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Technology Stocks : Stratex Networks, Inc. (STXN) -- Ignore unavailable to you. Want to Upgrade?

To: akmike who wrote (1246)	1/11/2001 1:17:11 PM
From: Rob Preuss	Read Replies (1) \| Respond to of 1762

Hi Mike, Congrats on buying into STXN. If you bought a few days ago, you got a great price at a great time. As you know doubt know, STXN is up in each of the last couple of days (although that rise has been on somewhat low volume) and I expect to see further price increases as we approach the earnings release on 17 January 2001. STXN is the market leader in the fixed wireless telecom equipment sector because its got the best and broadest line of products to serve this market. Competitors such as PCOM, NTRO, ADAP and others have been losing money for some time while STXN has been showing strong and growing EPS... those competitors are also suffering now as customers (in the telecomm services business) have recently cut back orders. I think these cutbacks are temporary and that they do not affect STXN very much because STXN has a much more broad (global) customer base and product line than these competitors. Still, STXN has had all-time record orders in each of the last two quarters and while I expect to see reasonably strong orders again this quarter... I'd be (pleasantly) shocked to see STXN report all-time record orders again. In short, I think STXN has been unfairly tarred with the same brush as its competitors... someday, I expect that investors will see how much better STXN is and award STXN the much higher P/E ratio that it deserves. Remark: In today's news, WMUX just canceled its deal to acquire ADAP which recently warned about plunging revenues. ADAP is down on the news while WMUX is up. Yes, Altium is enjoying strong sales. Its the top dog among 155 Mbps fixed wireless products and it offers unmatched spectral efficiency. Furthermore, STXN has the manufacturing capacity (and parts availability) to meet growing market demand. I don't know what gross margin STXN gets on the Altium product line, but I imagine its over 40%. As you note, the overall company gross margin is not terribly high. Two quarters ago, STXN got hit hard because it did not meet the street's revenue expectations... however, they did beat the street's EPS expectations (while showing record orders) because their gross margins were quite high that quarter. The situation arose because their sales of high- capacity and high-margin Altium products were strong while sales of lower-margin and lower-capacity XP-4 (and older Spectrum II) products were weak. My understanding of what happened is this: they were having difficulty getting all the parts they needed to meet demand, so they funneled the parts they could get to their high-margin Altium products and told customers they would have to wait for the lower-capacity products. Although STXN's share price took a big hit at the time, this parts "shortage" turned out to be a 1-quarter phenomenon; they now seem to have this problem under control. These lower-capacity products have more serious competition in the market... so STXN sees downward pressure on prices and margins for these lower-capacity products... but these lower-capacity products still make up a large portion of STXN's overall sales revenue and, as a result, they tend to drag down the overall company gross margin. At that same conference call two quarters ago, STXN said that their high gross margins for that quarter would return to historical levels in the next quarter (which they did) as the "mix" of product sales returned to normal; but they also said that they expect these margins to grow over time (albeit slowly). Given their product mix, I'm actually fairly pleased to see the company gross margins at these levels and I'm confident that they will improve steadily. Its easy for a company with one hot niche product to sport very high gross margins (since their company-wide gross margin is their product gross margin), but STXN has a broad product line which includes older lower-capacity and lower-margin products as well as newer high-capcity and high-margin products. This broad product line makes them more attractive to their customers as it provides those customers with more of a "one stop shopping" experience. Also, by competing vigorously in the lower-capacity market, STXN takes market share (and cash) away from competitors who would like to try and leapfrog past STXN. The nature of this market is that new products are being introduced all the time. These new products offer new advantages, which makes them popular with customers and allows the maker to charge higher gross margins. Competitors are usually close behind with competing products that offer similar advantages... as those competing products appear, the product price and gross margin comes under pressure. Thus its always important for a company like STXN to keep introducing new products with new advantages. What is sometimes less obvious is that its equally important to get the product features right, and to introduce the product at the right time, to meet market demand... introducing a new product that has the wrong features, or with the right features but too early (before market demand develops), squanders company resources while allowing competitors to "get it right" and make all the sales. STXN was once criticized by investors for not bringing out P-MP products a year or more ago. The P-MP story was one that investors loved and companies like PCOM and NTRO enjoyed high share prices as a result. [NTRO was smart enough to cash in on their high share price through a secondary offering.] But they were too early. Customers tried their products and found problems... and these early P-MP products offered relatively low capacity... so the sales volume has been slow to grow. In the interim, STXN concentrated on high-capacity with high spectral efficiency by bringing out its Altium product line... its still P-P so its not quite as sexy, but it was there at the right time to meet market demand and sales volume has continued to grow rapidly. In short, STXN correctly judged where the "sweet spot" for demand would be in the fixed wireless equipment market and they were there to meet it. STXN will introduce their new ultra-high capacity "Millennium" product line in late March 2001. This will again offer high spectral efficiency in a P-P product and it will meet their customer's needs as those customers begin their network build-out for new 3G technology... starting in the latter half of 2001 and continuing into 2002. Again, STXN is poised to "catch the wave" in demand and to hit that "sweet spot" just right. In the interim, STXN has not ignored the P-MP market. They have significant investments (and a marketing agreement) in privately held Ensemble Communications whose P-MP products have recently been beating competitors like NTRO. [When I say "beating", I don't mean by winning blue ribbons from some magazine's product review committee, I mean making sales to big customers like Lucent.] But these are still lower-capacity P-MP products like those from PCOM and NTRO. In their R&D labs, STXN is working on high-capacity P-MP products... they mentioned this when they gave a timetable for there Millennium product introductions during a conference call about a year ago - more recently, their head of marketing and sales would not talk to me about this as they did not want to give their competition a heads up. I'm not certain exactly what they've got up their sleeves... it could be an acquisition of Ensemble (for lower-capacity and lower-margin P-MP products that compete with offerings by NTRO, PCOM, and others) together with a high-capacity P-MP version of their new Millennium products... but whatever it is, I trust STXN's sharp management to make the right moves at the right time. Another thing that should not be lost in all this is STXN's development of their proprietary "velocity" chip set. This is the chip set that is behind the Millennium product line. What this chip set means to STXN is that their products will not only enjoy a technological advantage, they will also enjoy a higher-degree of integration (which means lower manufacturing cost)... that, in-turn, means higher gross margins and a better ability to compete (when needed) on price... Well, I've got to go now, welcome to the thread. Rob