Rod Hall's Daily Download - Zacks Investment Research
[Pages:12]North America Equity Research
05 March 2014
Rod Hall's Daily Download
BBM ads, GLW says demand in line, RVBD says no other bids and boosts buyback, F5 on ACE and more
Ciena: In Spite of Q4'13 Capex Worries We Expect a Positive Q and Solid G, Rod Hall, CFA: For FQ1'14, we forecast revenues of $545m (cons. $534m) and EPS of $0.09 (cons. $0.05). For FQ2'14, we expect revenues of $568m (cons. $561m) and EPS of $0.15 (cons. $0.17). Click here for our report.
BBRY: Advertising on BBM (BBM: Slight Positive): BBRY announced that they have started to push sponsored content to some external beta testers, but clarified that they will not be inserting sponsored content of any kind into BBM chats. (BBRY) Our View: We see attempts to monetize BBM as interesting though we believe that BlackBerry first needs to focus on the acquisition of a critical mass of dedicated users. Attempting to monetize too early could stall user growth in our opinion.
Corning: Retail Demand Inline (GLW: Neutral): Corning reiterated its target of mid-to-high single digits retail glass market growth for 2014. On Sapphire vs. Gorilla, Corning said that the benefits of sapphire are offset by the cost (10x), weight (1.6x), poor light transmission and formation length (4,000x). (Corning) Our View: We believe that Corning could be well positioned for UHD TV sales later this year though we have been less encouraged by more recent demand indications.
Riverbed Dismisses Speculated ~$25 Bids and Increases Stock Repurchase (RVBD: Negative): Riverbed's CFO Ernie Maddock extinguished recent speculation surrounding ~$25 offers. Maddock reaffirmed the company's target of 1.5x to 3.0x the market growth rate and expects a high-single digit growth rate in
Communications Equipment & Data Networking
AC
Rod Hall, CFA
(1-415) 315-6713 rod.b.hall@ Bloomberg JPMA HALL J.P. Morgan Securities LLC
Ashwin Kesireddy
(1-415) 315-6756 ashwin.x.kesireddy@ J.P. Morgan Securities LLC
Greg Schuck
(1-415) 315-6760 greg.t.schuck@ J.P. Morgan Securities LLC
Rajagopal Raghunathan
(91-22) 615 732555 rajagopal.raghunathan@ J.P. Morgan India Private Limited
2014. Riverbed also announced a $250m increase to buyback authorization. (Riverbed) Our View: We agree that Riverbed probably hasn't had credible/real bids higher than the $21/share offer from Elliott. However, we equally question whether betting on an uncertain growth strategy is a better choice for investors than a "bird in hand" bid from Elliott. On the buyback we like the fact that the company has increased authorization but wonder whether now is the best time to buy stock
Upcoming events 6 Mar
CIEN, FNSR: Earnings
13 Mar
FFIV: AGM
back when the shares are likely inflated by recent bid speculation.
Table 1: One-Day Index Performance
F5 Networks' Management Sees More Refresh Opportunity with Cisco ACE (FFIV: Neutral): F5 said that SDN won't impact the portfolio considering very few functions in ADC have been commoditized ? the company expects the shift will bring visibility to the L4 to L7 services that F5 is focusing on. The company also said that it remains focused on the ACE replacement phase and has pegged it at $1.0bn to $1.5bn in total opportunity. (F5 Networks) Our View: We continue to believe that F5's growth prospects are good and like the changes the company has
Index
1 day
DJ Stoxx 600
337
2.1%
S&P 500
1874
1.5%
Nasdaq Comp
4352
1.7%
DJ Tech
287
2.0%
DJ Telco
301
2.1%
Source: Bloomberg. Priced at close on Mar 4, 2014.
made to pricing packages and product recently.
Qualcomm: Dividend and Share Buyback Increased, Rod Hall, CFA: Qualcomm
announced an annual dividend increase of 20%. This was slightly below our estimate for a 25% increase. The company also increased its share repurchase authorization
by $5bn, in line with previous semi-annual raises. Click here for our alert.
Table 2: Coverage Universe: Multiples and Performance
Company Rec
Current EV/Sales
P/E Absolute Perf.
Price
CY14E CY14E QTD YTD Company Rec
Current EV/Sales P/E Absolute Perf.
