Telecom Vendors Financial Index & Performance Monitor

Transcription

1 Telecom Vendors Financial Index & Performance Monitor Q Summary In addition to technology, CTOs and CIOs must have independent information about the sustainability of a vendor/company to assess the risk of selecting the right vendor to meet their business requirements and to ascertain a risk level on the stability of the vendor regardless of technology innovations. ACG Research s Index tracks the vendors current state and which are trending up or down: Adtran, Alcatel-Lucent, Brocade, Ciena, Cisco, Ericsson, Fujitsu, Infinera, Juniper, Tellabs, and ZTE. The performance scores are calculated using 11 ratios and Z scores, subdivided into two categories: sustainability and operational; the data originates from annual reports, and quarterly filings. The index examines standard financial ratios related to profitability and liquidity, which are validated by Wall Street. An average of all ratios across all vendors was defined as the index. The goal of the index service is to create an industry baseline that takes all of the vendors in targeted sectors and creates an industry average to determine vendors risk levels. 1

2 Methodology Key financial data for telecom equipment vendors was gathered from reports and alternate sources. Sustainability and operational ratios were calculated using the financial data as input. Vendor comparative analyses were done using the ratio results, supported with descriptive facts from vendors reports and press releases. Using the data a visual representation of the risk level of vendors was created. Based on the risk score, vendors were segmented as low risk (score: 0 to 3.5), medium risk (score: 3.6 to 8) or high risk (score: 8.1 to 10). This risk score is a composite of various sustainability and operational ratios. Gather key financial data for vendors Define financial ratios Create financial database & indexes Sustainability Risk Score Considers following financial ratios: Future Revenue Ratio Equity to Debt Ratio Net Cash Ratio R&D Potential Ratio Future FCF Ratio Services to Product Revenue Ratio Analyze vendor data using comparative analysis techniques Calculate risk score, sustainability risk and operational risk Operational Risk Score Considers following financial ratios: Receivable Efficiency Ratio FCF to OCF Ratio Operating Margin Inventory Turnover Ratio Revenue to Fixed Assets Ratio Create summary chart based on risk scores * Risk Score is a weighted average of all the financial ratios 2

3 Disclaimer: This financial index is not or should not be used to determine any company s stock position. ACG Research makes no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the contents. Ratios and financial information presented in this index is information publically posted. They do not represent the opinions of ACG Research or any of its analysts on whether to buy, sell or hold shares of a particular stock. ACG Research is an analyst and consulting company that focuses in the networking and telecom space. Our best-in-class subject matter analysts have a combined 120+ years of experience and expertise in telecom segments that address both technology and business issues. We offer comprehensive, high-quality, end-to-end business consulting and syndicated research services. For more information about this service, contact sales@acgresearch.net. Copyright 2013 ACG Research, The copyright in this publication or the material on this website (including without limitation the text, computer code, artwork, photographs, images, music, audio material, video material and audio-visual material on this website) is owned by ACG Research. All Rights Reserved. 3

4 Ratios 9.7% 3.2% 13.8% 2.8% 20.3% 8.0% 2.9% 4.5% 12.2% -3.1% -4.3% Operating income (or loss) divided by total revenue. It constitutes a widely accepted operations performance measure and reflects level of profitability. Higher operating margin is encouraging as it indicates that higher proportion of revenue is being converted to operating income Provides a measure of how fast a vendor is moving out (selling) its inventory and is assessed by dividing cost of sales by inventory in each quarter. A higher value of inventory turnover indicates better inventory management efficiency of a firm. Low inventory turnover ratio signifies increased risk of inventory obsolescence Compares a vendor s equity and debt to determine vendor s future operational capacity. Higher value is favorable because this means that the vendor is financing its assets with more (shareholders ) equity than debt. Higher debt (from external lenders) implies more financial obligations and hence higher risk Used to analyze the vendor s accounts receivables against total revenue to determine efficiencies (or inefficiencies) in extending credit and collecting debts. A high ratio indicates efficient receivables management, vendor s extension of credit and collection of accounts receivable is efficient. Low value means collections are taking longer Used to determine amount of revenue per fixed-asset dollar. Measures how the firm leverages its assets. High ratio signifies that the vendor has less money tied up with fixed assets for each unit of sales revenue. Low ratio indicates that the vendor has overinvested in the fixed assets, property, plant and equipment (PPE). 4

