Analyst's Report on PCMS.
The following text appeared on the Yahoo thread (Posts 2341-2347)
for PCMS. It seems to be the text of an analyst's report. I found
it to be interesting reading so I thought I'd repost it here on SI.
I tried to clean it up a little, but there are chunks missing...
Rob
History Company
P-COM is a supplier of millimeter-wave digital radio systems for point-to-point,
point-to-multipoint, and spread spectrum applications. Founded in 1991, P-COM has
grown through both acquisitions and internal expansion and currently employs more
than 200 people. The company is headquartered in Campbell, California, with offices
in more than 20 countries. P-COM plays primarily in the cellular infrastructure
market, with sales to service providers and systems integrators. Recently, the
company demonstrated one of the first operational point-to-multipoint communications
systems that could expand P-COM's opportunity set into the white-hot
competitive access and high-speed data access markets.
Technology
P-COM's core technologies are apparent in the company's Tel-Link point-to-point
radios. Each radio consists of an indoor unit (IDU) and outdoor unit (ODU) connected
by a single coaxial cable of up to 300 meters. The IDU is a rack-mountable chassis,
containing the baseband electronics for modulation, line interface, multiplexing, and
frequency generation as well as alarm and diagnostic systems and a management
interface for configuring the capacity, frequency, and power of the radio. The ODU is
a light-weight, environmentally sealed antenna package that integrates the RF
electronics. These radios have data rates up to a single T3 line (45 Mbps) or 16 E1
lines (16 x 2.048 = 32.768 Mbps). Transmission range is inversely proportional to the
radio's frequency and ranges between 30 miles for the 7 GHz units to around 3 miles
at 50 GHz. This range makes these radios ideally suited for short-haul applications.
Frequency (GHz)guides or multiple cables. In addition, placing the modulator and
demodulator in the IDU as well as eliminating the Gunn Oscillator used in older
radios makes the ODU much less sensitive to temperature and climate variations, and
hence more reliable. In addition, the architecture of the radios allow them to be
remotely reconfigured to different frequencies, capacities, and power levels on the
fly, making managing large networks much easier for operators.
Like leased lines, P-COM's point-to-point radios are content agnostic. They can carry
GSM, TDMA, CDMA, or analog cellular traffic in addition to voice, video, or data.
These links may be thought of as simply a fat wireless "pipe." The cost of a link
varies according to its capacity but averages around $1,000 per T1 equivalent for
high-capacity links. This compares very favorably with the rates for leased lines,
which can run more than $1,000 per month. Historically, the markets for wireless
backhaul have been the strongest adopters of microwave technology. With the advent
of cellular telephony, the microwave and millimeter wave markets were re-energized as
point-to-point links proved to be a tremendously effective and economical method for
transporting wireless base station traffic back to switching centers and the wireline
networks. With the explosion in the number of cellular networks, the demand for
point-to-point radios has increased sharply. Today, as competition has heated up in
the local access and broadband delivery markets, microwave and millimeter wave radio
technology could again see a new wave of demand as point-to-multipoint configurations
emerge as an alternative to wired access schemes. P-COM is well established in the
point-to-point market, which has accounted for the majority of its revenues to date.
The two dominant applications of P-COM's point-to-point products are in Cellular/PCS
infrastructure and in competitive access.
P-COM radios are also used in a variety of other applications.
Cellular/PCS: Cellular and PCS carriers employ point-to-point radio links to
interconnect base stations and for backhaul to the central switching sites. In the
United States, these connections can often be made using land lines. In other coun-tries,
particularly in Europe and many emerging economies, wireless connections [??]
Last year, around 70% of P-COM's sales were completed in international markets,
with almost 30% into the United Kingdom. Orange Personal Communications Ltd. (a
U.K. operator) accounted for over half of the U.K. Sales (16% of total revenues).
Europe is a key market for P-COM. With the ongoing build-out of GSM-1800 PCS
networks, we expect P-COM to continue to have a strong presence in Europe. We
also anticipate that the areas with the most rapid network build-outs, such as China
and South America, could strengthen their presence in the sales mix. In our view,
P-COM's recent acquisition of Cylink gives them the regional sales presence to
participate in these new markets. In the U.S., Winstar has been P-COM's most
important customer at 11% of sales. WinStar could continue to be a strong customer,
particularly in light of its strong point-to-multipoint interest.