Price
CY14E CY14E QTD YTD
ADTN N
ALU
N
ARUN UW
BBRY N
CIEN OW
COMM OW
CSCO UW
CYNI UW
$26.56 1.6x 23.1x (2%) (2%) ERIC
OW
3.12 0.6x 11.6x (4%) (4%) FFIV
N
$21.19 2.7x 22.6x 18% 18% GLW
N
$10.34 1.2x
NM 39% 39% INFN
OW
$24.70 1.5x 27.8x
3%
3% JNPR
OW
$24.13 1.8x 13.9x 27% 27% NOK
OW
$21.82 1.8x 11.0x (3%) (3%) QCOM N
$3.32 0.7x
NM (37%) (37%) RVBD
N
SEK 81.95 $113.12 $19.50 $8.61 $26.26 5.60 $76.11 $21.33
0.9x 22.8x 4% 4% 4.2x 20.8x 24% 24% 2.5x 13.5x 9% 9% 1.3x NM (12%) (12%) 2.3x 16.0x 16% 16% 1.5x 33.5x (4%) (4%) 3.6x 14.3x 3% 3% 2.9x 18.6x 18% 18%
Source: J.P. Morgan estimates, Bloomberg, Priced as of Mar 4, 2014.
See page 9 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
Rod Hall, CFA (1-415) 315-6713 rod.b.hall@
North America Equity Research 05 March 2014 .
Overnight News
Apple CarPlay Infotainment System Reportedly Runs on BlackBerry's QNX: According to an article on N4BB citing company sources, Apple's CarPlay runs on top of BlackBerry's QNX operating system. "We have a long-standing partnership with Apple to ensure highquality connectivity with their devices, and this partnership extends to support for Apple CarPlay," Paul Leroux from QNX reportedly said. (N4BB)
Intel Reportedly Buys Smartwatch Maker Basis for ~$100M: According to an article on TechCrunch citing unnamed sources, Intel has bought Basis for ~$100m, although the article cited another source pegging the deal at closer to $150m. According to the article, Basis makes wristwatch health trackers, capturing 7% of the market versus competitor Jawbone's 21%. (TechCrunch)
Radioshack to Close 1,100 Stores in US: Radioshack announced Q4'13 results, with revenue of $935.4m, missing consensus by 16.5%. The company said comparable store sales were down 19% driven by traffic declines and soft performance in the mobility business. Radioshack also announced that it plans to close down up to 1,100 underperforming stores in the US. (Radioshack)
Apple's CFO Peter Oppenheimer to Retire at the End of September: Apple announced that Peter Oppenheimer, Apple's senior vice president and CFO, will retire at the end of September. Luca Maestri, Apple's vice president of Finance and corporate controller, will succeed Peter as CFO reporting to Apple CEO, Tim Cook. Peter will transition the CFO role to Luca in June and the balance of his responsibilities over the remaining time allowing for a professional and seamless transition. (Apple)
Corning Announces $1.25bn Accelerated Share Repurchase: Corning announced that it has entered into an accelerated share repurchase agreement with Citibank to repurchase $1.25bn of the company's common stock. The ASR is part of Corning's $2 billion share repurchase program made effective concurrent with the closing of Corning's full acquisition of Samsung Corning Precision on Jan. 15, 2014. Final settlement of the transaction under the ASR is expected to occur in the second quarter of 2014. (Corning)
Pace Beats Estimates Driven by Media Server Demand in North America: Pace announced FY 2013 results with revenue of $2,469m (+2.7% Y/Y) beating JPMe by 0.4% and consensus by 0.6%. EBITDA of $218.6m beat JPMe by 1.8% and consensus by 1.5% driven by improved revenue mix, supply chain efficiency
2
and increased operational efficiency. The company said that the Pay TV market continues to perform well and demand for its products and services remains strong. For 2014, the company guided for revenues of $2.7bn, beating JPMe by 4.4% and consensus by 3.9%. (Pace)
Infinera Announces Multi-Layer Automation for the Intelligent Transport Network: Infinera introduced new solutions for service providers planning to simplify the operation of multi-layer transport networks through increased automation. Infinera said that its new solution includes the industry's first super-channel FlexROADM (reconfigurable optical add drop multiplexer), the first standards based multi-layer control plane for spectrum switched optical networks (SSON) and the first 500Gb/s flexible-grid super-channels. (Infinera)
Bellevue College Accommodates Proliferation of Mobile Devices, Enables Classroom Technology Innovations with Aruba Networks: Aruba Networks announced that Bellevue College has deployed a unified wired and wireless access network based on Aruba's Mobile Virtual Enterprise (MOVE) architecture. The new infrastructure delivers high-performance, campuswide wireless access inside buildings and outside in common areas to the College's 36,000+ students, faculty and staff as well as guests, enabling Bellevue to accommodate the escalating number of mobile devices being used on campus and to deploy a wide range of technology innovations to enhance students' educational experiences. (Aruba Networks)
Alcatel-Lucent to Help Verizon Wireless Manage Growing Data Traffic: Verizon Wireless is to deploy Alcatel-Lucent's advanced data management platform throughout its network, helping to support the carrier's LTE expansion. The Alcatel-Lucent Subscriber Data Manager (SDM), part of the company's IMS Subsystem portfolio of technologies, will help support the expansion of Verizon's LTE services by centralizing multiple application databases. The deployment continues the role Alcatel-Lucent plays in the expansion of the Verizon Wireless 4G LTE network, for which the company was named a key supplier for the IMS portion when the network was originally launched. (Alcatel-Lucent)
SoftBank CEO to Discuss US Mobile Industry after Regulatory Rebuff: SoftBank CEO Masayoshi Son will present his views on the US mobile industry in Washington D.C. next week, the Japanese mobile operator said, after US regulators expressed skepticism towards a potential SoftBank bid for T-Mobile US. (Reuters)
Rod Hall, CFA (1-415) 315-6713 rod.b.hall@
North America Equity Research 05 March 2014
Overnight Research
The following extracts are from recently published research. Please see the relevant research report and important disclosures, including a discussion of valuation and risks, for any security recommended herein before forming any investment opinion whatsoever. JP Morgan research is available at , or you can contact the analyst named below.
