITDA loss
of $7.9 million as compared with a loss of $8.0 million in 4Q98
and a loss of $6.8 million one year ago. This reduction in loss
fell modestly short of our estimate for a loss of $7.5 million,
reflecting the company's efforts to scale its network on a
national basis and its aggressive rollout of xDSL services in new
markets. Management increased sales and marketing expenses from
$10.5 million in 4Q98 to $11.2 million in 1Q99. The company's
EBITDA margin expanded by 570 basis-points to
-26.2%, reflecting the significant leverage that Concentric
realized at the SG&A line. Based on the company's aggressive
ramp up of its xDSL business and the nationwide rollout of its
network, we are pushing back our assumption for EBITDA breakeven
from 4Q99 to 1H00. During the quarter Concentric received a
significant equity infusion from financial and strategic
investors. SBC Communications invested $20.0 million in
Concentric's common stock for an 8% ownership stake. During the
quarter Concentric completed another financing with a public
offering of approximately 2.8 million shares of common stock.
The sale of common stock and the exercise of the warrants
resulted in a total cash infusion of about $130.0 million. At
the quarter's end, Concentric's cash and cash equivalents stood
at $310.7 million up from $187.5 million year end. As such the
company is fully financed for its business plan and has a war
chest that it can use to pursue new growth opportunities or
strategic acquisitions. |
