I'm going by Nortel's comments. These include: 1) potential pricing pressure in the long-haul DWDM market, especially as some vendors try to regain lost share, 2) long-haul DWDM inventory builds at customers, 3) slowing
of carrier CapEx, and the financial health of some competitive carriers. Nt did say they're working off there long-haul inventory DWDM could take to complete in 4 mos. something to watch for.
Gst for infrastructure software comparisions would you consider Muse for management of multiple elements underlying an enterprise's information technology over the infrastructure and Cien's CoreDirector and metro products?
On
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./IT Software/ Internet & eBusiness
STRONG BUY
MID CAP
Micromuse, Inc. (MUSE)
Q2:FY01 Results Confirm Momentum, Conservative Guidance is Prudent
Summary
MUSE reported better than expected Q2:FY01 results of $59.3 million and $0.12
versus our $54.3 million and $0.11 estimates, with $0.01 of upside due to
lower share count. Street consensus EPS was $0.11.
The Company's indirect distribution channel (OEMs, SIs, resellers) made a
more significant contribution in Q2:FY01 and represented 44% of total revenue
with 115 partners contributing, compared with 34% and 103 in the prior quarter..
Q2:FY01 saw MUSE generate considerably higher contribution from new products
that are sold as add-ons to the core Netcool/OMNIbus platform.
After solidly better than expected Q2:FY01 results, we are raising our FY01
estimates to $237 million and $0.46 (from $229 million and $0.45) and keeping
our conservative FY02 estimates unchanged at $315 million and $0.60.
Reiterating STRONG BUY and maintaining our 12-month price target of $44 (1.5
PEG using 60% growth rate and CY01 EPS of $0.50).
Price Target Mkt.Value 52-Week
4/18/01 (12mo.) Div. Yield (MM) Price Range
USD 50.23 44 - - 2,541 $108.38-23.20
Annual Prev. Abs. Rel. EBITDA/
EPS EPS P/E P/E Share
FY 9/02E $0.60 73.9 NA
FY 9/01E 0.46 100.6 NA
FY 9/00A 0.19 264.4 NA
Dec Mar Jun Sep FY End
2002E 0.14 0.14 0.15 0.16 Sep. 30
2001E 0.10A 0.12A 0.12 0.13
2000A 0.03 0.04 0.05 0.07
ROIC NA
Total Debt (03/00) $0
Book Value/Share (12/00) $2.06
WACC NA
Debt/Total Capital NA
Common Shares 79.3 mil.
EP Trend2 NA
Est. 5-Yr EPS Growth 60%
Est. 5-Yr. Div. Growth NA
1On 4/18/01 DJIA closed at 10615.83 and S&P 500 at 1238.16.
2Economic profit trend.
Micromuse is the leading supplier of service level management (SLM) software
. The company's Netcool product suite of applications is used to collect,
correlate, monitor and manage large volumes of network elements and map these
elements to the business services they impact.
Investment Summary
Q2:FY01 Ahead of Estimates
MUSE reported better than expected Q2:FY01 results of $59.3 million and $0.12
versus our $54.3 million and $0.11 estimates, with one penny of upside due to
lower share count. Street consensus EPS was $0.11. Top line represented 119
% YoY growth and 19% sequential growth. License revenue of $43.2 million
beat our $39.6 million estimate and reflected 19% sequential growth or 114%
on YoY basis. License revenue remained steady at 73% of total revenue.
Other income of roughly $1.6 million was down sequentially as a result of
lower interest rates, more conservative cash management policy and absence of
one-time gains.
Strong Service Provider Contribution
Service providers grew to represent 82% of total revenue (or $49 million) in
Q2:FY01 compared with 75% (or $37.4 million) in Q1:FY01 and 82% (or $33.7
million) in Q4:FY00. On a sequential basis, total service provider revenue
grew 11% compared with corresponding sequential revenue and license revenue
growth of 19%. Management firmly believes that despite the downturn in total
service provider budgets, this base still represents the largest addressable
market for MUSE products. Noteworthy is the fact that 22 of the top 25
global telcos are currently Netcool customers and that associated penetration
rates remain in the high single-digit to low double-digit range as a
percentage of the overall addressable opportunity. Service provider revenue
by vertical ranked as follows: ISPs (26%), managed data (17%), wireless (14
%), cable (8%), DSL (5%), new entrant voice (5%), other voice (4%) and optical
(3%).
