New Products: Filling the map for IP data networks
-- Research Notes
Subject: Lucent Technologies
(LU--$72.37)--NYSE Opinion: BUY
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Date: May 28, 1998
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Market Profile
52-Week Range $79-$31 | EPS Growth Rate (3-5 Yrs.) 25%
Avg. Daily Volume 5,383 M | ROAE (LTM) 16%
Shares Outstanding 1304.0 MM | Debt to Total Capital 44%
Market Capitalization $94,370 MM | Book Value Per Share $3.58
Floating Market Cap. $85,877 MM | Indicated Dividend/Yield $0.16/0.23%
Institutional Owner. 41% | Revenue (LTM) $28,154 MM
Insider Holdings 11% |
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Earnings/Share Fiscal Consensus Fiscal
1Q/Dec 2Q/Mar 3Q/Jun 4Q/Sep Year Est. # P/E Ratio
------ ------ ------ ------ ------ --------- ---------
1997 $0.67 $0.05 $0.17 $0.28 $1.17 $1.17 60.3x
1998E 0.87A 0.14A 0.23 0.38 1.62 1.63 27 44.6
1999E - - - - 2.00 1.93 27 36.2
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Highlights:
- Lucent introduces IP Switch, Access Servers and Gateway Solution Products
- These products are for its key customers - service providers.
- Surprise, surprise; MCI is testing the PacketStar IP Switch.
- Today, Lucent almost has a full data offering in WAN Access as well as
Service Provider Core and Edge products for ATM, IP or SONET/SDH platforms.
- We like management's intensity and sense of urgency to get new product to
market, especially data networking solutions.
- Lucent's momentum supports a premium valuation. Price target remains $90.
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LUCENT IS TAKING CARE OF ITS KEY CUSTOMERS - SERVICE PROVIDERS
Service providers represent almost two thirds of Lucent's revenue base, and
these customers are demanding IP and data networking solutions ASAP.
We recognize management's sense of urgency and intensity to satisfy its service
provider customer base before Cisco and Nortel gain further momentum in new
products or services to take market share.
To our surprise, Lucent management has Bell Labs innovating in shorter and
shorter development cycles to get new product to market. For example, the
PacketStar IP Switch took 12 months while the PathStar Access Server took 9
months. In some cases, Bell Labs is able to leverage related products that
share similar platforms.
The consensus viewpoint has been if Lucent doesn't have it, management will
write the check to acquire it to gain time to market advantages.
So far, acquisitions have been very focused or tactical like Yurie Systems for
advanced ATM systems. We are more confident, Lucent will not make a large
acquisition in the enterprise market for data communication, especially if
their IP service products for service providers are successful which is our
bet.
Lucent has raised the output of internal product development with continued
emphasis on quality and reliability. Early results and feedback from its key
customers on new products should give Lucent more confidence to innovate within
instead of acquire.
Lucent had to deliver a comprehensive IP offering that broke new ground and
afforded its customers new network solutions at lower costs. The IP portfolio
they announced meets that criteria.
Service providers may be able to save up to 40% because Lucent's new IP
products requires fewer network elements; so integration on access, routing and
features becomes more economic and efficient. The scale economies it has
worked through the AnyMedia Access Switch are transferable to the PacketStar IP
Switch.
In some cases, its the manufacturing know how of Lucent to put all features
functionality on the face of the line cards as well other spec features on theback, and do it with high reliability and fault tolerance performance. The
WaveStar Bandwidth Manager, a core transport product announced earlier this
year, can save service providers up to 60% in equipment costs and 85% in space
requirements. This product integrates all access and transport facilities into
a single network node.
LUCENT IS AGGRESSIVELY FILLING IN ITS DATA NETWORKING SOLUTIONS
At the end of the day, Lucent is trying to help service providers, Internet
service/access providers, and high end corporate enterprises streamline their
operations, maximize capital investments, and offer advanced IP voice and data
products.
Lucent is catching up quickly with an expanding product offering of intelligent
switching, Internet access and services, transport and optical networking,
network management, and services and support.
The service provider's appetite for bandwidth is driven by explosive data
communications requirements from enterprises and the consumer market. Lucent's
new product announcements add to its arsenal to excite the customer and keep
away competing suppliers.
PACKETSTAR IP SWITCH: Product will be useful for Virtual Private Networking and
Voice over IP telephony. This is a Layer 3/Layer 4 WAN routing switch which
can work with today's conventional routers. The beauty of PackeStar IP Switch
is its service feature functionality to segment pricing of different Class
services to varied customer categories.
A service provider can offer tiers of services at varied prices and quality
from low cost to premium service. Put simply, these are breakthrough traffic
management capabilities that no one is offering today. The IP switch will
interface with all of Lucent's access products.
MCI TEST TRIALS
Not much detail but a positive announcement nonetheless. MCI will kick the
tires next month to determine if the PacketStar IP switch fits its need to
increase its Internet backbone.
PATHSTAR ACCESS SERVER: It allows service providers to offer low-cost, reliable
local and long distance voice and data services over IP networks. Priced at
half the cost of multiple products with full integration into one product, the
PathStar becomes a central office switch-router for IP traffic.
Lucent will price the server at about $300 per line and half the cost in the
typical server configuration. The server features are dynamite with billing,
call waiting, call forwarding, operator assistance, and a standard interface to
directory systems. It is the only server with direct access to copper pair wire
in one direct connection.
The server is even able to tie into the circuit switch public voice network, so
an IP subscriber can reach any telephone anywhere in the world whether it's a
data packet phone, a standard telephone, or a PC with phone capabilities. The
server does use many of the specifications that exist in the 5ESS-200 AnyMedia
Switch.
A PacketStar ITS server was introduced for Internet telephony and is available
in North America and Europe. There is another version for voice and fax
transmissions over IP networks using analog phones, faxes and PCs.
PACKETSTAR GATEWAY SOLUTION is three gateway functions. This is a voice gateway
product that turns a voice signal into packets for IP or ATM networks. It also
has a signaling gateway which provides signaling and routing information to
carry the packets through the network. There is a feature server to support
the advanced network services. The gateways use significantly less space that
older gateway products. This means fewer boxes installed at the central
office. Commercial delivery expected in calendar 1Q99 with trials in 4Q98.
INVESTMENT THESIS:
We believe Lucent shares will appreciate to match its attractive earnings
outlook. We have a bullish two-year earnings forecast. Earnings in 1998-1999
should grow in the mid-20% range, which would exceed the growth rates of most
of Lucent's peer group.
So far, management has exceeded investor expectations, but the bar continues to
be raised in terms of strategic and financial expectations. This quarter again
there are many earnings disappointments in the telecommunications equipment
sector. And yet, Lucent's track record remains strong but carefully watched by
the market with the stock trading at record levels. We remain bullish.
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