Robert --
Since you've been kind enough to answer my questions off-screen, I'll post my rather rambling notes to you.
I won't even attempt to do a full analysis of VARL. Instead, I'll share a few reasons why it caught my attention and why I think it's a good long-term investment.
While researching the list of companies presenting at the upcoming AEA tech conference in Monterey, CA (May 16-18), I studied their websites and financial statements and narrowed them down to 5 or 6 that were interesting enough to pursue further. High on that list was Vari-L.
In business since 1953, they have a dominant position in components for wireless technologies that benefit from the growth in base stations, handsets, and last-mile wireless broadband, including LMDS. A few years ago they were predominantly a supplier to military and aerospace markets. Today the split is 87% commercial and 13% military-aerospace. Just like SDLI, the quality and reliability of their military products has given them a lead in the commercial markets where high levels of performance and reliability are required.
I'm impressed that Vari-L's components are in 75% of the base stations in Europe and that their primary customers are Motorola, Ericsson, and Nokia, each representing between 10 - 13% in any given quarter.
Geared to the CATV market, their LMDS components convert light waves to radio frequencies that allow cable programming to be carried from the neighborhood to homes without the need of fiber optic cables --- cable to the neighborhood, wireless to each home. In addition to the consumer market, there's a big market in small and mid-sized businesses. I believe only 3% of this market has cable, leaving a huge opportunity for last-mile wireless.
A few background notes for anyone new to the company:
VARL's commercial customers, besides MOT, ERICY, and NOK, are:
AT&T, California Microwave, EF Data, Harris, Hewlett Packard, Hyundai, IBM, JRC, Lucent, NEC, Northern Telecom, Omnipoint, Qualcomm, Rockwell, Samsung, Stanford Telecom, Texas Instruments, Toshiba, TRW, Uniden, Westinghouse, and Wireless Access.
VARL's primary products:
The largest product segment for Vari-L is the production of high quality voltage controlled oscillators (VCO) and phase-locked loop synthesizers (PLL) or simply called synthesizers. A VCO is ann electronic circuit that produces a pure and predictable signal source, which can be tuned within a given range of frequencies. A VCO is a necessary component for radio transmission, and it must provide high performance and clean or low noise signal for a radio to work properly. A PLL is a VCO with an additional device added to it, which in effect tunes the signal created from the VCO to a given channel within a frequency range. The equipment manufacturers may buy a finished synthesizer from Vari-L or they may just purchase the VCO and add the remaining circuits required in a synthesizer themselves. Either way, PLL synthesizers are necessary for nearly all radio transmission. These synthesizers are in every wireless phone, every pager and every base station within these networks.
In a typical cellular phone call, for instance, there are actually four synthesizers at work: a transmitting and a receiving synthesizer in each handset and base station. The transmitting synthesizer in the handset will operate on the same frequency as the receiving synthesizer in the base station and vice versa.. . .
There is a wide variety int he VCO world, from simple low cost, low performance VCO's to very sophisticated VCO's capable of operating on multiple bands. The military uses VCO's that operate within an extremely wide band range so they can detect any possible threats. . . . The VCO's that are used commercially operate within a much mroe narrow range and typically cost from $4 to $9 per unit. The VCO's used for customer products only have to work within the prescribed range of each product where cost, size and power efficiency are the key issues. These VCO's run anywhere from $1.50 each, for the most simple, to $3.50 per unit for components that are capable of operating on multiple bands. [From EBI research.]
VARL has patents for technologies that allow them to produce products with higher frequencies and bandwidth using low cost commercial materials. They've also received patent protection by the People's Republic of China for their VCO's and PLL's. Another patent covers components in their fiber optic applications for the CATV market.
In the consumer PCS market, there are three dominant forms of wireless communication, TDMA, CDMA, and GSM, and the Company stands to benefit as vendors add multi-protocol capabilites. They also benefit from dual-band --- cellular to digital --- products. As customers switch from one system to another, they'll buy new equipment and in some markets upgrade-sales are outpacing new-user sales.
At the end of 1997, there were approximately 210 million cellular and PCS subscribers globally. This number is expected to reach 450 million by the end of 2000 and 700 million by the end of 2003. . . . China currently has 120 million wire line phones, 20 million wireless phones and 60 million pageres. By the end of 2000 those numbers are expected to be 180 million wireline phones, 50 million wireless phones and 100 million pagers. [EBI research.]
Worldwide, there were 107.8 million wireless handsets in 1997, 162.9 million in 1998, and it's projected they'll reach 220 million in 2000. With two synthesizers in every handset, it equates to 440 million VCO's for consumer handsets by the year 2000, not including the other consumer applications.
In the LMDS area revenues should be generated by late Q3. Their components allow two-way transmission for voice, data, and video. (I know this is an emerging market and I'm still trying to get industry projections.)
I asked about analyst coverage and was told there are two who are likely to initiate in the near future, one based in NYC with 2400 retail brokers, and another from the mid-west.
Their principle competitors, Murata and Alps (part of Panasonic), have been competing since 1994 and they've disloged them at Ericsson, Nokia, Motorola, and Lucent. Their competitive advantage is performance, a critical factor in base stations. To meet pricing competition for the higher-volume handset products, the Company has added fully-automated manufacturing facilities that can produce 10 million units a year on a single shift. With five-months lead, they can double that capacity. They anticipated the market by asking their board to approve these facilities in time to have them operational when the contracts began ramping. One customer recently ordered 840,000 handsets and is already talking about a second order. Eight companies have quotes out and it's likely the company will have significant announcements in the next couple quarters.
EBI, a Colorado investment firm, estimates the company's EPS will grow from 0.57 in '99 to 0.67 in '00 and 0.85 in '01 --- figures that don't include the handset market. In the most recent quarter, their earnings were up 30% to $754,000, or 14 cents, versus $579,000, or 11 cents a share a year earlier.
I've been assured they're a profit-driven company, poised to benefit from the emerging handset and LMDS markets in a way that will add to the bottom line.
I may be early, but the risk-reward seems favorable for those with patience.
I welcome further help in understanding this exciting wireless components company.
Pat |
