This mornings FirstCall report by Cowen:
COWN: CMNT/DELIVERS SOLID Q1 WITH STRONG SAN SALES/STRONG BUY
(First Call 04/15 08:37:00)
08:21am EDT 15-Apr-99 SG Cowen Securities Inc. (STIX, CHRISTOPHER 617-946-3700)
SG COWEN
Chris Stix /Vijay Rajamani
617-946-3700
April 14, 1999
Computer Network (CMNT: $16 1/2)
RATING: Strong Buy With A $23 Target Price.
CMNT Delivers Solid Q1 With Strong SAN Sales. Target Price Raised To $23.
Strong Buy Retained.
===========================================================================
EPS (FY Dec.) Quarterly EPS
Old EPS New EPS P/E Q1 Q2 Q3 Q4
F97A $0.03 $0.03 nmf $0.02a $(0.04)a $0.02a $0.03a
F98E $0.25 $0.25 66x $0.02a $0.04a $0.08a $0.11a
F99E $0.50 $0.53 31x $0.09 $0.11 $0.14 $0.18
F00P $0.75 $0.80 21x
Does not include the write-off associated with the Apertus or IntelliFrame
acquisition.
===========================================================================
Key Points:
1. CMNT Delivers Solid Q1 With Strong SAN Sales.
2. SAN Revenues Grew 40% Q/Q And 91% Y/Y To $11.8MM.
3. Enterprise Integration Solutions Grew 9% Y/Y To $4.9MM.
4. Outlook Continues To Be Strong As EMC Relationship Marches On.
5. Raising Estimates. Strong Buy With A New $23 Target Price
Representing 29x C99 EPS Of $0.80.
Thesis/Valuation: As an early leader in the high growth, emerging storage
area networking market, Computer Network continues to be our favorite small
cap pick. Computer Network Technology has long been a leader in connecting
remote locations and users to host resources. . With the release of new
storage area networking products (both Ultranet and Channelink), the
company entered the explosive storage area network (SAN) market, which
connects both host and open systems to networked storage resources. The
Spring '99 SG Cowen/Datamation survey showed strong SAN deployment
intentions among North American organizations, with 42% planning to deploy
at some stage. The company's small, but high growth enterprise application
integration business links multiple mainframe data bases to customer
relationship management software, such as Siebel, enabling comprehensive
management of customer relationships. CMNT's gateway and web-to-host
software products are used to connect open systems to host servers and
databases. OEMs and partners now include EMC, Exabyte, Cap Gemini, Compaq,
Brocade Hitachi, IBM, and Sun. Computer Network is also a derivative play
on some of the fastest growing parts of EMC's businesses. Its Ultranet and
Channelink products are necessary to deploy EMC's explosive growth
mirroring application, Far Point. On the strength of a new management
team, led by Tom Hudson, the company has met or exceeded Street
expectations in the past few quarters. We believe that the company can
come close to achieving its target business model of 60% gross margin, 15%
operating margin, and 25% top-line growth by the end of 1999. Our 1999 EPS
estimate of $0.53 reflects significant progress toward this model. Our 12-
month price target for CMNT is $23 (29x 2000E EPS of $0.80).
CMNT Delivers Solid Q1. Q1 results were solid. Revenues of $36.9MM were
up 3% Q/Q and up 19% Y/Y. EPS of $0.11 included a one-time gain of $667K
related to the sale of its Vision product line in December 1997. Vision
was part of CMNT's acquisition of the Internet Solutions Division of
Apertus. Excluding this payment for Vision, EPS was $0.09, in line with
Street expectations. Product revenues of $25.8MM, up 1% Q/Q and up 15%
Y/Y. Service revenues of $11.2MM were up 8% Q/Q and up 26% Y/Y.
Professional services saw strong revenue growth in the quarter; at $2.2MM
they were up 53% Q/Q. The approximately $4-5MM in orders that were
deferred into Q1 (including $3MM in SAN orders) have all shipped. US
revenues represented 69% of the mix, while international revenues comprised
31% of the mix.
Strong SAN Revenues In The Quarter. SAN revenues of $11.8MM were up 40%
Q/Q and up 91% Y/Y. Both Ultranet and Channelink are used for disk
mirroring applications. About $10MM of Q1 SAN revenues resulted from disk
mirroring applications using EMC's Far Point software. Both Ultranet and
Channelink are used for disk mirroring applications; Ultranet is often sold
for networking disk mirroring applications in conjunction with EMC's Far
Point, when the customer is using both ESCON and T3 WAN connections.
Channelink is also often used for disk mirroring when T1 links are used or
when the mainframe connection is Bus and Tag. Channelink is also often
used with T1 links for near-real time mirroring using a Cascade
application.
EISD Business Continues To Be Strong. Total EISD revenues (including EAI
applications and SNA and web-ti-host gateways) were $4.9MM, down 21% Q/Q.
