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Technology Stocks : Lucent Technologies (LU) -- Ignore unavailable to you. Want to Upgrade?

To: Sawtooth who wrote (2732)	6/2/1998 4:25:00 PM
From: ALTERN8	Read Replies (3) \| Respond to of 21876

Update: DWDM for Fiber Optic Networks -- Research Notes Subject: Lucent Technologies (LU--$68.81) NYSE Opinion: BUY ============= =============================================================================== Date: June 2, 1998 ------------------------------------------------------------------------------- Market Profile 52-Week Range $79-$31 \| EPS Growth Rate (3-5 Yrs.) 25% Avg. Daily Volume 5,187 M \| ROAE (LTM) 16% Shares Outstanding 1304.0 MM \| Debt to Total Capital 44% Market Capitalization $89,731 MM \| Book Value Per Share $3.58 Floating Market Cap. $79,861 MM \| Indicated Dividend/Yield $0.16/0.24% Institutional Owner. 41% \| Revenue (LTM) $28,154 MM Insider Holdings 11% \| _______________________________________________________________________________ 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 58.1x 1998E 0.87A 0.14A 0.23 0.38 1.62 1.63 42.5x 1999E - - - - 2.00 1.93 34.4x ------------------------------------------------------------------------------- HIGHLIGHTS: - DWDM demand is the hot zone for boosting capacity of installed fiber optic. - Right now, Ciena (CIEN-51, Buy) and Lucent are the 2 leading DWDM suppliers. - Lucent sees the undersea and terrestrial, long haul segment dominating the DWDM market through 1999 and 2000. - This is contrary to Ciena's focus which is rapidly shifting to the local exchange carriers like the RBOCs/GTE and then enterprise accounts. - Nonetheless, Lucent will launch a metro product at SuperCom next week. - Price target for Lucent remains $90 which is a deserved premium valuation. ------------------------------------------------------------------------------- REASON FOR NOTE: We spoke to Kathy Szelag, Director of Strategy in Optical Networking at Lucent. ------------------------------------------------------------------------------- BACKGROUND: DWDM is Dense Wavelength Division Multiplexing. It is more economic to boost existing fiber optic capacity than to dig up the streets to install additional fiber lines. DWDM is a high speed version of conventional wave division multiplexing (WDM). It increases the capacity of fiber-optic transmission systems through multiplexing of multiple wavelengths of light. Each wavelength channel may support OC-48 (optical fiber) transmission at 2.5 Gbps. Of course, continued refinement of DWDM drives even higher gigabit transmission capacity. DOMESTIC DWDM MARKET: Lucent is battling Ciena (CIEN-Buy, 51) for the race to capture early market share for DWDM systems, potentially a $5 billion market by 2001. Recent awards from large service providers like Bell Atlantic are going to a two vendor model; so far Ciena and Lucent. WorldCom was Ciena's largest customer in 1997. MCI Communications, soon to be acquired by WorldCom, has selected Lucent's True Wave network manager for DWDM. There are 4-5 planning activities going on between MCI and Lucent before we see any real commercial orders. This must be watched carefully, because a big order from WorldCom/MCI would be a victory for Lucent and put pressure on Ciena to expand its customer base more rapidly from five to six service providers it services today. Will there be more competition? Yes. In the next 6-12 months, more suppliers are coming into the DWDM market in the US such as Alcatel, ADC, Ericsson, NEC, Nortel, Siemens, and Tellabs. Many of these world class suppliers will announced DWDM products at SuperCom. Other competitors like Fujitsu and NEC seem to be way behind in DWDM product development. The bottom line is the world is behind US market developments in deploying DWDM. Cable & Wireless is the most active using Ciena systems. This spells opportunity for all suppliers, especially those that can stay at the cutting edge of DWDM trends. Don't forget Cisco has strong ambitions to be a major player in the service provider market for data networking. Ciena and Cisco have initiated an inter-networking forum which will have its first meeting at SuperCom next week. Bothcompanies are working with Japan Telecom. OTHER COMMENTS FROM OUR DISCUSSION WITH LUCENT: In terms of the big picture, Lucent is a full systems integrator that understands how to sort through the different technologies like ATM routers, SONET and WDM. Truthfully, Ciena needs a partner to offer the depth of services that Lucent can offer. Lucent has some lead time over new entrants with 20-25 carrier trials that may lead to potential contracts. The company believes the 80 channel long haul DWDM product it is designing will be 90% of the market in the next 3-4 years. Lucent works DWDM through the three technology platforms - ATM, SONET and IP. Right now, there is some early stage difficulty with IP but the upside of going around the Sonet box drives network cost savings. Lucent will still play the metro market with a 16 channel short haul product ready for market trials. It will use lower power and cheaper amplifiers than the ones used for the 80 channel long haul product. The local loop network can not handle the same level of speed as the long haul market. Lucent has done some trials with British Telecom. It will announce a metro DWDM contract with Teleport, now owned by AT&T in the next week. We believe Ciena's lead time may be 3-6 months for rollout of the metro products. Its initial product would be a point-to-point system, not a ring product. At SuperCom, Lucent is also expected to introduce a high performance long-haul amplifier which is about 90% complete. Lucent is testing a DWDM product with IP routers north of Boston, MA. DWDM is still too expensive for enterprise customers and is probably two years away before the first signs of major demand from this market. Nonetheless, Lucent will announce an enterprise contract in the next week. ADC, a competitor, is working on a DWDM applications for the cable industry. ADC hs been talking to set top vendors to move the product to market. Ms. Szelag is not as optimistic as we are (or Ciena) on the 1999 demand for DWDM from the local exchange market - interoffice rings and metro access products. She believes it will take several years to grow DWDM in the local market compared to the market size for the long haul market, both terrestrial and undersea projects. Lucent is providing the terrestrial optical cable transport for "Oxygen," a proposed multi-billion dollar undersea network. The supplier of the undersea cable will use DWDM applications. 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. ===============================================================================