5 To assess the probability of a vendor going bankrupt, the Altman Z-Score is used. The Z- score uses several business income and balance sheet values to assess the financial health of a firm. Vendor with low Z-Score has a relatively high probability of bankruptcy. NA NA Divides vendor s services revenue by products revenue, providing a picture of the quarterly business model. A lower ratio suggests that the vendor is focusing more on products and less on (value-added) services. Higher ratio is favorable as it indicates that the products are being backed with consulting or professional services, which have a better margin and therefore increase the profitability of the vendor. 0.6% 15.4% 1.8% 1.8% 33.9% 23.5% 11.4% 0.7% 5.2% 0.8% 4.8% Provides a comparison of vendor s research and development (R&D) spending against aggregated industry R&D spending. Higher R&D potential is favorable because this means that the vendor is spending more on R&D, and this usually translates to more new products and technologies, and improves competitive differentiation with better products This helps understand the sales outlook for the next year. It is the ratio of estimated revenue for next quarter and actual revenue of the current quarter. Higher ratio signifies estimated next quarter revenue based on outlook is higher than current quarter revenue. $1.6 ($5.9) $2.2 ($8.1) $391.7 $67.2 $1.0 $2.0 $20.5 $8.3 $18.7 Net cash (in $m) is the absolute difference between cash (cash, cash equivalents and short-term investments) and long-term debt. Net cash ratio is the division of Net Cash by 90 days, which provides the cash burn rate surplus/deficit per day for a vendor. Higher value indicates that the vendor has sufficient cash to meet its future commitments. 5

6 Free cash flow (FCF) is defined as operating cash flow minus capital expenditures. FCF measures likely cash flows that can be disbursed to fund providers and used for expansion, without affecting the production. FCF to OCF ratio analyzes the availability of free cash flow and how capital expenditure is impacting it. Higher ratio reflects good financial health as more free cash flows are embedded in the operating cash flows of the vendor Compares estimated free cash flow of the next quarter and the free cash flow of the current quarter. Higher ratio is preferred as it indicates more cash flows that can be disbursed to fund providers and used to pursue opportunities that enhance shareholder value, without affecting the production. 6

7 Vendor Assessment ADTRAN High operating margin: 9.7%, above the industry average and an improvement of 12%, sequentially Industry highest equity to debt ratio (2.78); financing its assets with more shareholders equity than debt. The ratio value decreased by 5.8% as liabilities increased by 6.6% International business achieved record revenue level Altman Z-Score highest in the industry R&D potential (0.6%) one of the lowest One of the three vendors with lowest inventory turnover ratio (1.02); risk of obsolescence Asset utilization (2.28) low compared to industry average The revenue for 4Q13 is estimated at $160M, a drop of 10%, sequentially. With the Deutsche Telekom and AT&T opportunities and improved spending by carriers, Adtran s growth will accelerate into Significant cost reductions are expected in the second half of The firm is positioned to benefit from emerging broadband competition. However, customer concentration is the major and foremost risk for the company. 7

8 ALCATEL-LUCENT High R&D potential ratio: 15.4%, a marginal drop on QoQ basis. High fixed asset utilization (3.53); business has less money tied up in fixed assets for each unit of currency of sales revenue, and fixed assets are being utilized efficiently Higher services to products revenue ratio: 0.44, close to the industry average Low inventory turnover ratio; 1.24; increased risk of inventory obsolescence. Inventory increased by 3.7% sequentially Operating margin (3.2%) well below the industry average One of the lowest equity to debt ratio (0.12); financing assets with more debt than shareholders equity puts future operations at risk Alcatel-Lucent is contemplating the sale of assets outside of its core business to bolster its finances and open the company to debt market opportunities. It achieved more than 50% of its targeted cost reduction in the first two quarters. The firm has a strong pipeline of new products and strategic outsourcing deals across operating segments. The firm has shifted focus from the older technologies to high-potential newer ones such as Internet routing. Revenue for 4Q13 is estimated at $5.5B. 8