The Q/Q compare was not helped by a large $2.2MM order that shipped in
Q4:98. Of the $4.9MM, about $1.1MM shipped for EAI applications, primarily
Enterprise Access. Enterprise Access is a set of middleware used to create
objects for distributed applications, enabling them to access data from
mainframe data bases. This product is often sold to deliver legacy data to
Siebel customer relationship management applications. CMNT implements this
solution directly through its professional services organization, and
indirectly through Cap Gemini, Price Waterhouse, and Anderson Consulting.
Customers include Fortune 100 companies and governments. In contrast to
Wall Data's app, it requires no scripting and generates no code. MapMaker,
the development tools suite for this product will release with Enterprise
Access 3.0 in May. We believe that the relationship with Siebel will be
further formalized in the near future. The Process Dynamics application,
to deploy in mid-C99 is a top down development tool, that sits on top of
middleware and is used to link applications. It does not generate any
source code and since it delivers information in java, it can deploy
anywhere. We believe that this application is exceptionally promising.
Gross Margins Down Slightly; DSOs Up; Inventory Turns Up. Overall gross
margins of 59.1% were down from 60.4% in Q4:98, due to a different hardware
and software mix in the quarter. Product gross margins of 68% were down
from 69% in Q1:98, while service gross margins of 40% were flat Q/Q and up
from 36% in Q1:98. Overall networking gross margins (product and service)
were 56%, while overall EISD (product and service) gross margins were 71%.
DSOs of 87 days were up from 77 days at the end of Q4, primarily because
CMNT bills many of its annual maintenance contracts in Q1. The company's
stated goal continues to be 70 days of receivables by the end of Q4:99.
Inventory turns of 3.5x were up from 3.0x in Q4:98.
Outlook Continues To Be Strong. The outlook continues to be strong; with
the pipeline continuing to grow rapidly in both the networking and EISD
businesses. We believe the EAI business is likely to double Q/Q in Q2. We
believe CMNT's relationship with EMC continues to be very strong and the
two companies continue to be engaged in joint product development. CMNT's
products are reference sold for SRDF and Far Point. Ultranet and
Channelink products are sold for WAN, disk mirroring applications and CMNT
is one of two vendors (the other is INRANGE) qualified for this application
with EMC's SRDF and Far Point. The Siebel relationship is likely to
provide a boost to the EAI part of the EISD business, with new
relationships around areas such as customer relationship management
software likely to be created in the near future. We believe the EAI
business is poised for rapid growth.
Estimates Raised. Strong Buy Retained. New $23 Target Price Represents
29x C00 EPS Of $0.80. We have raised F99 estimates to $0.53, +0.03 and
have raised F00 estimates to $0.80 +$0.05. Our target price of $23, is
based on 29x C00 EPS of $0.80. We believe CMNT's overall market cap is
roughly half of the value of the likely public market cap of some private
Fiber Channel startups that are likely to go public soon. We believe the
fundamentals for CMNT are exceptionally strong. Its early leadership
position in the storage networking market -- projected to grow over 125% in
C99 to over $1.2B in 2000 -- with growth being driven by its key role in
implementing EMC's remote SRDF, driving 65 to 80% of disk mirroring sales,
points to a premium valuation. With strong operating leverage
opportunities on its income statement, we believe that EPS is likely to
more than double in C99. Over the last seven quarters, the company has met
or exceeded expectations.
SG Cowen Securities Corporation makes a market in CMNT securities.
SG COWEN SECURITIES CORPORATION BOSTON (617) 946-3700 NEW YORK (212)
495-6000 (212) 278-6000
SAN FRANCISCO (415) 646-7200 CHICAGO (312) 704-7400 ALBANY (518) 463-
5244 CLEVELAND (216) 621-8300
DAYTON (937) 226-4800 HOUSTON (713) 652-7100 PHOENIX (602) 840-0951
LONDON 44-171-710-0900
GENEVA 41-22-707-6900 PARIS 331-4244-1740 TOKYO 813-3503-0371 TORONTO
(416) 362-2229
Further information on any of the above securities may be obtained from
our offices. This report is published solely for information purposes,
and is not to be construed as an offer to sell or the solicitation of
an offer to buy any security in any state where such an offer or
solicitation would be illegal. The information herein is based on
sources we believe to be reliable but is not guaranteed by us and does
not purport to be a complete statement or summary of the available
data. Any opinions expressed herein are statements of our judgment on
this date and are subject to change without notice. SG Cowen
Securities Corporation, or one or more of its employees, including the
writer of this report, may have a position in any of the securities
discussed herein.
MM 3727
First Call Corporation - all rights reserved. 617/345-2500
END OF NOTE
[SU COM.1 OPR.1 CUS.1 CNA.1]
[IN COMPUT.1 DATAPR.1]
S.FL COWN.1 CMNT COM.1 OPR.1 CUS.1 CNA.1 COMPUT.1 DATAPR.1 |