Global
Ciena Corp. In Spite of Q4'13 Capex Worries We Expect a Positive Q and Solid G (Analyst: Rod Hall, CFA) 100G momentum solid: According to Dell'Oro's Q4
optical data, Total 100G wavelengths grew by ~3x Y/Y to 9.6k in Q4'13. As of Q4'13 100G wavelengths accounted for only 24% of total long haul wavelengths. We continue to believe there is room to run in both the US and EMEA 100G LH market, and expect this to pick up in H2'14. In metro and long haul markets combined, 100G accounted for just 5% of total wavelengths shipped.
100G pricing stable: 100G price/wavelength premium vs. 40G was constant Q/Q at 1.3x in Q4'13. 100G price premium actually improved slightly vs. 10G to 14.3x in Q4'13 from 14.1x in Q3'13. We believe the 100G pricing environment remains stable. Although worsening FX in EMs could create some pricing pressure, we believe that 100G activity in EMs (ex. China) is still in its infancy when compared to the US and EMEA so that unit volumes could easily more than offset FX impacts.
Expect rich international mix in FQ2 and slight margin pressure: We believe that optical activity will pick up strongly this year in international markets, particularly in EMEA. However, in the near term, strong international builds could translate into slight margin pressure for Ciena. Our FQ2 margin forecast of 41.8% is 0.7pp below consensus of 42.5%.
FY14 Margin guidance: We expect Ciena to reiterate their FY14 margin target. Note that on their FQ4'13 call, Ciena guided for FY14 to reach the low end of the 7% to 10% target range ? note this is the first time in our memory the company has provide a FY target range.
FQ1'14 Estimates/Guidance/Consensus: We forecast FQ1'14 revenues of $545m vs. the Street at $534m and guidance of $515m-$545m (midpoint: $530m). Our forecast for gross margin is 42.1%
(Street: 41.7%, Guid: low-40%), OpEx is $205m (Street: $204m, Guid: $205m) and EPS is $0.09 (Street: $0.05).
FQ2'14 Estimates/Consensus: For FQ2'14, we model revenues of $568m (Street: $561m), reflecting +4.2% Q/Q and 11.9% Y/Y growth. We target gross margin of 41.8% (Street: 42.5%), OpEx of $206m (Cons: $204m), operating margin of 5.6% (Street: 6.1%) and EPS of $0.15 (Street: $0.17).
QUALCOMM Dividend and Share Buyback Increased (Analyst: Rod Hall, CFA) Qualcomm today announced an annual dividend increase of 20%. This was slightly below our estimate of a 25% increase. The company also increased its share repurchase authorization by $5bn, in line with previous semi-annual raises.
Dividend increase. Qualcomm announced that it is increasing its quarterly cash dividend by 20%, from $0.35 per share to $0.42 per share. This represents a dividend yield of ~2.3%. The increase is less than the 25% increase that we were modeling and the 40% increase in 2013.
Share buyback authorization increase. Qualcomm said that it is increasing its share repurchase authorization by $5bn, bringing the total authorization to $7.8bn. This increase is in line with the last two semi-annual raises done by the company.
$1bn worth of shares repurchased in FQ2. Qualcomm said that it has repurchased 27.6m shares to date in fiscal 2014 for $2bn. We calculate that this implies that the company has repurchased ~$1bn worth of shares so far in FQ2 (to March).
