TECH WORLD: NTGR—NetGear Shines in Stock Market Debut By Frederic Ruffy, Optionetics.com 7/31/2003 2:30:00 PM
Shares of NetGear (NTGR) surged on their first day of trading Thursday. The stock finished the day 26% above its initial offering prices. Investors cheered NetGear’s achievement because it was one of the few Initial Public Offerings [IPO] during 2003 so far to achieve a high degree of success. That, in turn, is perhaps an indication of increasing investor demand for new technology issues and a long awaited rebound in the market for Initial Public Offerings.
NetGear is a Santa Clara, Calif.-based company that designs, develops, markets and sells technologically advanced, branded networking equipment. Unlike many of its rivals that specialize in the large enterprise market, NetGear targets home markets and companies with 250 employs or less. According to the company’s web site (netgear.com), the company has so far sold over 17 million units and “as a result of NetGear’s brand name, the execution of its operating strategy and the growth in demand for networking products within small businesses and homes, the company has achieved net revenue growth each year since its inception in 1996.”
Investors eagerly bought shares of NetGear when shares debuted on Thursday. Lehman Brothers (LEH) led the IPO and priced seven million shares at the high end of the expected price of $12.00 to $14.00 a share. The price had been $10.00 to $12.00 a share, but Lehman Brothers raised the offering bid due to strong prepricing demand. Shares opened much higher than expected and started trading at $18.50 a share on the Nasdaq Stock Market Thursday morning.
One reason for NetGear’s warm reception on Wall Street probably owes to the fact that, unlike most IPOs so far this year, the company is profitable. In the first quarter, the company reported $67.7 million in revenues, which was up from $45.5 million last year. Furthermore, net income totaled $1.6 million, compared to a loss of $17.3 million last year. In short, the company’s operating profit in the first quarter may be one of the factors underpinning the successful IPO.
NetGear’s successful offering also comes on the heels of a period of strong performance in the networking sector. The nearby chart shows the one-year performance of the AMEX Networking Index ($NWX). The index, which tracks the performance of fifteen leading networking companies, has more than doubled since October of last year. The index is up nearly 40% during the past five months. Investors have been buying shares of networking companies on expectations that a turnaround in information technology spending is close at hand. Therefore, the sheer momentum within the networking sector is perhaps another factor underlying NTGR’s strong first day gains.
Some market watchers view NetGear’s successful debut as a sign of improving conditions in the new issues market. It was, in fact, the company’s second attempt at an IPO. The company filed to raise $130 million in September 2000, and just before the IPO market entered its long three-year slump. So the offering never took place. Now conditions are improving, however. This year, only eighteen companies have come to market. Eight have IPOs have taken place this month alone and the pace of Initial Public Offerings appears to be picking up. Going forward, if other offerings get warm receptions like NetGear’s, it will probably encourage more companies to return to the market and begin selling their shares to the public.
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site Visit Fred Ruffy’s Forum
The Dow Industrials suffered their first weekly decline since June as the economy unexpectedly lost jobs last month and a gauge of manufacturing fell shy of economists' forecasts. Reports on personal income, personal spending, and construction activity also fell short of expectations, while a rise in the University of Michigan Sentiment Index was largely ignored. The DJIA dropped 79 points (-0.9%) to 9,153. The S&P 500 fell 10 points (-1.0%) to 980. The Nasdaq Composite slipped 19 points (-1.1%) to 1,715. Declines in the biotech sector weighed on the Nasdaq while drug and financial shares weakened blue chips. In the financial sector, worries mounted that the recent surge in bond yields could sting banks and brokerages. More than five stocks declined for every two that advanced on the NYSE. Volume was on the light side, as 1.4 billion shares changed hands on the Big Board, 5.1 percent less than the daily average over the past three months. Treasuries fell for the sixth weekly loss in seven, and bond losses have begun to influence brokerage action. Crude oil was up over a dollar after an attack against an Iraqi pipeline, while the dollar ended its strongest week against the euro in 4-months on signs of sporadic economic success.
