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Technology Stocks : Emulex, What Prospects? -- Ignore unavailable to you. Want to Upgrade?

To: Thomas Scharf who wrote (70)	1/23/1998 4:14:00 PM
From: Claude Edelson	Read Replies (1) \| Respond to of 788

Hope this helps: 01:02pm EST 23-Jan-98 Nesbitt Burns (Moro) EMLX NESBI Near Doubling of Earnings Driven by Margin Expansion [FirstCall Notes 01/23] Nesbitt Burns Securities Inc. Emulex Corp. THOMAS A. MORO (EMLX - NASDAQ) (312) 460-8336 January 23, 1998 Chicago, Illinois Near Doubling of Earnings Driven by Margin Expansion Price(1/22)& EPS (FY-Jun) P/E Mkt Div/ Rating/ 52-Week Range 1997A 1998E 1999E 1998E 1999E Cap Yield Target $13.88 $0.36 $0.82 $1.50 16.9 9.3 $87.7mm $0.00 5 $21.25-$13.25 0.0% $27.00 Event Emulex reported FQ298 operating EPS of $0.15 (versus $0.08 last year and $0.10 last quarter), in line with our estimate. Additionally, the company announced a Fibre Channel agreement with IBM. Impact We are reiterating our 5 rating, EPS estimates of $0.82 this year (versus $0.36 last year) and $1.50 for 1999, and our price target of $27. Details Emulex reported EPS of $0.18, including $0.03 from a non-recurring tax gain. Excluding the gain, EPS was $0.15, in line with our estimate, while increasing 87.5% from last year and 50% sequentially. Revenues were $15.5 million (versus $16 million last year and $15 million last quarter) and just under $1 million below our estimate (roughly 6%). The shortfall was centered on the Fibre Channel Hub side, which decreased approximately 50% on a sequential basis. Fibre Channel Adapters, which are the core products for the company's Fibre Channel family (roughly 90% of revenues), increased close to 15% on a sequential basis and well over 100% year- to-year. Overall, Fibre Channel revenue was up 132% from last year while decreasing approximately 6% sequentially. We expect Hub revenue to improve from last quarter as it was primarily dependent on one large customer. Revenue should be diversified going forward as other OEMs that have been signed begin to take product. Based on our same growth assumptions, our revenue estimates do drop slightly. Our 1998 year-end number decreases from $73.9 million to $71.1 million, with Fibre Channel revenue dropping (mostly in the current quarter) from $30.3 million to $27.5 million versus $11.4 million last year. However, this decrease is offset by an upward adjustment to our gross margins. We continue to believe that this line item offers upside potential for the coming quarters---we are estimating levels below last quarter to guard against any pricing pressure (which is not apparent currently) and mix shifts. Our revenue estimate for Network Access (26% of revenues) and printer servers (39% of revenues) also adjusts slightly (down for network access and up for printer servers, basically canceling each other out). Gross margin expansion was the key driver for the bottom line, jumping 740 b.p. from last year and 330 b.p. from last quarter. The margins were helped primarily by mix as Adapter cards, which carry margins in excess of 500 b.p. over Hubs, generated a higher portion of revenues. Operating expenses were up significantly from last quarter (140 b.p.) as the company continues to invest heavily in R&D. R&D spending increased to 18.1% of sales from 15.9% last quarter (and 13.7% last year), 72% of which was for Fibre Channel (primarily headcount additions). We believe Emulex will continue to spend aggressively for product development and we look for further sequential increases on a monetary basis. On the new customer\product front, Emulex announced a Fibre Channel agreement with IBM, which will encompass the company's recently released LP7000 ("superfly") adapter card. This card provides 11,000 I/Os per second, roughly a 15% to 20% improvement over the earlier generation LP6000. We believe the IBM agreement will commence toward the second half of this year, and although financial terms were not disclosed, the agreement may offer upside for fiscal 1999. Digital Equipment and Data General contracts should begin in the current quarter. Currently the company has 36 active Fibre Channel wins. Tier I OEM Agreements Announced (Fibre Channel Only) Sequent Systems Data General Digital Equipment IBM Hitachi Data Systems NEC Unisys Siemens Nixdorf Fujitsu Groupe Bull We are reiterating our 5 rating, estimates and price target, and consider Emulex the premiere play for investors in the burgeoning Fibre Channel arena. ------------------------------------------------------------------------------- The opinions, estimates and projections contained herein are those of Nesbitt Burns Securities Inc. ("NBSI") as of the date hereof and are subject to change without notice. NBSI makes every effort to ensure that the contents herein have been compiled or derived from sources believed reliable and contain information and opinions which are accurate and complete. However, NBSI makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss (howsoever arising and whether direct or consequential) arising from any use of or reliance on this report or its contents. Information may be available to NBSI which is not reflected herein. This report is not to be construed as, an offer to sell or solicitation for or an offer to buy, any securities. NBSI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. NBSI usually makes a market in the securities and actively trades these securities for its customers and as principal for its own account. NBSI may have an investment banking relationship with certain of the corporations or issuers mentioned herein and may receive remuneration for same. NBSI is a subsidiary of Bankmont Financial Corp. which is a subsidiary of Bank of Montreal. NBSI is affiliated with Harris Bankcorp Inc. and Nesbitt Burns Inc. TO UK RESIDENTS: The contents hereof are intended for the use of non-private customers and may not be issued or passed on to any person except a person described in article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995, as amended. First Call Corporation - all rights reserved. 617/345-2500 END OF NOTE