9 BROCADE Operating margin: 13.8%, second highest in the industry and an improvement of 30% QoQ Good inventory management practice. Inventory turnover ratio (3.92) above the industry average Highest receivable efficiency ratio: 2.46, implying efficient collection of accounts receivable mainly from sales to OEM partners. Receivables decreased by 8.7% QoQ Healthy equity to debt ratio (1.90); consistent growth of equity and shrinkage of total debt Low service to product revenue (0.20); marginal QoQ increase R&D potential (1.83%) is among the lowest in the industry Fixed assets not being leveraged. Low revenue to fixed assets ratio yielding only $1.1 for each fixed-asset dollar Customer concentration: three customers accounted for significant percentage of total net revenues A significant portion of the revenue is concentrated among a few customers. The loss of or significant decrease in the level of sales to any one of these customers could seriously harm its financial condition. Total revenue is expected to be $555M. Operating expenditure is expected to grow sequentially even though the firm continues to make progress on cost cutting initiatives. Considering competitive pressures in Ethernet, there are concerns regarding the growth prospects of the business. 9

10 CIENA High fixed asset utilization (4.72). Less money tied up with fixed assets for each unit of currency of sales revenue. Ratio value growth of 9.3% sequentially Better operational efficiencies from the redesign of billing/collection processes/systems R&D potential (1.8%) is among the lowest in the industry Very low value of equity to debt ratio; high dependency on debt Inventory turnover ratio of 1.32 indicates inefficient inventory management Although operating income has increased, operating margin (2.8%) is below the industry average of 6.4%. Project ramp ups are hurting margins Financials closely correlated to a small number of customers Lowest net cash ratio at $(8.14M) A substantial segment of the revenue continues to come from sales to a small number of service providers. The firm s finances are strongly dependent on spending levels of their service provider customers. For 4Q13, revenue expectation is $565M. Going forward, Ciena s financials may improve in FY2013 with AT&T planning to aggressively roll out faster networks. However, the competitive environment is adversely affecting Ciena's operation results and contributing to fluctuations in these results. Network operators have started adopting converged network architectures, which align with Ciena's Open Architecture and solution offerings. 10

11 CISCO Most stable revenue and very high operating margins because of sales, solid gross margin, and expense discipline Dependency on debt is low. Can acquire less expensive loans Effective asset utilization yielded $3.69 for each fixed-asset dollar High receivables efficiency ratio: Aligned credit policy Highest R&D potential (33.9%); allocated more than $1.3B to R&D each quarter in past two years High service revenue but still below the services to products revenue ratio average of the industry Potential exposure to decline in profit margins because of market transitions related to virtualization trends Weak presence in emerging markets Revenue for next quarter is estimated at $11.1B. Total revenue is expected to decline in the range of 8% to 10% YoY and about 11% QoQ. Cisco is aggressive in terms of major technology developments, including IoE and SDN. Cisco acquired spin-in Insieme Networks and rolled out a family of its switches as a response to the growing SDN demand. This indicates focus on delivering an integrated system. However, evolution of portfolio and leadership changes may lead to quarter-to-quarter volatility. 11

12 ERICSSON Historically, net cash has been above the industry average; strong cash position. Net cash ratio at $67.21M is second highest in industry Efficient management of cost of sales, R&D expenses, and SG&A expenses. With a sequential increase of 79%, operating margin reached its highest value of 8% in past year Highest revenue to fixed assets ratio yielding $4.72 for each fixed-asset dollar Very high R&D potential (23.5%). Allocated $1.2B in 3Q13 to R&D. Strongest holder of patents in the wireless industry Financials strongly correlate to a few large customers; indicates a potential risk factor Receivables efficiency (0.82) is 46% below the industry average; in 3Q13 trade receivables exceeded revenues by $1.8B Inventory turnover ratio below the industry average of 2.26 indicates inefficient inventory management Relying more on debt compared to equity Ericsson believes that the underlying business mix and customers demands will start to gradually shift toward more capacity projects during the second half of Because of this, a positive impact on the firm s revenue is expected in the second half of Revenue for next quarter is estimated at $10B. Response to launch of small-cell product has been positive. Momentum for Professional Services is expected to continue. Global Services margins will also improve. As a result of Mediaroom acquisition, Ericsson is placed as world s largest IPTV player. 12