Top Stories . . . The U.S. economy unexpectedly lost 44,000 jobs in July for a sixth straight decline, the government reported. The unemployment rate dropped to 6.2 percent as discouraged job-seekers left the work force.
U.S. manufacturing expanded last month for the first time since February, adding to evidence the economy is starting to pick up, an industry report showed.
ChevronTexaco, the second- biggest U.S. oil company, said second-quarter profit quadrupled as energy prices rose and the refining business improved.
California plans to guarantee $1.5 billion of bonds backed by payments from cigarette makers with state tax revenue, the second U.S. state to offer a back-up pledge on tobacco bonds being used to fill budget deficits.
Ford Motor, the world's second- largest automaker, said its U.S. sales of cars and trucks fell 10.7 percent in July from the 2002 period.
President George W. Bush said the U.S. economy is growing even as a government report showed a decline of 44,000 jobs last month, and urged Congress to pass energy legislation and restrictions on damage awards in lawsuits.
Quotes of Note . . . ``We're going to need to see an improving job market to prove the economy is doing better and give justification to the equity prices we have right now,'' said Allan Meyers, who helps manage $30 billion for Fifth Third Bank. He recently bought shares of Citigroup Inc. and American International Group.
``The market has clearly discounted a recovery. We'd better get one and we'd better see continued improvement in corporate profitability, otherwise this rally's over.'' said Bob Sitko, portfolio manager at USAA Investment Management Co., which oversees $27 billion in San Antonio.
Of Note . . . Along with favorable economic numbers the rally has been sparked by favorable earnings. Overall, for the second-quarter, 64% of the S&P 500 companies that have released earnings have beat analyst expectations, compared with an average of 58% over the past 9-years.
The closely followed Stock Trader's Almanac notes that August has become the worst month for the Dow Industrials and the broader S&P 500 index over the past 15 years and the third worst month for the Nasdaq.
Gurus . . . Ed Yardeni told CNBC that a rise in the 10-Year Note to 5% yield would not harm the economic or stock market recovery. He would equate the 5% yield to a 20 PE multiple for the S&P from the current 18 times, and bring the bellwether to a range of 1100-to-1140 against the current level of 990. Ed would be a buyer of retail stocks and capital spending, particularly in technology.
Jeff Rubin, Research Director for Birinyi Associates, says earnings and second-half guidance validate the rally that began in March, the strongest and broadest rally as measured by advance-to-decline lines since 1960. Rubin says this rally is different from the previous 20% upside moves, and he does not think it is overheated.
Jason Trennert of ISI is now paying attention to see if the first leg, supported by low interest rates, cost-cutting, and a weak dollar, gives way to a second leg, powered by lowered unemployment, renewed corporate spending and GDP growth.
Commenting on the July jobs data, Ian Shepherdson, chief U.S. economist at High Frequency Economics, said manufacturing employment remain "awful," with 71,000 jobs lost in the sector last month. The bright spot in employment is the growth in temporary help, the economist said, since big swings in temp jobs lead overall employment by a few months.
BusinessWeek article discusses the "third quarter doldrums" suggesting the market could stall right here as summer profit taking takes a toll. Stocks that have low betas fare well during this time with S&P's chief investment strategists top picks being Alberto Culver, Compass Bancshares and Oxford Health. In addition, General Maritime is mentioned given its position to capitalize on the "dwindling" tanker supply and rise in U.S. oil imports as the economy begins to "perk up". Its recent acquisitions of tankers is supposed to add impact by the third quarter according to the CEO of the company.
Lesson . . . Darwin Rules. The standardizing and then commoditizing trends in the IT market, driven by Moore's law, imply that the "low-cost" vendor almost always wins, with Dell and Intel as two examples. While an "exit/de-emphasize" strategy such as IBM's can work, the most challenged business models will be faced by vendors who "double-down" like H-P and those who are in "denial," like Sun.
