THREAD ---Lucent Technologies Inc.
Dow Jones Newswires -- July 2, 1999
DJ System Upgrades Improve Cable Equipment Suppliers' 2Q
By Christina Cheddar
NEW YORK (Dow Jones)--Cable equipment providers are poised to benefit from a strong cable system upgrade cycle in the second quarter and beyond.
"In the seven years I've been in the business, there hasn't been this level of certainty in the industry," said CIBC World Markets analyst James Jungjohann.
Jungjohann believes the equipment providers in the network transmission portion of the business can't ship their products fast enough to meet the demand for the current upgrades.
Analysts agree AT&T Corp.'s (T) acquisition of Tele-Communication Inc. in March was the catalyst behind the move to two-way communications capability and a subsequent flurry of acquisition activity as both telecommunications companies and Internet service providers stake their claims in the evolving cable industry.
Behind the consolidation is the potential for cable lines to create new revenue streams for the cable operators by delivering new services such as high-speed Internet, digital video, video-on-demand and Internet telephony.
Some had feared the merger madness would result in a pause in cable systems upgrades, but no such slowdown has occurred so far, said Donaldson Lufkin & Jenrette Securities Corp. analyst Eric Buck.
"The big guys aren't slowing down," he said. "They can't afford to."
Josephthal & Co. analyst Lawrence M. Harris sees clustering, or acquisitions within a regional area, as the next merger trend.
Comcast Corp. (CMCSA) of Philadelphia signaled clustering behavior when it pulled out of its deal with MediaOne Group Inc. (UMG) in early May after AT&T topped its bid for the Englewood, Colo., broadband communications company, said Harris. Much of Comcast's holdings are in the Northeast.
"When we had clustering going on years ago, it resulted in a slowdown in spending (on cable equipment)," Harris said. He doesn't expect that to happen this time, though. "It is becoming increasingly apparent that these new services are becoming profitable," he said.
Sector Seen Drawing Big New Entrants
Credit Suisse First Boston Corp. analyst James Parmelee expects bigger telecommunications technology players to begin to mine opportunities within the cable equipment sector.
Lucent Technologies Inc. (LU), Motorola Corp. (MOT) and L.M. Ericsson Telephone Co. (ERICY) were at the National Cable Television Association's annual convention in June. "Their presence lends legitimacy to the attractiveness of the (cable equipment) market," said Parmelee. "At the same time, it indicates there will be greater competition in the future."
Lucent and Motorola have agreed to jointly develop and market Internet protocol telephony and data via cable. Ericsson also has plans to tap the Internet telephony market.
Antec Corp. (ANTC), of Rolling Meadows, Ill., is growing because of its 19% stake in a cable telephony venture with Nortel Networks Corp. (NT), Buck said. Through the Arris Interactive venture, Antec is AT&T's sole supplier of cable telephony equipment, but this could change since the deal isn't exclusive.
Buck expects AT&T to spend $900 million on cable telephony in 2000 and about $6 billion over the next several years as it penetrates the sector.
"Antec is building up a huge footprint," he said. "Antec has the business to lose."
Buck sees Antec meeting First Call Corp.'s second-quarter estimate of 19 cents a share, up from 10 cents a year earlier.
The switch to digital set-top boxes, which allow cable operators to immediately offer customers new services and more channels, is one of the fastest moving forces in the equipment sector.
By the third quarter, digital boxes should deliver Internet-related services such as e-mail, Web browsing, e-commerce and targeted advertising.
Sales Of Scientific-Atlanta Boxes May Beat Views
The leaders in the set-top box sector are General Instrument Corp. (GIC), Horsham, Pa., and Scientific-Atlanta Inc. (SFA), Atlanta.
Jungjohann said market acceptance of Scientific-Atlanta's Explorer 2000 digital set-up boxes may result in an upside surprise in the number of boxes shipped. "The Street is looking for 170,000 units of the digital set-top boxes," he said. "They could ship 200,000 units."
The analyst said he is comfortable with First Call's projection of 28 cents a share for the fiscal fourth quarter ended June 30, compared with 25 cents before items a year earlier.
Jungjohann expects the company's fourth-quarter network transmission product sales to reach $130 million. For fourth quarter 1998, Scientific-Atlanta posted $303.7 million in total sales.
The company is aggressively shipping set-top boxes to Time Warner Inc.'s (TWX) Time Warner Cable unit, Jungjohann said, and he expects Time Warner to announce the nationwide deployment of the set-top boxes this summer. The New York media and entertainment company is currently using the digital boxes in limited areas.
Several analysts expect General Instrument Corp. (GIC) to ship 800,000 units of its digital set-top boxes in the second quarter, up from the 420,000 units in 1998.
Lehman Brothers Inc. analyst Steven Levy expects General Instrument's second-quarter earnings to rise to 22 cents a share on sales of $522 million from 19 cents on $488.5 million a year ago. His earnings estimate matches the First Call consensus view.
Lehman Brothers Inc.'s equity research group picked General Instrument as one of its 10 Uncommon Values stocks Thursday.
Commscope Inc. (CTV) is the "sleeper" among the group, said Jungjohann. "The Street perceives them like a Chevrolet," he said, "but they are running like a Ferrari."
The Hickory, N.C., company controls about 60% of the coaxial cable and supply market, according to Jungjohann. He expects demand for cable to remain strong because as the networks switch over to two-way communications, miles of cable will need to be replaced.
First Call's second-quarter consensus estimate for Commscope is 28 cents a share, up from 17 cents a year ago, but Harris said he wouldn't be surprised if the company reported earnings of 29 cents or 30 cents.
Jungjohann expects Harmonic Lightwaves Inc. (HLIT), a maker of fiber-optic transmission systems, to top First Call's second-quarter estimate of 12 cents a share by 2 cents. The Sunnyvale, Calif., company lost 25 cents a year ago.
Despite positive domestic trends, general economic conditions overseas meant flat international sales in the latest quarter at both Antec and Scientific-Atlanta, said Harris. At General Instrument, however, he sees second-quarter international sales lifting slightly to $70 million from $69 million.
While potential overseas demand from system upgrades and expansions is huge, analysts don't expect to realize it until economic conditions stabilize abroad.
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