Summaries from several different reports.
DESK NOTES
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Wireline January 25, 2001
SDL, Inc. BUY
LARGE CAP SDLI Reports Solid Q4:00 Results; Fundamentals On-Track
· SDLI posted Q4:00 EPS of $0.53 vs our and First Call consensus estimate of $0.49 and above our previewed $0.50 0.51; Raising 2001 EPS to $2.55 from $2.50, while maintaining rev at $1B; Es-tablishing 2002 EPS of $3.05 on sales of $1.45B.
· Sales totaled $175.6M, 4.2% above our $168.5M projection (at high end of our previewed $170-175M range), representing 19.9% seq growth; As anticipated, 980nm pump laser/module business drove top-line grwth (up 32% seq); Transmission product segment also strong albeit from a smaller base (up 60% seq).
· Though SDLI’s AWG (PIRI) business was soft in the qtr (seq down in Q) as expected due to weakness at LU (70-80%+ of this unit’s sales), we were encouraged with improved customer di-versity to over 12; View new Raman semiconductor laser (sam-pled in qtr), integrated AWG/VOA, and micro-amplifier as important new products for SDLI in 2001.
· Balance sheet remains strong; Based on our calculations, accounts receivables DSOs increased 6 days sequentially to 58 days from 52 days; Inventory turns were 4.6x from 4.5x in Q3:00.
· Separately, JDSU announced that the SDLI merger completion date has been delayed from end of Jan to end of Feb as DOJ evaluates JDSU’s submitted remedy (we believe could be sale of Zurich facility); We would not view such a sale as negative to JDSU’s competitive position in 980nm chip mkt given SDLI’s best-in-class status in this product line; We continue to assign a high probability to transaction closing generally w/in revised timeframe.
· Our current thesis on SDLI remains favorable based upon a broad set of leading edge products and technologies; Current arbitrage spread in JDSU/SDLI merger transaction is 3.2%; Rate shares BUY.
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Deutsche Banc Alex Brown Fiber Optics Review, January 5, 2001
TECHNOLOGY
What to Expect in 2001
We began 2000 with only a handful of ‘pure-play’ optics companies in the public market and today there are close to 20 ‘pure-plays’. Valuations in 2000 reached astronomical heights as private companies with leading technologies, but no revenues, were acquired for hundreds of millions, if not billions of dollars. The market has since taken several doses of aspirin and valuations, while still high, are beginning to move toward more reasonable levels.
Technologies and start-ups were being acquired last year as companies sought to capture the benefits of optical networking – what we called the “final answer” -- to meet the exploding demand for bandwidth. Technology breakthroughs in terms of reach, capacity and network intelligence were the name of the day. This year we expect to witness the emergence of the next generation, intelligent systems.
These next generation systems will emerge in part due to the integration of advanced technologies acquired in 2000. We are referring to technologies that increase transparency, like MEMS and ‘tunable’ components, that were the subject of keen competition and some hefty acquisition prices last year. This may be the year we begin to see the pay-off for MEMS with companies like Nortel beginning trials of their MEMS based switch. We expect to see the introduction of the first MEMS-based switches -- a significant step in the move toward all-optical networks. Technologies like tunable lasers and tunable filters will continue to be the focus of much activity in 2001, as will high data rate components (>10Gbps) and improved amplifier elements like high gain Raman. With the increasing complexity and sensitivity of many of these next generation components in 2001 we are anticipating further development of the test & measurement sub-sector (including EXFO and Agilent) that began to take shape in 2000.
Shaking out of component companies in 2001
The opportunities to invest in optics increased significantly in 2000 as investors benefited from a hot IPO market. This was especially true for optical components companies – some of which we believe may have come out a
little too early! We feel that investors are becoming more discerning as a result and that we are beginning to see a tiering of the component companies as the space begins to consolidate.
As we look at the companies that are expected to IPO this year we see a marked difference. With the competition heating up in the components space and consolidation beginning to take hold, we believe component companies
with only single product/technology are more likely to be acquired, while IPOs are being reserved for companies with greater prospects for survival – i.e., those with a breadth of technologies/products. We also expect preferential treatment to be given to component vendors that lead the way in integration. We are looking for the introduction of the first optical integrated circuits in 2001-2002 and we believe that AWG technology is currently a key technology in the development of optical integrated circuits.
While various manufacturers have used different materials and processes for AWGs including silica-on-silicon, polymer-on-silicon, and other materials such as Indium Phosphide, our view is that for the time being silica-on-silicon
will dominate as the material of choice.