13 FUJITSU End-to-end global portfolio (cloud computing, services, products, and solutions) that draws on the strengths of its global bases Service delivery model with price competitiveness that leverages its global delivery centers and regional delivery centers, lowering OpEx Operating income improved primarily due to the impact of workforce related actions Very low equity to debt ratio value in 2Q13 with debt 2.8 times that of equity. Higher financial obligations limit vendor's future operational capacity Historically, Fujitsu has had a receivable efficiency level below the industry average Low operating margin; 2.9%, below industry average Low revenue to fixed assets ratio (1.86) compared to industry indicates fixed assets are not being utilized efficiently Lower unit sales, higher costs in the mobile phone segment. In the last two years, Fujitsu s revenue has been in a downward cyclical trend. Revenue for 4Q is estimated at $11.2B. The firm expects some business results to deteriorate but is planning to counteract by improving earnings in core business segments. Net sale projections for the fiscal year have been revised upside because of upside revision of sales in the segment of technology solutions. 13

14 INFINERA Financing its assets with more equity than debt, implying more financial participation from stockholders 100G DTN-X pipeline is strong across multiple segments and geographies Lowest services to products revenue ratio of the industry: 0.18 Inefficient inventory management; inventory turnover ratio the lowest in the industry at 0.6 Asset utilization (1.8) low compared to industry Dependence on single-source suppliers Infinera is the only firm that has managed to lower its risk. Its operating margin, fixed assets utilization and receivable efficiency ratio have improved over last quarter. 100G DTN-X pipeline is strong across multiple segments and geographies. Acceptance of the DTN-X platform is growing. Revenue for 4Q is estimated at $135M, and the firm s annual revenue growth target is 20%. Infinera is focused on winning new network deployments and expanding its market presence. DTN-X customer count is expected to exceed 40 in 4Q. 14

15 JUNIPER Historically, Juniper has had one of the highest net cash High operating margin: 12.2%, well above the industry average of 6.4% Disciplined operational execution indicated by high inventory turnover ratio of 7.95 High receivable efficiency ratio (2.16) compared to industry average, indicating efficient credit extension Reduced supply chain costs and greater efficiency in delivery of services and customer support Fifth consecutive quarter of YoY growth Asset utilization (1.37) low compared to industry average (2.56) R&D potential (5.2%) low compared to other vendors Juniper is seeing increased momentum with new product offerings as it continues its strategy of innovating in high-performance networking. Juniper has a strong position in the service provider market and has opportunity in enterprise businesses. The company is focusing on improving operational execution and managing costs. The cash position is strong to meet liquidity requirements. Revenue for 4Q is estimated at $1.2B. The company is expecting good operating performance, continued strong service provider demand and some improvement in enterprise. SDN expansion is expected to strengthen networking space position. 15

16 TELLABS Majority of top global communication service providers select its mobile backhaul, packet optical and services solutions Healthy equity to debt ratio (1.9), indicating low dependency on debt Receivable efficiency ratio (1.06) below industry index. Receivables are very close to the net sales Verizon and AT&T account for high percentage of its revenues (potential risk factor) Operating margin has deteriorated in last few quarters Asset utilization very low compared to industry Low inventory turnover ratio (1.07) indicates inefficient inventory management High margin products have shown a downtrend globally. The firm has incurred losses in past many quarters In 3Q, revenue decreased 25% YoY to $198.5M Tellabs value of orders has shown a consistent downward trend over the last two years because customers are migrating to new technologies and are slow to adopt Tellabs new products and services. The firm is focusing on growing mobile Internet market, mobile backhaul solution and IP-packet optical solution. Tellabs faces a high level of customer concentration. Two customers accounted for a significant portion of its total revenue. Loss of any of these customers will have a significant impact on the company s top line. Estimated revenue for 4Q is $216M. Better carrier spending in North America is expected to drive the modest sales growth. 16

17 ZTE Strong LTE presence Fewer low profit margin contracts and strategic realignment to cut costs and increase efficiency Lowest receivable efficiency ratio (0.38) in the industry indicates significant risks associated with the credit policy and finances Financing its assets with more debt than equity Low inventory turnover ratio (0.97) indicates inefficient inventory management. Inventory increased by 5.5% QoQ Revenue dropped 13% QoQ; demand decreased for 2G and 3G network products in China Difficulty establishing a presence in North America markets ZTE is focusing on aligning its business segment reporting to its organizational structure to give current and potential customers better insight into ZTE s operations. The point estimate for 4Q revenue is $3.4B. Uncertainties in purchasing 4G equipment by domestic carriers may lead to a drop in revenue next quarter. Because of poor economics, ZTE has initiated cost-cutting programs to enhance operating efficiency. ZTE will continue to focus its efforts on major global carriers and government segments. 17