US
IBM The Answer Is Watson. What Is the Newest Part of IBM's Big Data/Analytics Growth Engine? (Analyst: Mark Moskowitz)
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Rod Hall, CFA (1-415) 315-6713 rod.b.hall@
North America Equity Research 05 March 2014 .
In this report, we discuss Watson and its potential impact on IBM's model. Currently, there are no direct competitive offerings to Watson, positioning IBM to be a first-mover in monetizing cognitive computing and related services. With Watson, the customer does not procure any hardware from IBM but instead pays for data analytics run as part of a cloud-based service. In our view, Watson is an evolution of IBM's Big Data/business analytics strategy established with the Cognos acquisition (announced Nov. 2007) and the Netezza acquisition (announced Sep. 2010).
IBM is pursuing a nearly $160 billion market opportunity. Along with Watson and other initiatives, IBM is addressing a Big Data/business analytics market opportunity that IDC estimates could reach nearly $160 billion by 2017. While IBM's consolidated revenue base has not grown, the company sees Big Data/business analytics as a long-term growth engine. IBM already has invested more than $22 billion to build out its capabilities in Big Data/business analytics, including $15 billion on more than 30 acquisitions.
Financial impact of Watson could be decent. We think Watson could present upside potential to the IBM model a few years out, but this dynamic does not change our cautious near-term view on IBM's stock. We estimate Watson's annual revenue contribution could be $2 billion by 2017. Assuming an operating margin of 25%, a tax rate of 24%, and share count of 1.0 billion, we estimate Watson could contribute approximately $0.38 to consolidated EPS likely north of $20.00 a few years out.
Watson to be part of a bigger growth engine. In 2013, IBM's total revenue related to Big Data/business analytics was $15.7 billion. We estimate that this business can grow to $25 billion by 2017, and the implied 12.4% CAGR significantly outpaces the limited-to-no-growth profile of IBM's consolidated model. If the Big Data/business analytics unit can grow even faster, then IBM's consolidated model could exhibit more attractive growth.
Watson also to be part of a favorable mix shift. In our view, a greater mix shift to Big Data/business analytics revenue would be favorable for IBM's consolidated operating margin. There is a higher attach rate of software and services components typically associated with Big Data/business analytics. As a result, we assume Big Data/business analytics revenue could carry operating margin of 25% or higher, versus IBM's consolidated average of 21-22%.
4
Wireless Telecom Services Digging into US Wireless Data Devices ? Impact on Carrier Market Share and 2014 Growth (Analyst: Philip Cusick, CFA) With stronger than expected subscriber growth from Sprint in 4Q13 we have received a number of questions about market share in the US wireless industry. We view Sprint's 4Q adds as just the latest in confusing data points attributable to the growth in data devices and alternative products like home phones and home security from what used to be an industry dominated by wireless voice-enabled devices. As tablet prices fall significantly, we expect data devices to contribute an increasing share of industry unit growth, and think it's worthwhile to dig into the data to explore industry implications. The most interesting finding to us is that T-Mobile's share of voice industry gross adds doubled from 4Q12-4Q13 from 10.8% to 21.6%, with the losses split surprisingly evenly across its three competitors, and the 10 pp gross add difference between T and VZ.
Data devices drove 3.1m of 5.2m postpaid device growth in 2013 among Big-4 US carriers. We include tablets, MiFi and laptop cards in the data category, and while tablets are still the minority of the 18.4 million postpaid data devices in the US, they contributed 117% of the growth last year. Tablets grew by 3.7 million to 7.4 million, while data devices only grew a net 3.1 million. Among the carriers, Verizon dominates the category with 10.4 million data devices, of which 3.5 million are tablets, followed by AT&T with 4.6 million, Sprint at 2.6 million (excluding Clearwire), and T-Mobile with only 500,000.
We forecast 4.1m data device adds in 2014 of 7.3m total postpaid adds. This year we look for tablets to again dominate, and model 4.0m tablet adds out of 4.1m data device adds. While we believe that iPad still is the biggest single tablet product, low-end Android devices like the Samsung Galaxy 7.0 for $50 up front at Sprint are driving much of the increase in adoption. In voice, we look for 2.8 million adds from 1.4 million in 2013, as disconnects from Blackberry-type enterprise devices slows and Nextel disconnects are past.