Buying Bonds . . . The rise in interest rates has created some asset allocation switches into bonds, with word yesterday afternoon of a large Goldman swap. However, a rate rise is normally part and parcel of an economic recovery.
Eco Speak . . . Consumer sentiment improved in late July, according to researchers at the University of Michigan. The consumer sentiment index rose to 90.9 in late July from 89.7 in June. The preliminary July sentiment index came in at 90.3. The increase was above the consensus forecast of Wall Street economists who had expected sentiment to improve to 90.7.
June personal income and consumer spending each posted a 0.3 percent rise in June. The income figure matched Wall Street forecasts, while the spending figure came in below expectations for a 0.5 percent rise. However, the Commerce Department also upwardly revised the May personal spending figure to show a 0.4 percent increase, compared to an initial estimate of a 0.1 percent rise.
The labor market continued to shed jobs in July. July nonfarm payroll employment fell by 44,000 jobs. The unemployment rate edged down to 6.2 percent from 6.4 percent last month. Economists looked for an increase of 13,000 nonfarm payrolls and a jobless rate to remain unchanged at 6.4 percent from June. June's payroll loss was revised to 72,000 from the 30,000 drop first reported. Manufacturing, retail trade and government all reported job losses, while the temporary help sector and the construction industry expanded their payrolls. A string of consecutive monthly payrolls declines since February now totals 486,000 lost jobs. The average workweek fell by six minutes in July. Factory hours fell by 12 minutes. Overtime in the factory sector was unchanged. Wages increased an expected 0.3 percent last month.
Spending on construction was weaker than expected in June at an annual rate of $864.3 billion, little changed from a downwardly revised May figure, the Commerce Department reported. A survey of economists had produced a consensus forecast of a 0.5 percent rise. The closely watched private sector figures showed a 0.3 percent decline in construction spending to an annual rate of $652.1 billion. Residential construction declined 0.4 percent from May to an annual rate of $434.8 billion. Public construction spending rose 1 percent from May to $212.2 billion. The overall June spending figure is 1.1 percent above the June 2002 estimate, the Commerce Department said. For the first 6 months of 2003, construction spending totaled $409.3 billion, 1.5 percent above the same period in 2002.
The manufacturing sector in the United States expanded for the first time in five months. The ISM index rose to 51.8 percent from 49.8 percent in June. This is the highest reading since January. The increase was in line with expectations. Readings over 50 percent indicate that a majority of firms surveyed thought business was getting better or at least no worse. New orders rose to 56.6 percent in July from 52.2 percent in June. Production rose to 53.3 percent from 52.9 percent in June.
IPO Mania . . . Citadel Broadcasting priced 22 million share at $19 each for its initial public offering. The radio broadcasting firm priced at the top of its $17 to $19 range in a sign of strong investor interest. The company is the sixth largest radio broadcasting company in the U.S. based on net broadcasting revenue. It's raising $418 million as the second IPO of the week after the successful kickoff from Netgear on Thursday. Friday marks the return to the public market for Citadel, which was publicly traded for about two years before it was taken private.
Fund Flows . . . Trim Tabs estimates that all equity funds witnessed inflows of $600 million over the week ending July 30, which compares to inflows of $4.1 billion in the prior week. And equity funds that invest primarily in U.S. stocks saw inflows of $1.2 billion versus inflows of $3.2 billion during the prior week. Finally, bond funds saw a $1.3 billion infusion, down from inflows of $1.5 billion the prior week.
Financials . . . Provident Financial Holdings said its board has declared a quarterly cash dividend of 10 cents per share, effectively doubling its payout.
IndyMac Bancorp said strong mortgage business contributed to record second quarter earnings. The company reported earnings of $41.4 million, or 73 cents per share, 20 percent higher than a year ago. Revenue rose 25 percent to $173 million. The company also boosted its dividend 50 percent to 15 cents from 10 cents.
