PROX-detailed comments from Dain Rauscher this afternoon
DAIN: PROX: SB-AGG; Intermec To Support Lucent Product; Anticipating Minimal
Impact
04:47pm EDT 7-Oct-99 Dain Rauscher Wessels (Searle, Scott 612-313-1219)
PROX
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
PROXIM, INC.
NASDAQ: PROX
STRONG BUY-AGGRESSIVE
PRICE TARGET: $69
October 7, 1999
Price: $46.50
52-Week Range: $61-$11
Year End: December
Fiscal Year EPS P/E
1998A $0.47 98.6x
1999E $0.66 70.0x
2000E $0.92 50.4x
Tr. 12 ROE: 8.31%
3-Yr. EPS Gr: 40%-plus
Shares Out: 12.7 million
Book Value: $8.63
Market Cap: $590.4 million
WIRELESS COMMUNICATIONS
Scott W. Searle, CFA
ssearle@dainrauscher.com
(612) 313-1219
Michael R. Brown
mbrown@dainrauscher.com
(612) 313-1211
* Intermec, a 30% Proxim customer, is anticipated to support Lucent's 11
Mbps
wireless LAN product. We view this as a perception problem, not a
fundamental
issue as Intermec's customer base is targeted at the logistics chain, which
requires lower bandwidth solutions.
* Proxim's Intermec business has grown 25%-plus in 1H1999, business demand
remains strong, and our 2000 estimates for Intermec growth are conservative.
* An NPRM for wideband-FH product is likely to be approved by mid 1Q00 at
the
latest. We anticipate Proxim to have a wideband hopper (6-10 Mbps) available
by
the end of 2Q99.
* Recent weakness creates tremendous buying opportunity. We are maintaining
our
Strong Buy-Aggressive rating with a $69 price target.
Perception And Reality: Intermec To Support Lucent Product,
Anticipating Minimal Impact To Proxim;
Data Item: We believe that Intermec, a 30%-plus Proxim customer, will
announce
their support of Lucent's 11 Mbps wireless LAN solution. Intial shipments
are
anticipated before year end.
We believe this has created a near-term perception problem related to 11
Mbps
solutions encroaching on traditional vertical market applications. However,
we
believe that fundamentally Proxim's core vertical business remains very
strong
as indicated by customer checks and anticipated favorable 3Q99 results and
4Q99
visibility. We anticipate Proxim's entry into the high speed marketplace by
late
2Q00 with wideband FH product (6-10 Mbps) and a HyperLAN product (23 Mbps)
that
should position the company to compete with present high-speed solutions. In
addition, we believe visibility related to the company's low-cost consumer
product (symphony and HomeRF) will accelerate via incremental OEM and retail
distribution partners in the near term. We would take advantage of present
stock
pressure to add or start positions in this exciting wireless LAN player. We
maintain our strong Buy-Aggressive rating with a 12- to 18-month price
target of
$69 or roughly 75x our likely conservative $0.92 2000 EPS estimate.
We Note The Following Regarding Intermec And The Industry:
* Intermec Demand For Proxim's Rangelan2 Solution Remains Strong: Intermec's
current Proxim OEM business is strong, and Intermec expects this trend to
continue in the near future. However, Intermec is also seeing considerable
interest from both its enterprise and vertical application customers in
standard
high speed solutions and expect that the Lucent radio card will gain market
acceptance upon commercial availability. These are incremental market
opportunities for Intermec who has traditionally participated in vertical
markets along the "logistics chain". We do not expect it to have a
meaningful
cannibalizing impact
We also note that LXE, another Proxim OEM, is seeing continued demand for
their
current Proxim OEM products and, consistent with Intermec, considerable
interest
in a high speed product. They will also likely OEM the 11 Mbps solution from
Lucent. Both companies expect that this product will start shipping this
month,
but we are somewhat skeptical given that Lucent has pushed out availability
of
its 11 Mbps solution included in Apple's iBook. At the present time, it is
unclear if this was due specifically to Lucent or Apple issues.
