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Technology Stocks : BAY Ntwks (under House) -- Ignore unavailable to you. Want to Upgrade?

To: Bosco who wrote (3613)	1/21/1998 10:07:00 AM
From: bayhead	Read Replies (3) \| Respond to of 6980

Here's the knife from DLJ... they manage to gut BAY again (note the DMG article was tame in relation to this...) 08:05am EST 21-Jan-98 DLJ Securities (Stephen G. Koffler) BAY WFLT SNPX BAY NETWORKS: 2Q98 a bit less than meets the eye. 3Q will slow way d [FirstCall Notes 01/21] DLJ **** DONALDSON, LUFKIN & JENRETTE **** DLJ January 21, 1998 Stephen G. Koffler (212) 892-4203 Peter Giglio (212) 892-8946 BAY NETWORKS (BAY: $29.5) # 2Q98 a bit less than meets the eye. 3Q will slow way down. Range: Earnings Per Share 1998 vs 1997 % Chg 40-15 Old New P/E Ratios F1Q $0.22 vs 0.25 -12% (FY:June) 1999E $1.55 $1.50 19.7 F2Q 0.27 vs 0.10 +170% 1998E 1.08 1.06 27.8 F3Q 0.26 vs 0.10 +160% 1997A 0.60 49.2 F4Q 0.30 vs 0.15 +100% Yield: % Market Cap.: $6.8 Billion 5-Yr. Growth Rate: 20% Dividend: $ Avg. Trading Vol.(000): 2300 Book Value: $6.02 RATING: Market Perf. Change: None 12-Mo. Target: $31 Investment Summary Bay Networks' fiscal 2Q98 results were in line with consensus expectations, but a few of elements in the quarter form what we would call a "wrinkle" when taken together. Also, we expect a significant fall-off in sequential revenue growth in 3Q98 as poor seasonality combines with an increasingly difficult product transition. Revenues of $645 million were in line with consensus expectations and significantly above our forecast of $630, but a few "kickers" probably contributed $10 - $15 million. Fully diluted EPS of $0.27 was one penny above consensus. The highlights of the quarter were 14% sequential growth in switching, 7% sequential growth in routers, and 29% sequential growth in remote access. We estimate that the Accelar switch contributed $12 - $15 million in the quarter, and the scenario for strong sequential growth in 3Q98 is very good. Among less "rosy" elements, hubs declined 5% sequentially, book to bill was slightly below one, channel inventories increased slightly and North America was down slightly. The scenario for improved gross and operating margins remains unchanged. The turn-around at Bay under the new management remains in full force, and the management gets high marks for execution. However, we remain concerned about the product transition that the company faces as well as the seasonally slow third fiscal quarter, and are trimming estimates for 3Q from $0.28 to $0.26 and for 4Q from $0.32 to $0.30. Also lowering FY99 from $1.55 to $1.50 to reflect slightly lower revenue assumptions. Maintaining market performance rating. "Kickers" helped make consensus revenue: Revenues of $645 million were in line with consensus expectations and significantly above our forecast of $630, but a few "kickers" probably contributed $10 - $15 million. These were service revenue, which at $64 million and 20% sequential growth was nearly triple the overall sequential growth rate, book to bill being slightly below one, and a slight increase in channel inventories. Also, the fact that North American revenues declined slightly sequentially while Wescon, Bay's largest North American channel partner, represented 10% of total revenue begs the question whether Bay needed Wescon to take a big in order to make the quarter. Accelar doing well but could exacerbate product transition. Based on information provided in the conference call, we estimate that Accelar generated roughly $12 to $15 million in the quarter. This product was on allocation in December, and now production capabilities have ramped to meet demand in the March quarter which seems quite substantial. However, shared media hubs declined over 5% in the quarter and will probably continue that trend. Also, although routers grew in the quarter, Accelar has the potential to provoke more flattish trends in the router business as the switch can be used as a router replacement. We are modeling both legacy technologies more conservatively coming off of this earnings report. Look for very low sequential growth in 3Q. The March quarter is seasonally slow for Bay because budgets are often not yet set early in the calendar year for large networking projects. This combined with the tough product transition is prompting us to carry very low sequential revenue assumptions ( $655 million, or less than 2% sequential). We are also lowering the fourth quarter, as well as fiscal 1999 to account for more conservative assumptions on routers and hubs.