Oil & Gas . . . ChevronTexaco reported earnings of $1.6 billion, or $1.50 per share, up from its year-ago profit of $407 million, or 39 cents per share. The latest results included a charge of $117 million, or 11 cents per share, related to the write-down of certain assets. Analysts were looking for earnings of $1.52 per share in the June period, on average. The company saw the biggest increase in net income from its refining, marketing and transportation operations, which produced earnings of $438 million in the latest three months, well ahead of its total of $18 million in the same period a year earlier. In addition, losses from the company's other interests, including its stake in Dynegy, and real estate and investment activities, narrowed to $154 million in the quarter from $893 million in the same period a year earlier.
Energy . . . Texas Utilities upped to Buy from Hold at Jefferies based on valuation. The firm raised price target to $22.50 from $20.50.
Transports . . . Winnebago was upgraded at RW Baird to Outperform from Neutral and raised their target to $48 from $42. The firm says they are incrementally more positive following a Winnebago dealer event, as retail trends remain healthy, helping dealers clear excess inventory and boosting the backlog, while the co launched important new diesel products targeting an untapped price segment, which over time could add roughly $100 million to revenue annually.
Frontier Airlines reported earnings of $0.07 per share which was $0.05 better than the consensus of $0.02. Revenues rose 27.4% year/year to $142.4 million versus the $144.6 million consensus. Company also announces it has signed a letter of intent with Airbus to acquire 15 additional Airbus A319 aircraft with purchase rights for up to an additional 23 A319 aircraft. The regional carrier said it expects to increase capacity by about 27 percent during fiscal 2005.
Education . . . Strayer Education reported earnings of $8.8 million, or 60 cents per share, up from its year-ago profit of $7.4 million, or 51 cents per share, and 2 cents ahead of the average estimate. Revenue jumped 24 percent in the latest three months to $37 million from $29.8 million in the same period a year earlier. The education services firm cited increased enrollment and a 5 percent boost in tuition for the revenue growth in the June period. Looking ahead, the company raised its outlook for the year to earnings of $2.04 to $2.08 per share, before items.
Services . . . Monster Worldwide was downgraded at Banc of America to Neutral from Buy based on valuation as well as a lack of near-term catalysts. Target is $25.
Consumer Products . . . Tupperware was upped to Market Outperform at Avondale Partners due to stock's attractive risk/reward profile. Firm now views TUP as an excellent total return vehicle with potential appreciation of 15-20% over the next yr driven by 10-15% potential stock upside coupled with its attractive 5.7% dividend yield. Target $17.50.
Tobacco . . . Philip Morris verdict in California seen as solid win for tobacco industry. Prudential views news of California court victory as an exceptional win for the tobacco industry against a very good plaintiff's attorney who has beaten the industry (badly) the prior two times they have faced off.
Retail . . . Amazon.com estimates cut at Legg Mason. Legg Mason reduces its 2003 cash EPS estimate to $0.56 from $0.61, reflecting the assumption of gross margin of 24% in 4th quarter versus firm's prior assumption of 25%. The adjustment is based upon input from company personnel of their plans. Legg Mason rates the stock a Hold.
Amazon.com was mentioned favorably in latest Business Week. Critics of AMZN are quick to pan the stock as overpriced at 47x 2004 earnings, bulls think that with co finally making money, the jump to $40 from $12 a year ago is justified -- with more to come. Bill Harnisch of Forstmann-Leff-Peconic Partners: "I get more enthusiastic as I look at the numbers." Profits are up -- on surging sales and low operating-expense growth." With Amazon's estimated yearly profit growth of 40%, Harnisch sees the stock at $60 in a year.
Healthcare . . . Johnson & Johnson was cut to Neutral at Merrill Lynch based on the following factors: 1) JNJ's reign as "King of the Hill" in stents may be short-lived since its early lead in coated stents has been botched by manufacturing woes, 2) the timing of next generation products from JNJ that could mitigate share loss seems to be slipping, and 3) JNJ's pharmaceutical franchise is facing several challenges that will trim sales growth to the 8-10% range over the next few years.
