|GS:ONI currently has about $2.90 in net cash ($685 mln in cash minus $300 mln in convertible debt). |
Excerpts from Goldman Sachs 10/24/01
ONI Systems - 3Q In-Line with Revised Guidance, Visibility Remains Low October 24, 2001
ONIS reported Q3 sales of $40.2 mln and LPS of $0.19, in line with our ests and at the bottom range of revised guidance. There are no significant changes to company or market outlook compared to the pre-announcement call. However, given that DSOs increased to 142 days from 88 days, ONIS provided no book-to-bill commentary, and '02 carrier capex levels continue to be slashed, we have slightly lowered our ests. At $5.75, ONIS trades at a 2x levered revenue multiple on forward sales, an attractive entry point for intermediate-term investors. Near-term upside may be limited until ONIS gets better traction with incumbent carriers and shows investors a clear path to profitability.
SLIGHTLY LOWERING ESTIMATES. Our new 2002 estimates are sales of $200 mln and a loss per share of $0.35 compared to our previous estimates of $215 mln and a loss per share of $0.28. The company did not provide 2002 guidance. Our Q4 estimates remain unchanged at sales of $40 mln and a loss per share of $0.17, in-line with company guidance of $40-50 mln and a loss per share of $0.16-$0.20.
KEY METRICS MIXED - DSOs INCREASE SHARPLY, MARGIN UPSDIE TO EXPECTATIONS. DSOs increased sharply in the quarter to 142 days vs. 88 days in 3Q. Investors will likely be concerned with this significant increase as it suggests that the company had a very back end loaded quarter. The company stated, however, that it expects DSOs to return to the 70-90 day range next quarter. ONI reported gross margin of 37% was below 2Q margin of 38.9%, but well above our 33% estimate. Given the sharp decline in sales sequentially, this relatively stable margin should be viewed positively by investors. The company added 3 customers, bring its cumulative base to 27, and had 17 repeat customers in the quarter. There were 3 customers accounting for more than 10% of sales. Cash decreased to $685 mln vs. $739 mln in 2Q.
VALUATION. ONI currently has about $2.90 in net cash ($685 mln in cash minus $300 mln in convertible debt). At about $5.75, the company trades at roughly 2x its levered revenue multiple, which has represented a support level for next-gen comm tech stocks (all next-gen commtech companies acquired over the last 4 years were valued at over 2.4x sales) - this represents attractive entry point for intermediate-term investors. Investors may discount the company's current cash levels and 2002 sales estimates, as the company has no clear path towards becoming cash flow positive and visibility into 2002 sales is very low. Therefore, the stock could trade to the $5 level before finding support. Positive catalysts for the stock will be driven by new customer announcements, increased activity in the metro WDM market by RBOCs and PTTs, and stabilization in the broad telco market.