Analyst Report on ONIS
SSB: Cash increased to $5.00/sh at $684mm
ONI Systems (ONIS)#
ONIS: 3Q Results Largely In Line With Our 1S (Buy, Speculative)
Forecasts Mkt Cap: $879.1 mil.
October 23, 2001 SUMMARY
* ONI reported results in line with the prerelease
TELECOMMUNICATIONS and our forecast with revenues in line at $40.2mm,
EQUIPMENT representing a 41% Q-Q decline and with an EPS loss
B. Alexander Henderson of $0.19 that missed our forecast by $0.01.
* Gross margins held up relatively well given the
revenue decline. They fell to 37%, only down 180
Timothy Anderson basis points Q-Q despite management's insistence
that of a continuing shift toward lower-margin
chassis sales relative to line cards.
Daryl Armstrong * Management insists trailing activity continues to
increase and they insist their relationship with
current customers and key prospective customers
remains strong and even improving.
* Cash increased to $5.00/sh at $684mm, DSOs ramped
dramatically in the qtr, reaching 142 days from 88
in 2Q. Another $50mm avail. in working accts.
* We continue to worry about the outlook given the
capex environment, but believe the company has the
cash position to survive through this downturn.
ONI Systems reported 3Q results that were largely in line with our forecasts.
The Q-Q declines represented in the report underscore the difficult
environment in which carriers operate. The capex forecast for 2002 continues
to deteriorate with almost daily downward revisions by service providers. In
fact, we are now forecasting a 28%-29% decline in 2002 Capex. Within this
backdrop, we expect it to be a difficult exercise for any optical company to
show momentum. Having said this, ONI does have some positive points in its
favor.
* Cash Is King And ONI's Cash Increased Sharply In The Quarter. First, its
cash position, exceeding $600 million, suggests that it should not need to
worry about near-term liquidity issues and at $5 per share helps support
the valuation. Additionally, we estimate there's another $50 million in
working accounts to come as inventories and receivables right size.
* Trial Activity Continues To Increase At A Robust Pace--Strong Position With
Customers And Prospects. Second, ONI insists its continuing to see strong
new trial growth and persistent strength in its working relationships with
its key customers and key prospective customers. ONI also insists it
hasn't lost business to competitors causing the down draft rather the
programs were delayed or downsized. ONI strongly believes its competitive
position continues to improve.
* ILEC Deployments Getting Closer. Management continues to believe that ILEC
deployments are still likely to occur in the calendar 2002 timeframe,
albeit likely in the 2H of the year and ONI should have completed the
OSMINE process necessary to entertain playing within this arena.
Net-net, we continue to believe in the long-term positioning in the company
but still harbor concerns relative to how rapidly the company can rebound in
the face of an extremely harsh operating environment. We see the company as
well positioned at Qwest (Q, 1M rated by Jack Grubman--$16.11). It looks
like SBC (SBC#, 3M--$41.40) has lined up with Nortel (NT, 2H--$5.79) and
Verizon (VZ, 1M rated by Jack Grubman--$51.1) with Lucent (LU#, 2H--$6.90)
and Nortel. We haven't heard any specific indications of BellSouth working
with ONI. We do not think ONI won out in the Worldcom (WCOM#, 1M rated by
Jack Grubman--$12.99) account , but there is good indications of penetration
at a number of PTTs. Regardless, the Qwest relationship looks strong and we
think this is sufficient to produce a solid ramp in 2H.
ONI Posts Revenues That Came In Marginally Under Consensus Expectations. ONI
posted revenues of $40.2 million, representing a 41% Q-Q decline, in line
with our forecast. Consensus revenue expectations for the vendor was $44.9
million. ONI classifies its customers into five categories and we believe
their revenue contribution was as follows:
* CLECs: We believe these revenues came in at around $18.9 million, down 13%
Q-Q.
* IXC: Revenues from this category came in at $12.5 million, down 59% Q-Q.
* ILECs:ILEC-related revenues came in at $2.4 million, down 73% Q-Q.
* ISPs/Utilities: These two categories provided a total of $6.4 million, down
14% Q-Q.
Management noted that 3 of their customers provided over 10% of revenues and
17 of their customers reordered equipment in the quarter. This compares to
3Q 2001, when the company also had three 10% customers and 19 customers
ordering in 3Q 2001.
ONI Continues To Add Customers In The Quarter. The company reported they
added three customers in the quarter, increasing the total customer base to
27. The vendor added an IXC, ISP/ASP, and ILEC customer in the quarter.
Management also reiterated their expectation that the year-end customer count
should come in at 28 to 30 customers. Management expects to add another 2-3
customers by the end of 2001 bringing the total to 28-30, in line with
revised guidance but down previous expectations of 32-34 customers by year
end.
ONI's customers are classified as follows:
CUSTOMER 3Q01 2Q01 1Q01 4Q00
TYPE
IXC 7 6 5 4
CLEC 10 10 10 7
ISP/ASP 4 3 3 2
Utilities 2 2 2 2
ILEC/PTT 4 3 1 1
TOTAL 27 24 21 16
Geographic Segmentation Remains Stable. The company's geographic breakdown
remained relatively stable in the quarter. While international growth
opportunities appear strong, management noted Europe and Asia continue to
remain the most price sensitive regions, with certain international competing
very aggressively on pricing in Asia Pacific. below is a summary of ONI's
geographic segmentation.
REGION 3Q01 2Q01 1Q01
North America 67% 71% 71%
Asia 22% 21% 19%
Europe 11% 8% 10%
Gross Margins Remain Stable Despite Revenue Falloff. Although revenues came
down 41% Q-Q, gross margins only fell 180 basis points sequentially to 37%.
This performance is perplexing given that management insists that mix
continues to move toward lower-margin chassis relative to line cards.
Management attributes the margin performance to better efficiency, materials
management, and a stable pricing environment. On a macro level, management
asserted they only see two competitors consistently, Nortel and Ciena (CIEN,
3H--$16.71), and that neither resorted to predatory pricing strategies in the
quarter. In terms of the forward outlook management expects margins to stay
roughly at the same level in the 4Q period. In the quarter, operating losses
were $29 million, compared to our $27.8 million forecast as the company
continued to invest diligently on the R&D and SG&A front.
ONI's OSMINE Certification Efforts Seem On Track. Management reaffirmed their
expectation that they should receive OSMINE certification for their transport
products in the 4Q timeframe. They also noted that they had added the
ONLINE2500 to their certification efforts. In total, the company spent
roughly $3 million on these efforts in the quarter.
Cash Position Remains Strong But DSOs Ramp Dramatically. ONI's cash
position stood at $684 million. Management believes this position is large
enough to fund them for four years, even if the current downturn lasts for
another four years.
COMPANY DESCRIPTION
ONI Systems is the only next-generation optical systems company to come
public to date that is focused exclusively on the metro optical markets. ONI
s products were purpose built for the metro arena and we believe as such have
a competitive advantage to products from its nearest competitors in Nortel,
Lucent, CIENA, and Sycamore, which have generalized solutions for the metro
and long-haul arenas.
[Harry: They would not give guidance on a burn rate going forward. So it is hard to tell how long that $600 mil will last. On the positive side, they are trying to reach a cash level and burn rate that would allow them to last 4 years with the same slow cap ex levels as this Q. Most analysts and even mangement agree that it should not last that long and this is a worst case scenario.] |
