Thnaks Frank and welcome. Looking forward to your input. Fwiw,
here's a report out on DMIC's Q:
DMIC: REPORTS STRONG RESULTS--UPGRADING INVESTMENT RATING TO "BUY"...
Bankers Trust Research/BT Alex. Brown Research
Brian Modoff,Ian Toll
April 22, 1999
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DIGITAL MICROWAVE CORPORATION [DMIC] "BUY"
Reports Stronger Results--Better Visibility--New Products Ramping
Well--Upgrading Investment Rating To "Buy" With 12-Month Price Target Of
$20
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Date: 04/21/1999 EPS 1998A 1999A 2000E
Price: 13.13 1Q 0.08 (0.14) 0.00
52-Wk Range: 13 - 2 2Q 0.19 (0.18) 0.03
Ann Dividend: 0.0 3Q 0.17 (0.11) 0.07
Ann Div Yld: 0.00% 4Q 0.16 (0.04) 0.10
Mkt Cap (mm): 811 FY(Mar.) 0.60 (0.47)A 0.20
3-Yr Growth: 20% FY P/EPS 21.9X NM 65.7X
CY EPS (0.27) 0.06 0.04
Est. Changed Yes CY P/EPS NM NM NM
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HIGHLIGHTS:
--4Q99 sales of $59.7 million and a loss per share of $0.04, versus our
estimates of $57.1 million and a loss per share of $0.06, Street
consensus was a loss per share of $0.06.
--DMIC has clearly made significant progress in cutting costs, integrating
the Innova product line, and rolling out new products.
--Higher orders, higher sales volumes, improved margins, strong book/bill
and a solid balance sheet, in our view.
--Recent channel checks with key component suppliers indicates a firming
of orders from DMIC and its sub-system vendors.
--The company's new products, including the Altium SONET/SDH radio, the
DART DS-1/E1 radio, and the DXR 700 long-haul radio, are all shipping in
volume.
--Increasing estimates, upgrading investment rating on the shares to "buy"
and establishing a 12-month price target of $20 (40x our FY01 EPS
estimate of $0.50).
DETAILS:
Digital Microwave Corporation reported F4Q99 sales of $59.7 million and a
loss per share of $0.04, versus our forecasts of $57.1 million and a loss
per share of $0.06. The Street consensus was a per share loss of $0.06.
Full fiscal year 1999 sales were $236.5 million and a net loss of $0.47 per
share.
DMIC has clearly made significant progress in cutting costs, integrating
the Innova product line, and rolling out new products. A stronger tone of
business is reflected in better orders, higher volumes absorbing overhead,
better margins, and a solid balance sheet, in our view.
Further, recent channel checks with key component suppliers indicates a
firming of orders from DMIC and its sub-system vendors.
Given the improving order flow, pipeline of new product introductions,
early strong interest in the Altium product line and potential for positive
forward earnings adjustments, we are upgrading our investment rating on the
shares to "buy" and establishing a 12-month price target of $20 (40x our
FY01 EPS estimate).
SALES AND ORDERS BY DIVISION
4Q99 orders were $65.2 million, a 16% increase over the prior quarter. The
backlog as of March 31, 1999, was $63.9 million. The book to bill was 1.1x
on the quarter. Stronger Broadband (Altium) sales were as expected.
Linearity was very good during the quarter. The company also had good
customer diversity, with 200 customers in the quarter including seven OEMs
(OEMs were only about 20% of sales, but that should grow).
Sales ($mil) 4Q 3Q Orders ($mil) 4Q 3Q
Narrowband 46.5 48.7 Narrowband 53.7 45.7
Broadband 3.6 0.7 Broadband 4.2 1.1
Long-Haul 9.6 8.9 Long-Haul 7.3 9.5
Total 59.7 58.3 Total 65.2 56.3
Source: Company reports
MARGIN IMPROVEMENT
Gross and operating margins benefited from higher volumes, product mix, and
past restructuring and cost-cutting measures. The quarter gross margin was
26.3% versus 20.2% in 3Q and 17.7% in 2Q. The key driver was lower factory
costs, driven by higher volume/overhead absorption and somewhat improved
product mix. Management hopes that the company will exit FY00 with gross
margin in the range of 30-35%. Operating expense was slightly lower at
29.3% of sales, versus 30.0% of sales in 3Q. Lower SG&A was offset by
higher R&D expense to support new product development and rollouts. The
company has completed all planned head count reductions.