Figure 9: 1997 PARTIAL CUSTOMER LIST
International Domestic
Bosch Telecom Advanced Radio Telecom
Ericsson AT&T Wireless
Esmartel Bell Atlantic
Fareastone Bell South
Ficomp System Digital Transmission System
Fujitsu FM Associates
Gentec Horizon Technologies
GMA Network Omnipoint
Grupo Iusacell PrimeCo Personal Comm.
Jonmag Group Southwestern Bell
Lucent Sprint Spectrum
Mercury Communications Teleport Communications
Northern Telecom Tellabs Operations
Orange Personal Commun. WinStar Wireless
Siemens (Italtel)
Spectrum Network Systems
TSY Poland
Source: Company reports.
Products
The company offers several product lines. The Tel-Link line of point-to-point digital
millimeter wave radios operate at both the E1 (2 Mbps) and T1 (1.5 Mbps)/T3 (45
Mbps) data rates. Currently, sales are dominated by these products. These systems
are available in a variety of speeds and frequency bands. The Model 100 as well as
the AirLink and AirPro lines acquired with Cylink provide lower rate spread
spectrum access in the unlicensed bands.
Recent Business Trends and Outlook
P-COM has grown strongly over the past several years. During 1997, the company
grew sales 83% to $221 million. Over the past two quarters, business conditions have
become more difficult with revenues dropping 9% sequentially in the March quarter
only to rebound 8% quarter over quarter for the June quarter.
We expect flat to down revenue in the September quarter and a recovery in the December
quarter. We expect the full year to grow at 13-14%. Should the global economic environment
improve and the company execute on several key metrics, F1999 could prove to be more
promising, in our view. There are several factors currently affecting P-COM's
revenue outlook:
ú Price Pressure in the point-to-point business: As a result of the Asian
financial crisis, several microwave players have been displaced from
their traditional market strongholds in Asia and have attempted to
compensate with increased sales in P-COM's traditional European
market. Although P-COM does not appear to have lost market share to
these competitors, customers may be using the opportunity to negotiate
pricing concessions from P-COM, which have adversely affected
revenue growth and gross margins.
ú Cellular market growth continues to be strong: Subscriber growth
continues to increase worldwide at a rate exceeding 35%. While this is
encouraging for infrastructure providers, we believe the bigger demand
driver for point-to-point radios will be the build-out of new networks.
The U.S. buildout of the new 1900 MHz PCS networks continues to be
steady, but was impacted by the recent C-Block auction fiasco. Much
of the awarded spectrum is now in limbo until the FCC redeploys
returned and disassembled licenses. The international scene presents
a better opportunity. The expected acceleration in Latin American
business has been slow to materialize. Confusion over Brazilian
spectrum auctions and other factors have pushed back the build-out
schedules of many networks in that region. Nevertheless, Brazil
remains a huge opportunity, in our view. Asia has also slowed in the
wake of the financial crisis, although China has remained an island of
strength in the region. European PCS 1800 MHz network build-out appears
to be proceeding well. P-COM's ability to compete for new business against
turnkey network equipment suppliers will be the important long-term
determinant of growth in the company's point-to-point business.
ú Point-to-Multipoint a longer-term prospect: We believe P-COM's
point-to-multipoint progress has been impressive. However, the point-to-
multipoint concept is still immature. Some revenue is possible in the
second half of 1998, but it is unlikely to drive growth in the near term.
The bulk of the opportunity from this technology could arrive in
1999, in our view.
A Perspective on the Stock
P-COM is a technology-rich play on the broadband connectivity markets. While the
stock has in the past closely mirrored the explosive penetration of cellular technology
into the communications marketplace, more recently, the brutal slowdown in the
Asian economies has filtered back to P-COM's business as network deployment
delays in Asia have forced competitors to target the company's healthy European
customers. The resultant pressures on the business have depressed the stock (down
75% since the first of May while the NASDAQ index is down just 1% over the same
time frame) and clouded the outlook in investors' minds. As a result of the
uncertainty in the company's core point-to-point business, we believe that the next
opportunity in the stock will be centered around the emergence of the broadband
wireless access markets, which could become a positive for P-COM's nascent point-to-
multipoint business. As a technology franchise, we believe that the stock is
appropriate for investors with a long-term perspective and an ability to ride-out
near-term volatility that could reemerge should the point-to-point business continue
to suffer or the prospects of the point-to-multipoint business become cloudy again.