Data devices skew gross add share calculations; TMobile voice share doubled y/y in 4Q. The increased dominance of tablets in industry net adds has had a skewing effect on gross add share calculations as well. T-Mobile in particular, which did not have much of a tablet effort until 4Q and even now adds far fewer than the other carriers, sees its market share affected by this. On our calculations, T-Mobile's share of total postpaid gross adds in 4Q actually fell from 18.2% in
Rod Hall, CFA (1-415) 315-6713 rod.b.hall@
North America Equity Research 05 March 2014
3Q to 17.7% in 4Q. However, when taking data gross adds out of the mix, T-Mobile's share of voice gross adds rose to 21.6% in 4Q13 ? double its 10.8% share in 4Q12 and up 50 bp q/q. The donors of this share were surprisingly even across competitors ? 304 bps from AT&T, 410 bps from Verizon, and 362 bps from Sprint.
Verizon's dominance likely to be tested going forward. We calculate that Verizon drew 37% of industry postpaid voice gross adds in 4Q and for FY13 - very high, though down from a peak of ~41% in 2H12. As we expect Sprint to rebound in the next two years we model it taking back ~4 percentage points of voice gross add share from 15.4% in 4Q13 to 19.5% in 4Q15 and currently model ~0.5 pp from AT&T, ~1.5 pp from Verizon, and ~2.0 pp from T-Mobile in that shift. Finally while AT&T's share of voice gross adds in 4Q was ~1100 bp below that of Verizon, we believe it has seen improvements in share and churn since its Next pricing changes in January ? we believe that AT&T's Next pricing, and the advertising associated with it, are specifically targeted at tightening AT&T's share of industry adds toward that of Verizon.
Intel Despite Altera's Update, We Remain Concerned on Foundry Business. Conference Call at 8:30PM Tonight (Analyst: Christopher Danely) On March 2, we outlined our view that Intel's foundry business is having issues and Altera has re-engaged TSMC as a result (please see our note, "Meetings at MWC...)." However, yesterday Altera's CFO denied that the company has re-engaged TSMC at 16nm, and indicated Altera remains committed to Intel at 14nm. Despite Altera's denial, we remain concerned about issues with Intel's foundry business based on our latest checks in the semiconductor supply chain.
Altera denies issues with Intel foundry process. Yesterday, at a competitor conference, Altera's CFO, Ron Pasek, denied that the company has re-engaged TSMC at the 16nm node, stating the company's opex structure does not support two foundries for a single product. Mr. Pasek indicated Altera remains on schedule to tapeout 14nm products at Intel at the end of 2014, with silicon available in early-2015. In addition, he indicated Altera does not have a contingency plan in place with TSMC should they encounter delays at Intel.
Our Asia team reiterates its stance on Altera reengaging TSMC. Despite the latest comments from Altera, our J.P. Morgan Foundry analyst, Gokul
Hariharan, continues to believe Altera is re-engaging TSMC at 16nm, and that other potential foundry customers are wary of issues at Intel (please see Gokul's March 4 note, "Intel vs. TSMC - Foundry Battle Heats Up"). As a result, we continue to believe Intel needs to make progress this year in fixing these issues or its foundry efforts could be dealt a serious blow.
Overweight thesis intact. Despite some issues with its foundry business, we believe the problems can be fixed. We also believe the reasons we upgraded INTC to Overweight remain intact: upside to Consensus estimates driven by stability in the PC market and improved guidance and spending (please see our Jan 14 note, "Making a Leap of Faith.").
Join us for a conference call at 8:30PM ET tonight. We invite you to attend a joint conference call with our J.P. Morgan Global Tech team at 8:30PM EST. The dial- in number is 347-817-7830 and the passcode is "J.P. Morgan Live."
Valuation. We are maintaining our Dec 2014 price target of $30.00, or 14X C15 EPS, a premium to Intel's current multiple due to upside to estimates, but in line with the S&P. We remain OW INTC due to upside to Consensus estimates driven by stability in the PC market and improved guidance and spending.
Apple Inc. CFO Oppenheimer to Retire in September; Luca Maestri to Take the Reins (Analyst: Mark Moskowitz) Overweight-rated Apple has announced that Peter Oppenheimer, SVP and CFO, will retire at the end of September. Luca Maestri, Apple's VP of Finance and Corporate Controller, will succeed Mr. Oppenheimer. In our view, Mr. Oppenheimer leaves behind a strong financial management infrastructure. We do not think the announcement is a surprise. When Mr. Maestri left Xerox to join Apple, we think it was Mr. Maestri's position to lose as the heir apparent. As a result, we expect a smooth transition and little disruption to the operating model.