JP Morgan downgraded Express Scripts and Cardinal Health to Neutral from Overweight. Regarding ESRX, firm believes that over the near-term Caremark and Advance PCS offer better investment opportunities, citing ESRX's weak relative performance in 2nd quarter and forecast for FY03, ability to meet future expectations with high-quality earnings, and relative valuation. Regarding Cardinal Health, firm believes that over the near-term Amerisource Bergen offers a better investment opportunity, as: 1) ABC did not benefit to the same extent as CAH with pharma manufacturers over the last few years, thus creating easier comparisons, and 2) ABC's operating profit also has room for expansion as it continues to leverage its position as the largest distributor and continue to grow its value-added services.
Omnicare target was raised to $45 at CIBC following stronger than expected results. The firm says re-acceleration in organic growth and strong free cash generation should set the stage for strong EPS comps over next 18 months; firm also notes attractive valuation at 13x their 2004 estimate.
LabOne announced that it has signed an agreement to acquire the MetLife Insurance Testing Laboratory and entered into a long-term agreement to provide laboratory testing services to MET.
CIGNA reported income from continuing ops of $1.13 per share, $0.05 better than the consensus of $1.08. Revenues fell 2.2% year/year to $4.63 billion versus the $4.83 billion consensus. CI currently estimates full year net of $5.00-$5.25 versus consensus $4.92.
Triad Hospitals was added to Merrill Lynch's Focus 1 List. The firm continues to believe that TRI is doing much better than is being perceived in the investment community, as the company has been posting some of the fastest internal growth and has consistently meet or beat expectations since its spin-off from HCA in 1999. In addition, firm believes that the company can deliver on forecasts even if volume trends within the hospital industry remain sluggish, and a rebound in industry admission trends should be a potential driver of upside relative to current forecasts.
Medical Devices . . . Digene said its DNAwithPap test for human papillomavirus has received the recommendation of The American College of Obstetricians and Gynecologists for use in cervical cancer screening by women age 30 and older.
Medtronic was upgraded at Lehman to Overweight from Equal-Weight and raised their target to $60 from $52. The firm cited increasing confidence that MDT should be able to realize higher growth rates than currently anticipated over the next 3 years; primary driver is their belief that MDT's drug-eluting stent program is on track and that it will accelerate the company's top- and bottom-line growth rates above 15% in 2005-06. Also, yesterday's announcement regarding new reimbursement for MDT's InFuse product bolsters the company's near-term outlook and could signal potential upside to their 2004 EPS estimate.
Drugs . . . Andrx was downgraded at Wachovia to Market Perform from Outperform. The firm is saying yesterday's generic Wellbutrin SR exclusivity transfer agreement may not represent a sustainable earnings stream for ADRX. The firm says the economic benefits of the first-to-file exclusivity expires in about 6 months, unless ADRX can get its own product approved and launched, and since the profit-share ends in 6 months there is less visibility in ADRX's ability to offset the declining generic Prilosec royalty in 2nd half 2004. The valuation range is $22-$26.
Impax Labs was upgraded at Wachovia to Outperform from Market Perform based on their analysis of the earnings impact of yesterday's generic Wellbutrin SR exclusivity transfer agreement. The firm says the structure of the deal is favorable for IPXL, as IPXL only has to share profits with Andrx for six months. Valuation range is $17-$19.
Biotech . . . The FDA has requested additional information, including clarification of clinical and pre-clinical data, on the Biopure’s anemia treatment Hemopure. This follows the completion of a review of the biologic license application. The FDA does not request additional clinical trials. The request for information suspends the FDA review cycle. "By maintaining thirty days on the review clock, the FDA is encouraging us to work with them to complete the approval process as quickly as possible," said Biopure CEO Thomas Moore.