Changing of the Guard at Systems Vendors
We entered last year with great respect for Lucent and exited wondering what had happened. For systems vendors 2000 was the year in which we finally saw the emergence of next generation networks and the acceleration of the
transition to DWDM. The resulting issues in the SONET market sent tremors through a number of companies and, we believe, led to the infamous shortfall at Nortel. Going into 2001 we expect the continued pressure from carriers to reduce costs/increase revenues will contribute to the transition to Next-Gen/DWDM optical networks. We believe 2001 will expand on the trends we observed in the latter half of 2000; namely deployment of intelligent optical networks that leverage core optical switches to provide intelligent end-to-end services which will favor next-gen vendors like CIENA and Sycamore. In addition, carriers will continue to invest in metro infrastructure – both for switching and transport – to enable useable bandwidth, and value-added services all the way to the desktop!
Beyond 2001
As we look into the crystal ball beyond 2001 we see a great deal of attention focused on MPLS (multi-protocol label switching) and the increased deployment of Gigabit Ethernet services. However, we believe that for the time being carrier networks will continue to function using a combination of ATM at the core and IP at the edge.
. . . Your own wavelength, and . . . 1 Gig to your desktop!
We believe we saw some of the first glimpses into the future of technology in the second half of 2000. In our view, these glimpses foreshadow the development of wavelength services all the way to our individual desktops in the medium term. We observed with some interest early efforts from companies like Lucent, Avanex and Essex to demonstrate systems that can provide up to 4000 channels – enough for every person in a small town to have his or her own wavelength.
While these projects are currently being studied deep within R&D labs, we expect that in the 2002-2003 time frame they will contribute to increasing channel densities and ultimately, in a few years, to the deployment of ‘personal wavelength’ services. These ‘personal wavelengths’ will require a dramatic decline in components costs based on volume manufacturing such as found in the semiconductor sector. These personal wavelengths will provide enormous individual bandwidth but the technical trade-off may be an
upper limit on bandwidth. Thus we are not projecting a cure-all but the possible creation of a tiered market with consumers enjoying a single wavelength that can provide up to 1 Gbps of services while large corporation may require multiple wavelengths, or more expensive to provision
connections that can provide 1+ Tbps of services.
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Deutsche Banc Alex. Brown, SDLI, Inc., January 24, 2001
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SDL, INC. [SDLI] "STRONG BUY"
Reports a Strong Quarter and Reiterates Revenues to Double in 2001
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Date: 01/24/2001 EPS 1999A 2000A 2001E
Price: 232.13 1Q 0.06 0.22 0.55
52-Wk Range: 461 - 117 2Q 0.08 0.33 0.61
Ann Dividend: 0.0 3Q 0.10 0.45 0.67
Ann Div Yld: 0.00% 4Q 0.15 0.53 0.74
Mkt Cap (mm): 21,128 FY(Dec.) 0.39 1.55A 2.57
3-Yr Growth: 50% FY P/EPS NM NM 90.3X
CY EPS NE NE NE
Est. Changed No CY P/EPS NM NM NM
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Industry: TELECOMMUNICATIONS EQUIPMENT
Shares Outstanding(Mil.): 91.02
Return On Equity (1999) : 0.0%
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HIGHLIGHTS:
SDL Inc. reported fourth quarter 2000 results last night followed by an upbeat conference call. We continue to believe that SDL is the best positioned company in the components sector and we reiterate our STRONG BUY rating.
KEY POINTS
1. EXCEEDED BOTH TOP AND BOTTOM LINE ESTIMATES: Revenues of $176 million were up 199% and above our $172 million estimate. Pro forma earnings were $0.53 per share, above our estimate of $0.50 and First Call consensus of $0.49 driven by strong revenues and exceptionally strong margins.
2. STRONG OUTLOOK: Outlook remains strong with Book/Bill comfortably over one. The company guided 1Q EPS higher by $0.02 to $0.03 from the earlier consensus estimate of $0.53. We are maintaining our estimate of $0.55 for 1Q and our 2001 estimate of $2.57.
3. JDS UNIPHASE MERGER: The SDL and JDS Uniphase shareholders' meeting that was to take place January 26th (to vote on the merger) has been postponed until Feb 12. Management expressed confidence in closing the merger with JDS Uniphase in February, having submitted a proposed remedy to the Department of Justice in response to HSR concerns.
4. RECORD MARGINS: Gross margin increased 20bps to an impressive %56.8, above our 56.0% estimate. The improvement in gross margin was due to improved yields in pump laser products and increased manufacturing efficiencies. Strong operating margin of 39.4% was consistent with the prior quarter and above our projection of 38.4%.
5. NEW PRODUCT RAMP: The company continues to release new leading-edge products. SDL plans to introduce over 20 new products at the Optical Fiber Conference (OFC) in March. |
