BTAB on DMIC:
DMIC: CURRENT QUARTER-ON-TRACK--INCREASING DEMAND FOR KEY NEW
PRODUCTS--UPGRADING RATING TO "STRONG BUY"
Bankers Trust Research/BT Alex. Brown Research
Brian Modoff,Ian Toll
May 18, 1999
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DIGITAL MICROWAVE CORPORATION [DMIC] "STRONG BUY"
Current Quarter On-Track--Increasing Demand For Key New Products--
Upgrading
Rating To "Strong Buy"
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Date: 05/17/1999 EPS 1998A 1999A 2000E
Price: 13.0 1Q 0.08 (0.14) 0.00
52-Wk Range: 14 - 2 2Q 0.19 (0.18) 0.03
Ann Dividend: 0.0 3Q 0.17 (0.11) 0.07
Ann Div Yld: 0.00% 4Q 0.16 (0.04) 0.10
Mkt Cap (mm): 803 FY(Mar.) 0.60 (0.47)A 0.20
3-Yr Growth: 20% FY P/EPS 21.7X NM 65.X
CY EPS (0.27) 0.06 0.04
Est. Changed No CY P/EPS NM NM NM
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HIGHLIGHTS:
HIGHLIGHTS:
--Yesterday, we visited Digital Microwave to receive an update on the
current quarter and discuss new product developments. We believe that
the current quarter is on-track to meet or exceed our current revenue
and EPS forecast of $64.6 million and $0.00.
--Recent channel checks with key component suppliers indicate a continued
firming of orders from DMIC and its sub-system vendors.
--At the beginning of the current quarter, management forecasted Altium
revenues of $4-$6 million. Current demand is tracking above the low-end
of that forecast (we are forecasting 1Q revenues of $5.9 million).
--The company recently completed a significant engineering design effort
that should improve the company's response time for delivering Altium
radios for new frequencies and increase volume manufacturing
efficiencies.
--Shipments of the company's core narrowband radios have been linear
during the current quarter. Deliveries of the Spectrum II radio are
tracking around our expectations, while orders for the XP4 are ramping
nicely.
--Given the improving order flow, pipeline of new product introductions,
early strong interest in the Altium product line and potential for
positive forward earnings adjustments, we are upgrading our investment
rating on the shares to "strong buy"
--We are reaffirming a 12-month price target of $20 (40x our FY01 EPS
estimate).
DETAILS:
DETAILS:
Yesterday, we visited Digital Microwave's headquarters to receive an update
on the current quarter and discuss new product developments. We believe
that the current quarter is on-track to meet or exceed our current revenue
and earnings forecasts of $64.6 million and $0.00. DMIC has clearly made
significant progress in cutting costs, integrating the Innova product line,
and rolling out new products. Further, recent channel checks with key
component suppliers indicate a continued firming of orders from DMIC and
its sub-system vendors.
Given the improving order flow, pipeline of new product introductions,
early strong interest in the Altium product line and potential for positive
forward earnings adjustments, we are upgrading our investment rating on the
shares to "strong buy" and reaffirming a 12-month price target of $20 (40x
our FY01 EPS estimate).
BROADBAND
Altium
The Altium radio is a very spectral efficient broadband radio targeted for
high bandwidth applications such as fiber extension/replacement and
backhaul for wireless networks including LMDS. The spectral efficiency is
derived from 128 QAM modulation which delivers 155 Mbps using only 28 Mhz
of spectrum. This spectral efficiency is very important for carriers with
limited spectrum capacity or those building high capacity networks in dense
environments. We believe that this product addresses a key emerging market
for telecommunications - providing bandwidth for the bottlenecked
metropolitan area networks (MANs).
At the beginning of the current quarter, management forecasted Altium
revenues of $4-$6 million. Current demand is tracking above the low-end of
that forecast (we are forecasting 1Q revenues of $5.9 million). Further,
the company is shipping significantly more radios out for trials than will
be recognized as revenue in the quarter. DMIC began shipping the 7 and 8
GHz versions in last quarter and is seeing demand for these products in
Asia and Latin America. DMIC has recently commenced 18 and 23 GHz version
shipments with the 26 GHz due out shortly. These higher frequency products
are targeted for European markets. The company plans to ship radios for
four more frequency bands over the Q2-Q300 timeframe.
The company recently completed a significant engineering design effort that
should improve the company's response time for delivering Altium radios for
new frequencies and increase volume manufacturing efficiencies.
Currently the DMIC salesforce is pursuing several specific opportunities
that could amount to around $70 million in Altium sales ($30 million in the
Americas, $25 million in Europe, $15 million in Asia). About half of these
are for mobile wireless capacity upgrades and new systems, about 35% to
PTTs for fixed access networks, with the remainder LMDS and data networks.
We are forecasting Altium revenues of $44.7 million in FY00. We believe
there is upside potential to this forecast if certain large opportunities
receive funding.
NARROWBAND
Spectrum II & XP-4
In general, shipments of the company's core narrowband radios have been
linear during the current quarter. Deliveries of the Spectrum II radio are
tracking around our expectations (flat revenues sequentially), while orders
for the XP4 are ramping nicely. We are forecasting $24.4 million in
Spectrum II revenues and $9.7 million in XP-4 revenues.
DART
The DART is shipping in volume, with applications including microcell
interconnect, single T1/E1 lines, rural cellular backhaul, and low-cost
temporary installations. Recently, the company completed an international
E1 version, the 23 GHz frequency band radio, and have additional bands
under development. The sales force is currently focused on Altium orders
and converting current customers from the Spectrum II to the XP-4.
Consequently, DART revenues are tracking slightly below our forecast of
$2.6 million. However, there are some significant potential orders in the
pipeline (ISP and microcell backhaul)that, if realized, would cause
revenues from this product line to exceed our forecast.
LONG HAUL
DXR-700
The DXR-700 shipped a 7GHz in the 4Q, and is now available in frequencies
from 3GHz to 8GHz. This product is just starting to ramp. In 1Q, we are
forecasting revenues of $10.3 million from the long-haul division. We are
comfortable with this forecast.
REGIONAL COMMENTS
By geography, the company is seeing strength in multiple markets. China is
strong and growing. In the remainder of Asia, the company is seeing some
revived order flow from the Southeast Asian markets that all but
disappeared last year. The company is seeing strong and diverse strength
in European markets. In Latin America, the company has seen very strong
demand levels, but management is more cautious on the market because of
economic concerns and the risk that customers would not secure needed
financing.
CONCLUSION
DMIC has clearly made significant progress in cutting costs, integrating
the Innova product line, and rolling out new products. Given the improving
order flow, pipeline of new product introductions, early strong interest in
the Altium product line and potential for positive forward earnings
adjustments, we are upgrading our investment rating on the shares to
"Strong Buy" and reaffirming our 12-month price target of $20 (40x our FY01
EPS estimate). |
