ML wireless equip earnings preview from 4/6:
Highlights:
· Revenues: Our revenue estimates reflect a weighted average increase of
11% versus an increase of 11% a year ago for our wireless equipment
companies. DSP Communications, Nokia and QUALCOMM should report
the greatest revenue growth, while revenues at Andrew, California
Microwave, Digital Microwave, and Glenayre should decline.
· Gross Margins: We expect gross margins to decline at most of our
companies in the March quarter. However, QUALCOMM should report a
year-over-year increase in gross margins partially reflecting improved
profitability in its handset business.
· EPS: Our EPS estimates reflect a weighted average increase in net income
of 10% versus a decrease of 9% a year ago for our wireless equipment
companies. QUALCOMM, Nokia and DSP Communications are expected
to report the largest increases in net income, while Andrew, California
Microwave, Digital Microwave, Glenayre, and Brightpoint should report
year-over-year declines.
· Price/Earnings Ratios: The weighted average of P/E ratios in our universe
of coverage is currently 25-times our calendar 1999 EPS estimate compared
to the year-ago ratio of 22-times. This compares to a multiple of 28-times
Merrill Lynch's EPS estimate for the S&P 500 index.
· Recommendations: We are recommending Motorola and QUALCOMM in
part because we expect operating margins to expand. In these two cases, the
companies are benefiting from recent restructuring actions. We are
recommending Nokia based on anticipated market share gains in 1999
similar to those achieved in 1998. We are also recommending DSP
Communications because its customers are gaining share in several cellular
handset markets. Finally, our recommendation of Ericsson is based on the
expectation of an improving infrastructure business and the introduction of
new handsets.
What Has Changed:
Revenue and earnings comparisons should get a little
easier after a rough 1998. The average revenue growth in
our companies continues to be only modestly impacted by
the economic turmoil in certain Asian and Latin American
countries. Average revenues are expected to increase by
11% this quarter versus 11% from a year ago. Our EPS
estimates reflect an average increase in net income of 10%
versus a decline of 9% in the March 1998 quarter.
However, the improvement is narrowly focused. Only 60%
of the companies in our universe of coverage are expected
to report an increase in revenues, primarily reflecting
improving market share positions. More importantly, only
40% should report an increase in net income. In two of
these cases – Motorola and QUALCOMM – the expected
increase in operating margins is partially a result of recent
restructuring actions.
Anticipated Results for the March
1999 Quarter:
- Andrew (ANDW, $12 3/4, C-3-2-9)
On March 8, 1999, Andrew announced that it expected
March quarter results to be below expectations primarily
due to a weak domestic wireless infrastructure market. We
expect sales to decline by 16% and gross margins to
decline by 7 points versus the March 1998 quarter because
of lower absorption rates. The company also announced
plans to address the declining gross margins by eliminating
12% of its workforce. The book-to-bill ratio should
exceed 1.0 in the March quarter, partially due to a $7
million contract in Hong Kong.
- Brightpoint (CELL, $6, D-3-2-9)
On March 10, 1999, Brightpoint announced that it
expected March quarter results to be significantly below
expectations. The company attributed the shortfall to
product supply issues in Asia, currency-impacted sales in
Brazil, lost business in Europe and lower than expected
sales of Iridium products. Revenues from value added
services should increase sequentially due to strength in the
U.S. Sales expenses are also projected to be higher than
expected reflecting start-up costs in certain international
markets; we expect the company to begin to eliminate
some of these costs.
- California Microwave (CMIC, $10 7/16, C-3-2-9)
We recently lowered our earnings estimates for the March
quarter due to delays at two customers that could impact
revenues by $5 million. We now expect revenues to
decline by 8% and gross margins to decline by 150 basis
points in the quarter. The company announced the sale of
its government business for $98 million. We believe the
company signed at least three contracts to trial its new
AB-Access product.
- Digital Microwave (DMIC, $8 1/16, C-3-2-9)
The integration of Innova and the introduction of new
products continue to be the company's key challenges. We
estimate that sales of new products (including those from
Innova) will represent about $5 million, or less than 10%
of total sales. Moreover, revenues are still expected to
decline by 38% in the quarter, and gross margins should
slip by over 10 points.
- DSP Communications(DSP, $16, C-2-1-9)
Despite an expected decline of about 10-15% in new
subscribers in Japan, we expect DSP's revenues to grow
by 52%. DSP is benefiting from the continued increase in
market share by several of its customers. We estimate that
DSP will capture 25% of the Japanese cellular market
versus 20% last year. The number of CDMA subscribers
added in Japan has slowed over the last two months, but
should re-accelerate when the nationwide network is
launched in April. The company also began shipping
CDMA chipsets to SK Teletech in Korea.
- Ericsson (ERICY, $25 1/16, B-2-1-7)
We expect total revenues to increase by 1% in the March
quarter. Revenue growth reflects issues in China and
Brazil, two key Ericsson markets. Revenues in China will
be impacted by a difficult comparison (where the March
1998 quarter was exceptionally strong), and a re-10-
organization at China Telecom. Brazil, at 6% of total
revenues, has also been weak over the past few months.
The handset business awaits the launch of a new product
line; until then, average selling prices and unit shipments
will remain weak, resulting in deteriorating margins. The
company recently announced plans to restructure its
workforce, which will result in an estimated charge of
SEK400 million in the quarter.
- Glenayre Technologies(GEMS, $3 9/16, C-3-2-9)
Glenayre continues to face many challenges.
Manufacturing yields for the company's two-way pagers,
an integral part of the company's future, continue to be
below acceptable levels. At the same time, the core paging
infrastructure business continues to be weak in the U.S.
and abroad, resulting in an 18% decline in revenues.
Additionally, the management team is in transition,
making a recovery from this current environment more
difficult.
- Motorola (MOT, $76 13/16, B-2-1-7)
While we expect revenues to grow a modest 4%, we see
improvements in the profitability of two of the company's
key businesses, semiconductors and cellular phones.
Semiconductor revenues are expected to be flat-to-up
slightly sequentially, the book-to-bill ratio should exceed
1.0, and the unit should report breakeven to modestly
positive operating income. Cellular phone sales are
expected to increase by 16%, positively impacted by the
introduction of several new digital StarTAC and GSM
phones in the December quarter. Overall, we expect
Motorola to report a modest increase in operating profit
margins.
- Nokia (NOKA, $163 9/16, B-2-1-7)
Nokia continues to benefit from strong unit shipments and
stable average selling prices in its handset business. We
expect handset revenues to increase by 49% in the March
quarter. We also believe that the company is gaining
market share in the cellular infrastructure business.
Overall, we expect revenues to increase by 37% (in euros)
in the March quarter.
- QUALCOMM (QCOM, $148 7/8, C-2-1-9)
Revenues are expected to grow by 24% and gross margins
should improve by 200 basis points as the company
streamlines its handset production process and divests its
unprofitable infrastructure product lines. Continued
strength in U.S. CDMA subscribers should lead to flat
handset unit shipments compared to the seasonally strong
December quarter. In Korea, there were 1.5 million
CDMA subs added in January and February alone, which
should enable ASIC shipments to be up sequentially. The
momentum behind CDMA should continue to improve as
Ericsson introduces its CDMA products, as China permits
CDMA networks to be deployed and as third generation
wireless standards bodies consider adopting CDMA. |