NEW PRODUCT ROLLOUTS ON PLAN
The company's new products, including the Altium SONET/SDH radio, the DART
DS-1/E1 radio, and the DXR 700 long-haul radio, are all shipping in volume.
These new products accounted for about 10% of sales in quarter. The
company hopes to grow them to around 35% of sales by the end of FY00. A
40% gross margin is targeted for all new products.
ALTIUM
Sales were $3.5 million, up from $1 million in the prior quarter. The
company booked over $4 million in Altium orders in the 4Q99. The company
began shipping the 7 and 8 GHz versions in mid-January, and has recently
commenced 18 GHz version shipments. In the 1Q00 the company plans to ship
two more bands, followed by four more over the Q2-Q300 timeframe.
Currently the DMIC salesforce is pursuing several specific opportunities
that could amount to around $70 million in Altium sales ($30 million in the
Americas, $25 million in Europe, $15 million in Asia). About half of these
are for mobile wireless capacity upgrades and new systems, about 35% to
PTTs for fixed access networks, with the remainder LMDS and data networks.
We are forecasting Altium revenues of $44.7 million in FY00. We believe
there is upside potential to this forecast if certain large opportunities
receive funding.
DART
The DART is shipping in volume, with applications including microcell
interconnect, single T1/E1 lines, rural cellular backhaul, and low-cost
temporary installations. Recently, the company completed an international
E1 version, the 23 GHz frequency band radio, and have additional bands
under development.
DXR-700
The DXR-700 shipped a 7GHz in the 4Q, and has since completed the 8GHz
version.
REGIONAL COMMENTS
By geography, the company is seeing strength in multiple markets. China is
strong and growing. In the remainder of Asia, the company is seeing some
revived order flow from the Southeast Asian markets that all but
disappeared last year. The company is seeing strong and diverse strength
in European markets. In Latin America, the company has seen very strong
demand levels, but management is more cautious on the market because of
economic concerns and the risk that customers would not secure needed
financing.
BALANCE SHEET LOOKS FINE, IN OUR OPINION
The company closed out the year with $27 million in cash, down slightly
from $28 million last quarter. Accounts receivable were up by $6.4
million, and DSOs were 91 days. DSOs were up sequentially from 3Q's 83
days, level with 2Q's 92 days, and down from 2Q's 104 days. Management
stated that the 8 day increase in DSOs was not an indication of a back-end
loaded quarter, that the quarter was in fact linear. The company stated
that more generous terms were required for competitive reasons. Inventory
was $50.6 million, down over $4 million sequentially. Inventory turns rose
to 3.5x from 3Q's 3.4x.
The company's recent $65 million shelf registration is intended to afford
rapid capital markets access in the event that the company must expand
manufacturing capacity, inventories, or head count.
ADJUSTING ESTIMATES
Based on business trends and management guidance, we are raising our sales
and earnings estimates for FY00 and FY01.
PREVIOUS REVISED
BTAB EST. BTAB EST.
1Q00 Sales $63.8 mil $64.6 mil
1Q00 EPS $0.00 $0.00
FY00 Sales $290.3 mil $303.5 mil
FY00 EPS $0.19 $0.20
FY01 Sales $352.9 mil $378.5
FY01 EPS $0.45 $0.50
CONCLUSION
DMIC has clearly made significant progress in cutting costs, integrating
the Innova product line, and rolling out new products. A stronger tone of
business is reflected in better orders, higher volumes absorbing overhead,
better margins, and a solid balance sheet, in our view. Given the
improving order flow, pipeline of new product introductions, early strong
interest in the Altium product line and potential for positive forward
earnings adjustments, we are upgrading our investment rating on the shares
to "buy" and establishing a 12-month price target of $20 (40x our FY01 EPS
estimate). |