CFO retiring at the end of September. Apple has announced CFO Peter Oppenheimer will retire at the end of September. The CFO role will transition to current corporate controller Luca Maestri in June with other responsibilities following, which should allow for a smooth handoff. Mr. Oppenheimer has been with Apple since 1996, first joining as controller for the Americas, and has been CFO since 2004. During his tenure as CFO, the company's annual revenue grew from $8 billion to $171 billion while its global operations expanded significantly. According to the
5
Rod Hall, CFA (1-415) 315-6713 rod.b.hall@
North America Equity Research 05 March 2014 .
company, Mr. Oppenheimer is retiring for personal reasons.
Luca Maestri to take the reins as CFO. Luca Maestri, who has served as Apple's VP of Finance and Corporate Controller since March 2013, will become the new CFO. We believe Apple has been grooming Mr. Maestri to take over the role since he joined the company. Previously, Mr. Maestri was at Xerox, where he served as EVP and CFO for approximately two years. Mr. Maestri has been well regarded by the investment community, in our view, and we think he has the skill sets to successfully lead the finance operations at Apple. Mr. Maestri brings over 25 years of global operations experience, including as CFO at Nokia Siemens and in multiple financial management roles at General Motors. Overall, we expect a smooth transition for Mr. Maestri as he becomes CFO.
We reiterate our Overweight-rating on shares of Apple. Our model recently was de-risked for iPhone headwinds and higher OpEx with a partial offset in better iPad unit assumptions. We think the stock's riskreward profile stands to become more attractive as investors consider model implications related to 1) mid-2014 iPhone launch with a 5-inch display and 2) longer term, the potential roll-out of what we call iAnywhere, providing a much needed leapfrog effect relative to the competition. For Apple, we are still modeling above-peer revenue growth and free cash flow. Both pillars are important to our relative stock assessment approach, hence, the Overweight rating.
Europe
Telef?nica Deutschland Standalone headwinds, longer term scenarios (Analyst: Hannes Wittig) In this report we update our analysis for Telefonica Deutschland, both on a standalone and a potential post merger basis. After two soft quarters, in what remains a commercially active market, we cut our ex merger EBITDA forecasts. The longer term outlook will depend on whether and on what terms the German market will consolidate.
Market environment: Underlying German mobile service revenues further deteriorated in H2 2013, although there have been few major price moves in recent months and German ARPU levels remain low compared to other markets. But the combination of back book repricing and out-of-bundle cannibalization continues to weigh. During 2013 all operators were
more active commercially than in prior years. Positively, this is potentially reversible.
Forecast cuts: Based on this outlook and O2D's soft recent trading performance, we have lowered our 2014-2016 standalone Telefonica Deutschland revenue forecasts by ~1.5% and our EBITDA forecasts by 3% in 2014 and 7% in 2015 and 2016. We note that our revised forecasts are below those contained in the merger report published by management ahead of the recent EGM.
Financials: Telefonica Deutschland's debt no longer includes 188m of short-term receivables. The company also increased receivables by 156m in 2013, together lowering reported net debt by 344m.
Merger impact: We look at alternative scenarios for Telefonica Deutschland's planned merger with E-Plus, which is subject to antitrust approvals (EU deadline 14 May). Financial results will depend on whether the deal is approved, the impact of potential antitrust remedies, the achievement of targeted synergies, and whether currently `excessive' commercial spending can be reversed. Without exhausting the range of possible outcomes, normalized 2016E (2018E) operating cash flow (excluding integration and spectrum costs) could be 1.2-1.7bn (1.3-2.2bn), according to the scenarios outlined in this report.