Onyx Pharma started with a Strong Buy at SG Cowen. The firm believes that the company's investigational cancer therapy BAY 43-9006 is one of the more promising new treatments in development, and expects ONXX to continue to be a strong performer through the rest of 2003 as Phase II data from BAY 43-9006 is released (Nov) and the compound enters Phase III trials (year-end 2003).
Gilead Sciences target raised to $88 from $73 at Prudential.
Cell Therapeutics disclosed that CEO Dr. James Bianco recently sold 172,718, representing approx 11% of his current total grants and holdings in the company. "I recently exercised stock options and sold shares of CTI stock to fund my ongoing philanthropic commitment to education and literacy in the Seattle community..."
Hotel & Leisure . . . Four Seasons reported earnings of $0.18 per share, ex items, $0.01 worse than the consensus of $0.19. Revenues fell 13.7% year/year to $49.6 million versus the $53.2 million consensus. Actuals converted from Canadian dollars.
Media . . . Disney reported its fiscal third quarter results, posting better-than-expected top-line growth (+4% estimate) and operating income growth (up 2%% versus -9% estimate). EPS were $0.19 versus our estimate for $0.15 and consensus of $0.16. There was no change in guidance. The most recent guidance was given during the company's Annual Shareholder Meeting in late March: that net income growth would be "more modest" than management's original growth estimate of 25%-35%. Analysts are increasing our full-year 2003 estimates following the better-than-anticipated 3rd quarter 2003 results: now expect operating income to grow 3.4% to $2.922 billion versus prior growth estimate of 0.5% (to $2.844 billion). New EPS estimate (excluding one-time items) is $0.57 versus prior $0.55. Expect revenue growth of 6% versus prior 5% estimate. A string of theatrical box office successes, coupled with market share gains at the TV and radio stations, drove profitability growth in the quarter. The robustness of the national TV ad market and lower programming costs at ESPN will help profitability in fiscal 4th quarter 2003.
The studio was strong (revenue up 5% and operating income more than doubling), parks continued to be weak (revenue down 6% and operating income down 25%) and media networks were mixed (broadcasting showed strong operating income growth on a 2% revenue increase, while cable had strong revenue growth of 38% but operating income fell 5% -- due mostly to NBA rights fees which were absent last year). Corporate overhead increased 54%, we believe mostly due to higher employee pension and health benefit costs, as well as new finance and human resource information technology systems. Employee costs rose across all the divisions, as per management’s guidance at the beginning of the fiscal year.
Disney’s television station group (10 stations) revenue was up 6% in fiscal 3rd quarter 2003 and is currently pacing up a similar amount in fiscal 4th quarter. Disney station growth during the quarter reflected market share gains, as believe market growth in Disney TV station markets was well below 6%. Comps are likely to get tougher in fiscal 1st quarter 2004 due to political advertising in fiscal 1st quarter 2003, though if the group can continue to gain share the impact should be largely mitigated.
Radio station revenue increased 7% in 3rd quarter 2003, though radio networks were down 4%. The radio stations also enjoyed solid share gains, especially in the two largest markets, New York and Los Angeles, where Disney outperformed market growth by 600 and 500 basis points, respectively. Current pacings at both the radio stations and networks are up 10%, ahead of most other radio station groups.
Telecom . . . MCI, formerly known as WorldCom, could be barred from receiving any more contracts from the federal government under a proposal from the agency responsible for issuing them. The General Services Administration said MCI lacks the "necessary internal controls and business ethics" to receive further government contracts. The federal government is one of MCI's largest customers. The loss of federal contracts would deal a severe blow to the company, which is struggling to emerge from bankruptcy. MCI receives nearly $1 billion a year for its government work and had made winning new contracts a key part of its strategy to emerge from bankruptcy court as a viable company.
Western Wireless was upped to Strong Buy from Outperform at Raymond James. The firm believes that the combined domestic and international businesses at WWCA are worth $20 per share.