* Intermec's Past Relationship With Lucent Has Not Impacted Proxim Results:
A
prior relationship between Intermec and Lucent (announced October 1997)
placed
pressure on Proxim's stock as Lucent's 1-2 Mbps DS solution was anticipated
to
cannibalize revenues. Since that time, Proxim's business with Intermec has
grown
50% in 1998 and 40% in 1H99. Our expectations for 2000 reflect roughly 10%
growth.
* Intermec's Traditional Customer Base Should Not Require High Speed In The
Near-Term: While we concede that an 11 Mbps offers higher speed
opportunities
relative to a comparable (in terms of speed) products in 1997, we believe
that
any high speed migration would likely be slow due to: 1) the large installed
base of RangeLAN2 products, 2) the higher costs, and most importantly 3)
that
the Intermec customer base targets logistics chain applications
(manufacturing,
warehousing, and inventory management) which require lower bandwidth
solutions.
We believe applications in healthcare, education and corporate enterprises
will
target high-speed solutions. We note that HBO (a leading vendor of
healthcare
information services) is firmly committed to Proxim product line and will
likely
support a wideband FH solution upon commercial introduction.
NPRM Approval Is On The Horizon: While competitors have already introduced
high-speed (11 Mbps) solutions, we expect that the FCC will approve the
outstanding Notice of Proposed Rulemaking (NPRM) regarding wideband
frequency
hoppers (FH). We anticipate this process to be completed by sometime early
next
year, at the latest. We anticipate Proxim to quickly leverage this
opportunity
as they have publicly committed to wideband-FH development (2Q99 EPS call).
We
expect to see the fruits of this development with commercial product
introduction by the end of 2Q00. In addition, Proxim expects to have a
HiperLAN
solution (a European standard) available by mid 2000. This solution, while
more
expensive, will be capable of delivering 23 Mbps.
So, What Does It Mean To The Numbers? Overall, our model reflects 2000
revenue
growth of 41%. Net of the low-cost consumer (Symphony and soon to be HomeRF)
products, we project revenues to grow 18%. Intermec, Proxim's largest
customer,
is expected to trend down from 30%-plus of revenues in 1999 to 25% of
revenues
in 2000 as we project 10% growth from this customer. This is significantly
less
than the estimated 25%-plus and 50% growth experienced in 1H1999 and 1998,
respectively. We believe this 10% growth fully accounts for ongoing ASP
declines
as well as potential market share shifts, which remain unclear at the
present
time. In the rest of the "core" business we anticipate slightly in excess of
20%
growth. This reflects growth in Japan (10% of 2Q99 revenues and coming off a
depressed 1998 revenue base), the U.S. and European channel (which grew an
estimated 35%-40% in 1H1999), and other key customers such as LXE and HBO
(which
anticipates a Y2K rebound in their business beginning in 1Q00).
We believe this revenue expectation remains conservative given the expected
introduction (mid 2000) of wideband-FH (6-10 Mbps) and HyperLAN (23 Mbps)
products. Furthermore, emerging customers/opportunities with mobile wireless
LAN
service providers such as MobileStar could provide further upside. Finally,
we
believe that our revenue expectations for Symphony/HomeRF product ($22
million
in 2000) are conservative.
Stock Opinion: At present levels, shares of PROX are extremely attractive.
Trading at roughly 43x our conservative 2000 EPS estimate of $0.92, shares
of
PROX are sorely discounted relative to other industry leaders in explosive
market segments, i.e. home networking, broadband access, and even IP royalty
models. These companies have historically traded up to, and in excess of,
75x-80x calendar 2000 numbers. Our 12- to 18-month $69 price target assumes
a
multiple of 75x our likely conservative 2000 EPS estimate of $0.92. In
addition,
we note that the company is highly leveraged to the success of the Symphony
product line with each incremental $1 million in revenues (roughly 3,000 to
5,000 homes) translating to $0.01 in EPS. We believe that as the negative
perception issues dissipate, investors will focus on anticipated solid 3Q99
results and 4Q99 visibility, strength in the core business, emerging
high-speed
opportunities, and the company's leadership position in the wireless home
networking market. We maintain our Strong Buy-Aggressive rating.
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