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

To: Bosco who wrote (3622)	1/21/1998 10:27:00 AM
From: bayhead	Read Replies (1) \| Respond to of 6980

DMG ......per your request 08:57am EST 21-Jan-98 Deutsche Morgan Grenfell Inc. (Lindsay/Suppiger 415-614- Bay Networks Reports Solid Q2 But Q3 Looks Weak - Downgrading To ACCUMULATE [FirstCall Notes 01/21] Bay Networks@- Bay Reports Solid Q2 But Q3 Looks Weak - Downgrading to "Accumulate" Subject: Earnings Review Analyst: Noel Lindsay, (415) 217-4227 Associate: Erik Suppiger, (415) 217-4228 Industry: Data Networking Date: January 21, 1998 Ticker: BAY Current-Rating: ACCUMULATE Price : $29 7/16 Previous-Rating: BUY ------------------------------------------------------------------------------ Fiscal Year : JUNE ------------------------------------------------------------------------------ EPS 1996A 1997A 1998E 1999E QTR. Actual Actual Prior Current Prior Current 1Q $0.32 $0.25 $0.22A $ $N/A $0.35 2Q 0.36 0.10 0.26 0.27A N/A 0.38 3Q 0.30 0.10 0.30 0.28 N/A 0.41 4Q 0.28 0.15 0.36 0.31 N/A 0.46 Total EPS: 1.26 0.59 1.14 1.08 N/A 1.60 ------------------------------------------------------------------------------ Shares Outstanding (MM): 232 : Market Cap ($MM): $ 6,618 Return on Equity (1997): 12% : Current Book Value/Share: $ 6.51 5 Year EPS Growth: 25% ------------------------------------------------------------------------------ * Bay reported revenues of $645M - almost equal to our $643M estimate. Pro-forma, fully-diluted EPS was $0.265, vs. our $0.26 estimate. * B/B was "almost one-to-one", although mgmt. noted that they had focused the sales force on selling products that were shippable in Q2. * Accounts receivable increased from 38 to 44 days, although Q1 levels were unusually low. Going forward, DSOs should remain in the forties. * European rev's. were strong, continuing a recent pattern among networking vendors. Asia "held up well," suggesting that companies with large Asian exposures, such as Xylan, may have been oversold. * However, as was recently the case with Cabletron, North American rev's and sales of shared-media hubs were weak. There may be a correlation between these two areas of weakness, given that North America seems to be most aggressive at moving from hubs to switches. * LAN switching remained the primary growth driver in Q2, with the "BayStack 350T" workgroup switch leading the charge. We expect a shift towards high-end "Accelar" layer 3 switches, but think it's too early to conclusively assess end-user demand. * On a percentage basis, Bay's remote access products grew the fastest - from a small base. Going forward, Bay plans to target ISPs and telcos more aggressively, and we noted that mgmt. mentioned that they plan to introduce a product that will compete with Cisco's Gigabit Switch Router. * We are modifying our model to include Bay's acquisition of New Oak Communications, and note that it's financial impact is nearly neutral in FY98. * Over the next 2 quarters, we're increasing our est. share count by 3 million more than normal to reflect newly issued employee stock options, thus diluting FY98 EPS by $0.01/sh, and CY98 EPS by $0.02/sh. * During the conference call, mgmt. questioned the ability to grow rev's. during the seasonally weak Q3. This appears to be an incremen- tally weaker outlook on Q3 than had been communicated in the past. * For these reasons, we are trimming our FY98 earnings from $1.14/share to $1.08/share, and CY98 earnings from $1.48/share to $1.32/share. * In light of the decline in backlog, the incrementally weaker outlook for Q3, and our estimate cuts, we feel compelled to downgrade Bay Networks stock from a BUY rating to an ACCUMULATE rating. * However, the company continues to improve on many fronts, and we will review our rating ahead of Bay's seasonally strong Q4, and may upgrade it at that time.