Acceleration of Channel Contribution
The Company's indirect distribution channel (OEMs, SIs, resellers) made a
more significant contribution in Q2:FY01 and represented 44% of total revenue
with 115 partners contributing, compared with 34% and 103 in the prior quarter
. We believe this channel represents a key strategic initiative for MUSE as
the Company seeks to extend its market coverage and broaden the base of
endorsement vehicles that effectively reinforce Netcool's de facto standard
position in the marketplace.
Cisco & Partners Ramping
Several of MUSE' largest partners appear to be gaining traction as evidenced
by Cisco, which now accounts for roughly 10% of total revenue, has trained
over 1,000 people on Cisco InfoCenter (Cisco-branded version of Netcool) and
already has 175 InfoCenter customers. SUNW, which became a global reseller
of Netcool in the March quarter, is actively training people and MUSE has
already recognized several orders that SUNW has closed in the Far East and
Europe. We believe similar success is playing out with the Ericsson
partnership which has generated slightly less than $1 million in revenue for
MUSE to date.
Global Revenue Diversity
Geographically, Americas continued to represent the largest region at 61% of
total revenue followed by Europe at 31% and Asia-Pacific at 8%. These
results compared against a corresponding distribution of 66%, 30% and 4% in
the December quarter. Continued strength in the Americas contribution,
despite the relatively dramatic slowdown in telco and service provider
spending, is indicative of the re-prioritization of spending taking place
within MUSE's target customer base. European business continues to center
around penetration of nationalized telcos and service providers in European
countries that enjoy a virtual monopoly position and are aggressively adding
new services to their respective intalled bases. Asia-Pacific delivered
solid results with solid repeat business in Japan from NTT and Japan Telecom
as well as more than 30 customers in the broader Asia-Pacific region, which
is also being covered by Cisco and Sun. The Company has now amassed a customer
base spanning 45 countries globally.
New Customer Growth Strong
MUSE added 107 new customers in the quarter - 3rd consecutive quarter of 100+
new customers - bringing the total customer base to 1,119 while at the same
time deriving the majority of revenue from existing customers - 66% of total
revenue in Q2:FY01 vs. 66% in Q1:FY01 and 62% in Q4:FY00. The Company closed
follow-on orders from Deutsche Telekom and British Telecom while closing new
deals with Telia (Sweden) and KPN (Netherlands). In the broadband area, MUSE
generated revenue from Telestra, Shanghai Cable, Diveo, Belgacom, KPN DSL and
Scanova DSL. In the cable area, MUSE added Cheetah (leading cable element
mangement vendor in U.S.) as well as added 31 wireless and wireline customers
in Q2:FY01 including Nextel, Omnitel, and MTN (South Africa). Several
Internet infrastructure vendors signed on as Netcool customers during the
quarter including Grickcomm, Orbitz, Aimnet, Inet (Italy's largest ISP) and E*
Trade. Enterprise revenue for Q2:FY01 was 18% of total revenue (or $10.7
million) compared against 25% (or $12.4 million) in the prior quarter. As
has been the case in prior quarters, enterprise revenue has varied by quarter
, more as a consequence of emphasis on the service provider market by the
sales force than intentional neglect for enterprise customers. March
quarter ASPs remain within the previous quarter range of $250K-$400K but are
beginning to creep toward the high end of the range as new products
experience a rising attach rate to the flagship Netcool/OMNIbus product.
Perfect Win Rate
The Netcool/OMNIbus product family enjoyed another strong quarter in terms of
competitive win rate as management indicated there were zero head-to-head
losses against HP, BMC or Agilent/OSI. These results appear even better than
last quarter when MUSE had only 4 head-to-head losses out of 146 direct
engagements. The Company's secret for success remains centered around
technical leadership, reference base, rapid ROI and customer satisfaction.
