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Technology Stocks : Newbridge Networks -- Ignore unavailable to you. Want to Upgrade?

To: Roman who wrote (2577)	12/13/1997 3:23:00 PM
From: Andrew	Read Replies (3) \| Respond to of 18016

All, In my view, we are just seeing the usual volatility in this stock. Over the past couple of years the market has several times overreacted spectacularly to both good news and bad. Here's a couple of things to remember: 1. ATM is still at the very early stages of market acceptance. It takes a long time for the carriers to trust new technology and make a change. When they do, they fork out obscene amounts of cash. They have to depreciate these capital costs over a period of many years, so they hang on to their old technology until the last possible second. Do you realize that there are still rural areas of North America that operate on rotary dial phones and ANALOG central office telephony switches?!? The carriers will attempt to squeeze every last penny out of their capital investments. When a paradigm shift occurs, it results in massive revenues for equipment vendors, but over a ramping up period of many years. The telecom providers are slow to support a new technology, but when they trust it, they stick with it for many years and throw a lot of money at it. Depreciation is a fact of life. Examples of this process include digital central office switches, X.25 packet switching, frame relay, etc. ATM is at the very meager beginning of a long investment cycle. 2. A few years ago, NN bet the company on ATM. They were in the heyday of TDM multiplexers and X.25 packet switches, leading the market. But they correctly recognized that these technologies would not last forever. Now we're seeing these LARGE components of NN's revenues plateauing out. Meanwhile, the gradual transition to ATM has seen their ATM revenues ramping up to the point where they're only now beginning to equal TDM's significance to their financial results. That's why we've seen decreasing margins and slower earnings growth. Once high growth ATM equipment dominates NN's revenue picture, we'll just as surely see the declining margins become accelerating margins. That's a fact of life when you sell equipment to folks with long technology transition cycles. We're at the very beginning, the inflection point, of a new carrier technology cycle. 10 years from now, NN will likely still be selling updated versions of the 36170 to carriers. But that technology will be plateauing, and NN will likely be ramping up new technology. 3. The ATM announcements we saw in early fall this year were the clues to this process. The carriers announced that ATM is their future, and signed some pretty big LONG TERM contracts. The stock market went euphoric, and sent the stock to the stratosphere PREMATURELY. Of course this was bound for short term disappointment and disillusionment. These contracts are going to take awhile to show up on NN's income statement. What we should be paying attention to is the fact that the carriers have made a long term commitment to the technology NN has bet it's future on. The obvious implication is that those contracts are only the beginning of many years of more contracts, because the carriers don't make such important changes very often. Depreciation is a fact of life. And it's now in our favor. 4. Newbridge is also committed of course to increasing it's presence in the corporate arena. Many large companies are more and more interested in buying some of the same technology the carriers want. Newbridge is like "Hey, we can sell you guys this stuff too!". To increase their sales force presence in this market, they bought a bunch of sales people who worked for UB networks. They weren't buying UB's technology (although that was part of the cost), they were buying the salespeople and their rolodexes. For a while, it looked like UB's own equipment sales would pay for the purchase themselves, but that wasn't why they bought the company. Time will tell if this new salesforce will effectively bring VIVID to the masses. So far, they have expressed disappointment. Just remember WHY this company was purchased. Anyway, the above is just one guy's opinon, and I welcome dissenting views. But I for one was disappointed to miss out on buying at these prices last spring because I didn't have the money (even though there was much LESS evidence of ATM acceptance at the time). I have money now. You do the math. Andrew