[??] digital cellular. The U.S. build-out continues in GSM 1900 and CDMA
EPS 1997: Actual $0.43
EPS 1998E: New $0.04
EPS 1999E: New $0.22
52-Week Range: $30-5
Shares Outstanding (MM): 44.3
Market Cap: $224.0
Average Daily Volume (000): 1,212.0
6/98 Book Value/Share: $3.07
6/98 Total Debt/Total Cap: 1%
1998 ROAE: 21%
Price/Book Value: 1.6x
Net Cash/Share: $(2.63)
Dividend/Yield: 0.00%
3-Year Secular Growth Rate: 30%
FY December 1997 1998E 1999E
We believe that P-COM's established technology base in point-to-point radio
links and extensive development work in point-to-multipoint systems could
enable the company to play in the nascent, but potentially huge market
for wireless broadband access.
ú We believe that a turnaround for P-COM's business could come from two areas:
1. A reacceleration of global wire-less infrastructure buildout, which
would stimulate the com-pany's traditional point-to-point business.
2. The adoption and deployment of P-COM's point-to-multipoint sol-ution
by a major wireless CLEC, such as TeligentRadio
[??] links are usu-ally less expensive to operate as well as
less expensive and time consuming to install.
In addition, in areas where the wired infrastructure is less pervasive or where terrain
is prohibitive, wireless links are often the only option. Infrastructure growth is driven
partially by capacity increases to existing systems but mainly by the construction of
new systems. While many industrialized nations already have established cellular
networks, there are several trends, which continue to drive system build-outs. Newly
allocated spectrum for PCS services in the 1800 and 1900 MHz bands is being
purchased by service providers who have no infrastructure in these frequency ranges
and who are spending liberally on equipment to make their time-to-market goals.
Also driving construction is the rapid pace of cellular deployment in China and
Brazil, two nations with strong economic growth and limited wire-line penetration.
Wireless subscriber growth has averaged 55% over the past several years to 200
million subscribers last year. We anticipate wireless subscriber growth to continue at
greater than 35% rates over the coming three years. We expect the following three
drivers to contribute to continued infrastructure growth:
ú Increased penetration: The need to expand capacity as subscriber growth continues due
to increasing penetration of wireless technology into the population in developed nations.
ú New technolo [??] New network deployments not only add to overall capacity, but deliver value
added new technology such as PCS and1900 technologies while European markets are rapidly
deploying GSM 1800 networks.
ú New geographic markets: Emerging market privatization of cellular telephony in many
economies that have had traditionally under-penetrated wireless markets could spur
new networks and new technology deployment. Massive markets, such as China, Brazil, and
Russia, remain tremendously underpenetrated. New build-outs in these markets can be a
key catalyst for point-to-point technology.
Competitive Access: For businesses with high communications bandwidth requirements, the
only option was once a leased line (T1 or E1 line) from the regional phone company. Leased
lines carry high installation and monthly use fees. With the local loop now open to
competition in many countries, competitive local carriers without an established,
high-quality copper infrastructure are searching for low-cost access alternatives to
wire or fiber. The type of high capacity, reliable point-to-point link provided by
P-COM has been a popular choice. Growth in this market depends on several factors.
It is driven by increasing business bandwidth demands and in the continued cost
advantage of wireless over wireline access.
It also depends on the success of the wireless access pioneers, such as
Winstar (WCII $33) and Teligent (TGNT $28-5/8), both from the standpoint of their
own build-outs and to determine if others will follow in their footsteps.
Other Applications: Point-to-point wireless technology remains a simple and effec-tive
means of communications in many private networks. Private networks around the
world use point-to-point wireless connections to communicate voice or data traffic
between buildings and campuses, a requirement previously met using leased lines.
The leased lines carried both a high monthly tariff as well as the problem of having
to physically route cables between buildings, even when the buildings were separated
by a busy street. The drivers for the private network market are similar to those in
competitive access: the cost of leased lines and the bandwidth demands of busi-nesses.
