interesting article:
Personal Capital: Copper Mountain's
precocious profits
By R. Scott Raynovich
Redherring.com, March 08, 2000
Just when you think you've seen one too many eccentric Internet
business models in which an entrepreneur tries to explain how a company
with a negative gross margin can be a good business, along comes Rick
Gilbert, the CEO of Copper Mountain Networks (Nasdaq: CMTN), to restore
sanity to the market.
Mr. Gilbert enjoys the finer points of business life, such as predictable
market growth and profits. He recently discussed Copper Mountain's
growth and the plight of networking company valuations while visiting
Redherring.com's New York City offices.
Mr. Gilbert is indeed in a high-growth business -- digital subscriber line
(DSL) access equipment that allows telecommunications carriers to deploy
broadband services. The market boomed in 1999, but growth isn't
expected to decline any time soon. In his business plan, Mr. Gilbert
believes that DSL lines will grow at better than a 200 percent clip through
the next year. The DSL market currently is moving toward consumers,
after starting in the branch-office business market, and this should
continue to boost the revenues and profits of Copper Mountain, which
sells the DSL access devices known as DSLAMs to the telecommunications
carriers that market the services. Mr. Gilbert said that Copper Mountain
also will enter the multi-tenant marketplace (MTU), in which service
providers wire high-rises for broadband services. Mr. Gilbert projects this
as a $1 billion market by the year 2002.
Despite such growth stories, Mr. Gilbert has been saving some of his
company's pennies for a rainy day. The way he sees it, the more profit he
earns now, the better position he'll be in to survive the Great Internet
Shakeout we've all been waiting for.
THE NEW OLD-FASHIONED
"We've balanced revenues and profitability in an old-fashioned way," says
Mr. Gilbert. "If you look at some of the multiples out there, we're nowhere
near those multiples, and we feel if there's ever a tech correction we'll
come out looking pretty good."
Mr. Gilbert may call his company old-fashioned, but that depends on your
standards. Copper Mountain, after all, isn't exactly a conservative value
stock. Shares are up 825 percent since the IPO in May of 1999, including a
2-for-1 split last December. The company announced fourth-quarter
revenues of $44.6 million for the quarter ending December 31; this
represented an increase of 203 percent over the preceding year's
comparable quarter. The company also announced $6.3 million -- or 11
cents a share -- in profit for the quarter. Profit margins continued to
increase, with gross profit reaching 53.4 percent and operating profit
reaching 22.3 percent.
In short, the profit is old-fashioned, but the growth is not. Mr. Gilbert has
focused on maintaining profitability to accompany the growth. He's also
shunned the high-profile acquisition strategy taken by some of his
competitors, which include Redback Networks (Nasdaq: RBAK), which last
November announced it would pay $4.3 billion in stock for Siara, a
company that had yet to even ship a product.
Mr. Gilbert scoffed at such acquisition strategies, saying that companies
are paying too much for private companies in a market whose valuations
have become sky-high. In general, Mr. Gilbert cited the valuations in the
private equity market as a reason to avoid acquisitions, unless they are
absolutely necessary. Copper Mountain did announce last month that it
would acquire Onprem Networks for 1.3 million shares and options of
Copper Mountain stock, a value of approximately $100 million.
"You can't afford to give away thirty percent of the company for a
company that's not going to have a product for 12 months," says Mr.
Gilbert, when asked why he shuns more high-profile acquisitions, such as
Redback's Siara buyout.
ATTENTION SHOPPERS
What does this all mean for investors? It means that if you are averse to
skyrocketing valuations, but you want to play in the broadband
networking sector, Mr. Gilbert's relatively conservative outlook may
actually make Copper Mountain a value play in the space.
For example, if you compare Copper Mountain to two companies at similar
growth stages, the stock comes out looking pretty cheap. Redback is
arguably Copper Mountain's most comparable cousin in the public market.
Working backward through the last four quarters, Redback announced
revenues of $26.1 million, $20.6 million, $11.1 million, and $6.5 million,
giving the company a grand total of $63 million in revenue over the last
four quarters. As of March 6, Redback was trading at a market cap of
approximately $15 billion, giving it a price-to-sales ratio of 238-to-1.
Likewise, Juniper Networks (Nasdaq: JNPR) has logged $29.6 million,
$17.6 million, $10 million, and $3.8 million over the last four quarters, for a
total of $61 million. With a market capitalization of $41 billion, Juniper is
trading at an eye-popping price-to-sales ratio of 672-to-1.
Copper Mountain, on the other hand, has logged $112.7 million in
revenues over the last four quarters, and it's trading at a market cap of
$4.5 billion. This gives it a relatively modest price-to-sales ratio of 40-to-1,
even though its growth curve is similar to both Juniper's and Redback's. In
the world of high-valuation networking stocks, this is the equivalent of a
blue-plate special. |