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Rod Hall, CFA (1-415) 315-6713 rod.b.hall@
North America Equity Research 05 March 2014
Table 3: Peer Group Valuation Multiples
JPM Rating
Target price
Price Market Cap Net Debt (Cash)
3/4/2014 (Local mn)
(Local mn)
Sales (Local MM)
CY13E
CY14E
EV/Sales
CY13E
CY14E
Large Cap Apple Amphenol Cisco Systems Corning Ericsson F5 Networks HTC Juniper Networks Nokia Qualcomm TE Connectivity Average Median
OW $585.00 $531.24
NC
NA
$89.98
UW
$17.00
$21.82
N
$16.50
$19.50
OW SEK 90.00 SEK 81.95
N $110.00 $113.12
UW NT$90.00 NT$135.00
OW
$30.00
$26.26
OW
8.00
5.60
N
$65.00
$76.11
NC
NA
$60.00
473,860 14,235 112,401 27,146 249,398
8,534 113,717 13,159 20,953 128,708 24,614
(23,750) 173,992
187,107
2.6x
2.4x
941 4,615
5,116
3.3x
3.0x
(29,918) 47,873
46,523
1.7x
1.8x
(1,942) 7,948
10,050
3.2x
2.5x
(47,634) 227,376
219,157
0.9x
0.9x
(1,235) 1,522
1,741
4.8x
4.2x
(43,220) 203,393
168,213
0.3x
0.4x
(1,847) 4,669
4,977
2.4x
2.3x
(2,274) 12,710
12,702
1.5x
1.5x
(29,406) 25,471
27,586
3.9x
3.6x
1,601 13,472
14,166
1.9x
1.9x
2.4x
2.2x
2.4x
2.3x
Small & Mid Cap ADTRAN Alcatel-Lucent ARRIS Group Aruba Networks Belden Brocade Ciena CommScope Cyan Finisar Infinera Oclaro Research In Motion Riverbed Ruckus Wireless ShoreTel Sonus Networks Average Median
N
$27.50
$26.56
N
3.30
3.12
NC
NA
$29.19
UW
$13.00
$21.19
NC
NA
$72.57
OW
$11.00
$9.66
OW
$26.00
$24.70
OW
$25.00
$24.13
UW
NA
$3.32
NC
NA
$23.94
OW
$13.00
$8.61
NC
NA
$2.99
N
NA
$10.34
N
$15.00
$21.33
NC
NA
$14.46
NC
NA
$8.77
NC
NA
$3.87
1,504 8,754 4,157 2,313 3,155 4,204 2,594 4,392
154 2,301 1,054
319 5,444 3,413 1,175
539 1,031
(427)
643
686
1.7x
1.6x
(193) 14,436
14,605
0.6x
0.6x
1,234 3,621
4,900
1.5x
1.1x
(278)
637
756
3.2x
2.7x
754 2,069
2,187
1.9x
1.8x
(388) 2,192
2,202
1.7x
1.7x
733 2,149
2,293
1.5x
1.5x
2,133 3,480
3,652
1.9x
1.8x
(72)
116
117
0.7x
0.7x
(214) 1,239
1,410
1.7x
1.5x
(256)
544
625
1.5x
1.3x
(130)
477
417
0.4x
0.5x
(2,198) 8,587
2,747
0.4x
1.2x
(22) 1,057
1,150
3.2x
2.9x
(152)
263
324
3.9x
3.2x
(47)
333
346
1.5x
1.4x
(204)
277
304
3.0x
2.7x
1.7x
1.6x
1.6x
1.5x
Source: Company data, Bloomberg, J.P. Morgan estimates. JPM Rating: OW = Overweight, N = Neutral, UW = Underweight, NC = Not Covered. JPM ANMlysts: Apple (Mark Moskowitz), Brocade (Mark Moskowitz), HTC (Alivn Kwock), Tripod (William Chen) ERIC has PT end date Jun-14, NOK has PTend date Dec-15. Others have PT end date Dec-14. Note: Enterprise Value adjusts for minority interest, pension deficit obligations and deferred tax assets, where applicable, in addition to net debt Note: Priced as of CoB March 4, 2014
Note: P/E (Adjusted) is P/E adjusted for Cash Source: Company data, Bloomberg, J.P. Morgan estimates. JPM Rating: OW = Overweight, N = Neutral, UW = Underweight, NC = Not Covered.