Electronics . . . For the second consecutive week, Palm lost market share owing to launch of new products by H-P and Sony. Nevertheless, Palm continued to remain at #1 position. During the week ended 7/19, Palm's unit market share was 36%, declined from 40% the week before. Benefiting from wider availability of its newest products as well as modest improvements in sales of its mid-range products, Sony increased its market share by 4% from 31% to 35% and maintained its #2 position. H-P continued to benefit its new iPaqs with unit market share remaining at 20%. In terms of revenue, for the first time, H-P's dollar market share exceeded the 30% mark to 31% of total sales, over taking Sony as #2 vendor and behind Palm by only 4% share. We expect new products as well as recent pause in Dell’s Axim sales owing to a software glitch could boost iPaq sales in the short-term. Toshiba was #4 with 5% of the market, a decline of 1% from the week before. It seems that Toshiba continues to lose share to H-P owing to decline in popularity of its new model. Handspring remained at #5 position with 2% of the market, as sales increased by 11% sequentially (21% on unit basis).
IT Services . . . Legg Mason upgraded Inforte to Buy from Hold based on the following factors: 1) an improving macro demand environment for IT services, 2) leverage to improvement in discretionary IT spending, specifically potential margin expansion and earnings acceleration, 3) strong balance sheet and solid financial performance in a tough environment, and 4) attractive valuation.
IBM’s pension plan has been ruled unfair to older employees by a federal judge in light of its switch to a cash balance pension plan that was very popular during the 1990's. The plan is more attractive to the younger and more mobile generation of workers while older workers contend it cuts their expected benefits by has much as half.
Accenture was upgraded at Legg Mason to Buy from Hold due to: 1) growing indications of firming demand within the North American consulting market, 2) strong co bookings, which portends a good 2H03 and beyond, 3) growing market share in outsourcing deals, and 4) streamlined overhead and strong cash flow. Target is $28.
EMS . . . Lehman upgrades Celestica and Sanmina-SCI. Lehman raises their view of the EMS sector to Positive from Neutral. The firm says that as each day goes by, it becomes clearer that we are not going to slip back into another recession and that the economy is making a slow, gradual recovery. In the near-term, firm expects to see a year-end rally in the group based on better Quarter over Quarter trends going into Dec and the hope that 2004 is stronger than 2003, and says catalysts could be encouraging quarterly results in August from Cisco, Dell, and Hewlett-Packard.
Storage . . . With EMC's announcement of iSCSI (or Storage over IP) support on its high-end DMX product line, it seems that interest in iSCSI is re-emerging with recent support of several industry leaders including Intel, Cisco, IBM, Microsoft, Dell and others. Meanwhile, Network Appliance has been shipping iSCSI systems for a few months now, and Hitachi Data Systems is expected to come up with iSCSI support (along with its NAS blades) in 3rd quarter 2003. The question is: why? The answer to paraphrase Willie Sutton is because that's where the money is. iSCSI's gain will probably be perceived by investors as a negative for the growth of Fibre Channel switches (Brocade, McData) and host bus adapters (Emulex, QLogic, JNI). The key theme here is not that iSCSI will have a negative impact on the Fibre Channel component vendors in the near term, but that iSCSI is now moving from being a technology with uncertain future to gaining support from major storage vendors such as EMC, Dell, Hitachi, and Network Appliance.
Where’s the money? The reason for the interest in iSCSI is that it appears to represent the largest market opportunity, since it represents the largest segment that has not been networked yet. How large is that opportunity? Interestingly, it looks like a larger market opportunity than the high end and mid range.
In a recent report by IDC on the state of the Fibre Channel Hub and Switch market, there is an important perspective on where the growth in storage networking can come from. The growth opportunity for storage networking appears to be in the lower-end segment of the market (i.e., systems costing less than $50,000 and accounting for about 35% of external storage revenues) where only 32% of the terabytes shipped in 2002 were networked.
Higher-end is estimated at around 40% of external storage revenues or around $5.4 billion. According to the report, more than 83% of 2002 external array terabyte shipments costing more than $150,000 were networked which means that the total available market remaining is around $1 billion or 17% of the 40% of the market.
