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ets (ETS) Message Board

  • terraprime37 terraprime37 Sep 26, 2003 1:59 PM Flag

    AM Analysis Part 3 - End.

    We believe that Enterasys' streamlining and cost-cutting efforts are proceeding
    well, laying the foundation for profitability in the fourth quarter.

    One of Enterasys' stated goals established during its analyst day in May is for
    the company to achieve profitability by the fourth quarter of this year. This
    goal is to be reached through a combination of revenue growth and operating
    expense reductions. While the trends driving revenue growth are well known, we
    feel that the company's efforts to reduce its operating expenses are
    under-appreciated. During the last quarter, management announced that it would
    begin streamlining its operations, a process that would include among other
    things a workforce reduction of 270 employees (approximately 16.5% of the
    company's employee base), the consolidation of facilities and the global
    implementation of a hosted CRM solution. Once completed, these actions will
    improve the company's profitability through both gross margin improvements
    (lower services COGS and lower D&A) and operating margin improvements (lower
    operating expenses). We are extremely pleased to find that these actions,
    especially the workforce reduction, have not seemed to create any shortcomings
    within the company's customer services organization, a hallmark of Enterasys'
    reputation. Furthermore, in several instances, we have heard from both
    employees and channel partners that these actions will ultimately make Enterasys
    a much more competitive, thorough and efficient vendor. In sum, we expect that
    Enterasys will fulfill its goal and achieve profitability by the fourth quarter
    through a combination of gross margin improvement, operating expense reductions
    and revenue growth.

    Despite the typical seasonality of the third quarter, we continue to expect
    Enterasys to report sequential revenue growth and improved gross margins.

    We continue to expect Enterasys to match our current 3Q03 operating estimates of
    $111.6 million in revenues and a loss of $0.03 per share. Our belief is based
    upon favorable feedback from several of the company's large domestic channel
    partners and customers and it is also based on the continued improvements in
    demand from the Asia Pacific region, especially Japan. Because we have yet to
    see a broad recovery in enterprise network spending, we believe that the third
    quarter results will be largely driven by sales into the company's existing
    customers with little chance of material upside to our expectations (as this
    note goes to publication we have the highest expectations of the published
    estimates). Furthermore, given the seasonally weak nature of Europe during the
    third quarter, we are not expecting the company's book to bill to remain above
    one exiting the quarter. While this may concern some, we do not believe that it
    will jeopardize our fourth quarter estimates and we expect that the company's
    book to bill will reaccelerate as a result of the timing of some fairly
    significant contracts.

    As a result of these positive trends, we are raising our 2004 operating
    estimates to $504.6mm from $493.8mm for revenue and to EPS of $0.15 from $0.12.
    Additionally, we are establishing preliminary 2005 operating estimates of
    $599.5mm of revenues and $0.27 EPS.

    The increase in our 2004 operating estimates is largely driven by the additional
    traction the company has gained with its distribution partners and our belief
    that Enterasys will continue to further broaden its distribution network.
    Importantly, of the $0.03 increase in our 2004 EPS estimate, $0.02 comes from an
    increase in operating margin assumption (from 8.0% to 8.4% for 2004) and $0.01
    comes from a reduction in our tax rate assumption (from 38.0% to 33.0% which
    will likely still prove too conservative).

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    • Yes, I concur, Thank You terraprime for that report. It said:
      <<<As a result of these positive trends, we are raising our 2004 operating
      estimates to $504.6mm from $493.8mm for revenue and to EPS of $0.15 from $0.12.>>>

      So if we apply the 35 PE ration that the report writer likes to the .15 for all of 2004, we get a price IN 2004 of 5.25. That is why I say that the stock got way ahead of itself, is currently overpriced and needs to correct to THIS YEARS anticipated value, which in my opinion is in the 3's.

    • A very good assessment...maybe optimistic...and if you feel 40 times 2004 projected earnings is could be a buyer....but 40 times 2004 pro forma ain't cheap.