New applications are also emerging in transport networks. As the use of fiber optic
media becomes more common in local loop and distribution networks, we expect
network providers to supplement these high-bandwidth network upgrades with new
wireless extensions such as SONET radios. An even greater opportunity could arise
in emerging economies in interconnecting cell sites in local loop applications. For
emerging nations without basic telephone infrastructure, the prospect of running
millions of access lines over the next decade is daunting. Wireless links provide a
cost-effective alternative, which is less sensitive to distance, terrain type, and
accidental damage. This market is driven by the international rate of development
and infrastructure investment.
In addition to the high bandwidth applications mentioned, there is a large market for
lower performance, rapidly deployable wireless links in unlicensed bands. Such
radios offer access rates up to single T1/E1 lines and are used in remote monitoring,
emergency communications, and broadcast applications as well as providing an
economical "last mile" solution for small businesses and emerging economies. P-COM
and its recently acquired Cylink business offer an extensive line of solutions to
these markets.
Cellular and PCS applications have accounted for around 65% of revenues, with the
balance provided by the other areas, including broadcast, access, and private
networks. Although these markets are mature, they still hold growth potential for
the company. Additionally, they represent areas where P-COM has an established
presence and proven track record.
Point-to-Multipoint
By far the most exciting opportunities facing P-COM today, in our view, are in the
applications for point-to-multipoint technology. Spectrum has recently been allocated
in many bands from 2.4-GHz to 40-GHz for new services such as Local Multipoint
Distribution Service (LMDS). These services allow a single central hub radio to serve
multiple end users in sectors from 15 to 90 degrees. Multiple hub radios can be
combined to offer a full 360 degrees of coverage. This system offers two distinct
advantages over point-to-point systems. First, the equipment cost is reduced, since
adding additional users requires only new customer equipment as opposed to the new
hub and customer equipment needed in a point-to-point system. [??] have proven popular
over leased lines for a number of reasons. Second, it enables more efficient use of
available spectrum. Bandwidth in point-to-multipoint systems can be dynamically
allocated to different users based on demand. By contrast, a point-to-point link
occupies its entire spectrum even when the link is not trans-mitting.
Point-to-multipoint represents an economical solution for many of the same areas
where point-to-point wireless links are currently used, such as telephony and private
networks.
Perhaps the most exciting area with the most explosive growth potential for point-to-multipoint,
in our opinion, is in the high speed access market, for businesses demanding T1 rates (1.5 Mbps)
and higher. The combination of the efficient use of spectrum along with over one GHz of bandwidth
allocated for LMDS systems could enable customer rates of OC-3 (155 Mbps) and higher-access rates
which are only possible over fiber today. These rates could allow wireless access providers to
attract larger, more bandwidth hungry customers than previously possible while the reduction in
radio costs for adding new customers could enable access providers to be even more aggressive in
expanding their customer base to smaller businesses as well. The flexibility of the technology
also allows for key new services such as bandwidth-on-demand. Winstar and Telligent have been
the most aggressive companies in pursuing this market and have already completed initial trials.
Telligent made its first complete call over an LMDS system in March of this year.
P-COM has invested extensively in point-to-multipoint technology. P-COM recently
completed lab trials and is scheduled to begin a field trial in Texas later this month.
At Supercom this year, P-COM was demonstrating a working point-to-multipoint
system using redundant links, clearly aimed at the high-availability business
customer. In addition, the company has already announced a $4-million purchase
order for point-to-multipoint millimeter wave systems from a major European
telecommunications system provider. Partnering closely with Siemens to complete
the switching functionality needed in implementing point-to-multipoint networks, P-COM
is actively pursuing network deployment opportunities in the exciting
competitive access markets both here in the U.S. and abroad.
Point-to-multipoint is a tremendously flexible architecture with many uses beyond
business access. We believe that terrestrial wireless broadcast and consumer Internet
access could emerge as future applications of the technology. In entertainment distribution,
point-to-multipoint technology can be used to transmit video channels to subscribers in
urban areas. An example of one such system is in operation in Brighton Beach, New York.
BellSouth has used the technology to provide cable TV service to customers in Atlanta
and New Orleans. Overall, the Wireless Communi-cations Association estimates that more
than 5 million subscribers worldwide receive programming over such networks. |