Mid-range is around 25% of external storage revenues or around $3.4 billion. According to IDC, more than 71% of terabyte shipments in external arrays costing between $50,000 and $150,000 were networked, which means that the remaining available market is around $1 billion of 29% of 25% of the total market.
Lower-end is around 35% of external storage revenues or around $4.7 billion. In comparison, the low end represents the largest opportunity. According to IDC, only 32% of external array terabyte shipments in arrays costing less than $50,000 were sold into networked environments, which means that the remaining market opportunity is around $3.2 billion or 68% of the 35% of the market and that only includes the external storage.
Network Equipment . . . Arris Group and Juniper Networks announced a collaboration enhance the choice and flexibility available to Multi-Service Operators looking to differentiate their offerings through the delivery of IP-based services. Through this co-marketing initiative, Juniper Networks and ARRIS will deliver industry-leading CMTS (Cable Modem Termination System) and IP solutions to help transform the MSOs' business. In support of this partnering strategy, Juniper Networks also announced its intention to voluntarily discontinue the G-series product line. JNPR plans to take a one-time charge of $10-15 million associated with this initiative.
Tellabs is laying off 325 employees as a result of its decision to outsource the manufacturing of North American products to Sanmina-SCI. The networker said it would record charges of $90 million to $110 million in the third quarter. The manufacturing transition will begin immediately, with benefits expected to be "slight" in 2003 and increasing in 2004.
Sonus Networks reaffirmed its 3rd quarter guidance of 15-20% rev growth given on July 10. The firm says that the article appearing on multex indicating that the company had revised its financial guidance for 3rd quarter and 2003 was incorrect and was not provided by the company.
Semiconductor Equipment . . . JP Morgan added Brooks Automation, ASML Holdings to Focus List. The firm is saying the recent activation of numerous fab projects should spark an order surge for automation and other long lead-time capacity items in 2nd half 2003. The firm also cited compelling valuations; target for BRKS is $51, target for ASML is $29.
ASE Test upgraded at Bear Stearns to Outperform from Peer Perform based on the following factors: 1) firm now expects the co to return to profitability in 3rd quarter vs their previous expectation of Q4, 2) co has the highest proportion of IC testing rev in its rev mix among its peers, which gives the co the highest operating leverage in the IC packaging and testing industry, 3) firm believes its new handset camera System-In-Package module biz should offer rev growth opportunities in 2H03, and 4) valuation is the lowest among leading backend IC company's. Target is $8.50.
Semiconductors . . . Smith Barney upped it price target and estimates for Micron Technology, citing strength in the DRAM (dynamic random access memory) market. The brokerage now expects the chip company to lose 17 cents a share in fiscal 2004 compared with previous assumptions of a loss of 45 cents a share while fiscal 2005 earnings are now expected to total $1.00 a share vs. the previously expected 77 cents. Micron's price target was lifted to $12 from $10.
Adams Harkness upgrades RF Micro and Skyworks to Strong Buy from Buy. The firm continues to believe that the upgrade cycle to new color and data-enabled devices in the wireless handset market is underway, and while the June qtr proved to be a lumpy one, they believe that expectations have now been reset, that valuations have corrected, and that news flow going forward will be positive.
Software . . . Intel will bundle Wave Systems' software and services with a future Intel desktop motherboard targeted for 'trusted computing platforms.
Hyperion Solutions was upped to Over Weight from Equal Weight at Pacific Growth. After taking some time to evaluate the Brio acquisition and analyzing where our estimates could end up, it became apparent to firm that the risk/reward opportunity on HYSL is to the upside versus the downside.
Business Objects was cut to Hold at Deutsche following stronger than expected earnings. The firm is saying the positive impact of the Crystal acquisition is already in the stock and they expect shares to drift sideways during the seasonally weak 3rd quarter. Price target is $24.
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