Influx of Sales Resumes
As a result of its well-documented success, MUSE is being approached by an
increasingly well qualified pool of sales representatives eager to join the
Company from highly relevant vendors in the hardware and systems management
areas. Although management is increasingly sensitive to adding heads in
proportion to productivity rates as well as sales capacity requirements, end
customer demand is enabling MUSE to add heads at a consistently rapid pace.
The Company also has almost 500 companies interested in joining the Netcool
Developers Alliance, up from 400 companies at the end of the December quarter
. We continue to believe this alliance is reinforcing Netcool's market
leadership and regard this program as facilitating broader interoperability
of multi-vendor equipment without any related expenses being incurred by the
Company.
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./IT Software/ Internet & eBusiness
STRONG BUY
MID CAP
Micromuse, Inc. (MUSE)
Q2:FY01 Results Confirm Momentum, Conservative Guidance is Prudent
More Margin Expansion
MUSE delivered on the margin expansion story with record-high operating
margins of 19.2%, up 160 basis points sequentially. Total gross margins of 84
.2% were down modestly from 85.4% in the prior quarter as maintenance margins
returned to normal levels. The Company's revenue mix remained essentially
unchanged at 73% license and 27% maintenance and service and license gross
margins of 94.5% were consistent with prior quarters. Going forward, we
expect management to deliver more gradual operating margin expansion and
believe 60-90 basis point sequential improvement is a more realistic planning
assumption, although likely lower than actual results. Given MUSE' focus on
license revenue, we believe there's nothing preventing the Company from
approaching operating margins in the 30% range over the medium-long term. R&D
was 15.2% of total revenue (down 80 basis points sequentially), S&M was lower
by 200 basis points sequentially to 41.4% and G&A of 8.3% was essentially
unchanged from prior quarters.
Balance Sheet Solid
MUSE' balance sheet revealed continued strength with higher cash, slightly
higher DSOs and deferred revenue growing sequentially at the same rate as
license revenue. The Company completed Q2:FY01 with cash and investments
totaling $166 million, which was up 22% sequentially. MUSE ended the March
quarter with DSO of 42 days, an increase of 4 days sequentially and
consistent with the year ago result. Deferred revenue was $33 million (16%
sequential growth) driven by steadily strong maintenance renewals and related
services revenue. We remind people that the vast majority of MUSE' license
revenue backlog is an off-balance sheet phenomenon.
Add-On, New Product Momentum
Q2:FY01 saw MUSE generate considerably higher contribution from new products
that are sold as add-ons to the core Netcool/OMNIbus platform. While OMNIbus
accounted for 58% of total revenue (or $34.4 million) for the quarter, Netcool
/Impact made an outstanding contribution at 16% of total revenue (or $9.5
million), which represented a 68% sequential improvement. Impact added 30
new customers in Q2:FY01 and after old 9 months of general availability has
amassed 142 customers. The third best-selling product was Internet Service
Monitors (or ISMs) which represented 11% of total revenue (or $6.5 million).
Beyond these 3 products, the next best-selling products are Reporter,
Precision, Firewall and Visionary. Given the compounding positive impact of i
) higher attach rates and ii) broader portfolio of new products, we remain
confident in MUSE' ability to increase penetration of its installed base and
in the process generating higher ASPs. Now that the Company has firmly
established itself as a multi-product vendor, we believe the architecture of
Netcool/OMNIbus will pay enormous dividends as MUSE steadily becomes the
universal data collection mechanism into which most other network management/
OSS vendors must plug in. Other noteworthy product details center around
Netcool/Precision, which added new 16 customers during its 3rd full quarter
of availability (now totals 46 customers) as well as Netcool/Visionary, which
added 7 customers during its second full quarter on the market (customer base
now totals 24). Netcool for Voice Networks seems to be generating strong
demand in the core transmission market (particularly the optical segment) in
a relatively short period of time and is certainly having a positive
contribution on blended ASPs. Going forward, we expect MUSE to increasingly
leverage its currency in expanding its product portfolio through acquisition
in addition to organic development work. |