EV/EBITDA
CY13E
CY14E
7.6x 14.6x 5.5x 9.8x 6.0x 12.3x -67.6x 10.7x 9.8x 10.0x 10.2x 2.6x 9.8x
7.2x 13.2x 5.7x 7.2x 7.4x 10.6x NM 8.8x 13.0x 8.7x 9.3x 9.1x 8.8x
14.1x 9.8x 15.2x 17.4x 13.6x 5.5x 12.7x 9.7x NM 8.1x 24.0x NM 4.9x 9.2x 38.0x 47.0x NM 16.2x 13.1x
11.3x 6.2x 10.0x 12.7x 10.2x 5.2x 10.6x 8.8x NM 7.3x 14.2x NM NM 9.2x 39.4x 17.6x NA 12.3x 10.1x
EPS (Local)
CY13E
CY14E
P/E
P/E (Adjusted)
CY13E CY14E
CY14E
42.24 3.85 2.03 1.27 4.95 4.67 (1.56) 1.29 0.24 4.53 3.39
46.40 4.27 1.98 1.44 3.59 5.43 (4.29) 1.64 0.17 5.34 3.89
12.6x 23.4x 10.7x 15.4x 16.6x 24.2x NM 20.4x 23.8x 16.8x 17.7x 18.2x 17.2x
11.4x 21.1x 11.0x 13.5x 22.8x 20.8x NM 16.0x 33.5x 14.3x 15.4x 18.0x 15.7x
11.1x 22.8x 8.2x 12.1x
NM 17.9x
NM 13.2x 24.2x 11.6x 16.5x 15.1x 12.6x
0.95 (0.17) 1.66 0.58 3.69 0.81 0.66 1.60 (1.03) 1.70 0.03 (1.29) (0.88) 1.01 0.18 0.17 0.02
1.15 0.27 2.08 0.94 4.02 0.83 0.89 1.74 (0.64) NM 0.17 (0.42) (1.64) 1.15 0.22 0.16 0.05
28.1x NM 17.6x 36.8x 19.7x 12.0x 37.4x 15.1x NM 14.1x NM NM NM 21.1x NM NM NM 22.4x 19.7x
23.1x 11.6x 14.0x 22.6x 18.0x 11.7x 27.8x 13.9x NM NM NM NM NM 18.6x NM NM NM 17.9x 18.0x
17.5x 22.5x 15.5x 20.0x 22.3x 9.9x 24.0x 15.3x
NM NM 36.1x NM NM 16.9x NM 44.9x NM 22.3x 20.0x
7
Rod Hall, CFA (1-415) 315-6713 rod.b.hall@
North America Equity Research 05 March 2014 .
Table 4: Peer Group Price Performance
CCY
Target Price
Price 3/4/2014
3-Yr Range
High
Low
Short Interest % 1M Chg
Absolute Performance
YTD
QTD 1 Day
1 M
12M
Large Cap Apple Amphenol Cisco Systems Corning Ericsson F5 Networks HTC Juniper Networks Nokia Qualcomm TE Connectivity
US$ US$ US$ US$ SEK US$ NT$ US$ EUR US$ US$
$585.00 NA
$17.00 $16.50 SEK 90.00 $110.00 NT$90.00 $22.00 8.00 $65.00
NA
$531.24 $89.98 $21.82 $19.50
SEK 81.95 $113.12
NT$135.00 $26.26 5.60 $76.11 $60.00
702.10 92.41 26.38 22.69 96.25 138.06 1238.10 44.46 6.30 76.44 60.00
315.32 39.80 13.73 10.88 56.80 68.02 125.50 14.27 1.37 46.40 27.25
3% 1% 1% 3% NA 10% 10% 4% NA 1% 1%
73% -15% 19% 30%
NA 10% NA -11% NA -6% 19%
-5% 1% -3% 9% 4% 24% -1% 16% -4% 3% 9%
-5% 1% -3% 9% 4% 24% -1% 16% -4% 3% 9%
1%
4% 23%
3%
5% 24%
1%
-1%
3%
2% 11% 56%
1%
4%
0%
2%
9% 21%
3%
8% -49%
-1%
-2% 31%
2% 12% 105%
3%
5% 12%
3%
9% 47%
Small & Mid Cap ADTRAN Alcatel-Lucent ARRIS Group Aruba Networks Belden Brocade Ciena CommScope Cyan Finisar Infinera Oclaro Research In Motion Riverbed Ruckus Wireless ShoreTel Sonus Networks
US$ EUR US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$
$27.50 3.30
NA $13.00
NA $11.00 $26.00 $25.00
NA NA $13.00 NA NA $15.00 NA NA NA
$26.56 3.12 $29.19 $21.19 $72.57 $9.66 $24.70 $24.13 $3.32 $23.94 $8.61 $2.99 $10.34 $21.33 $8.77 $8.77 $3.87
45.63 4.20 31.34 35.92 72.57 9.71 28.24 24.24 13.92 40.72 12.00 16.93 64.86 42.95 25.87 11.92 4.04
15.65 0.68 9.70 12.47 23.93 3.22 10.28 14.88 3.24 11.22 4.35 0.89 5.75 13.68 10.68 3.35 1.39
5% NA 4% 14% 3% 1% 19% 0% 4% 15% 11% 3% 18% 3% 4% 2% 3%
3% NA 13% 1% 8% -51% 2% 16% 3% 15% -11% -35% -12% -35% 40% 70% 15%
-2% -4% 20% 18% 3% 9% 3% 27% -37% 0% -12% 20% 39% 18% 2% -5% 23%
-2% -4% 20% 18% 3% 9% 3% 27% -37% 0% -12% 20% 39% 18% 2% -5% 23%
3%
8% 27%
2%
3% 189%
3% 14% 68%
4% 10% -17%
3% 14% 43%
1%
5% 67%
1% 13% 66%
0% 30%
NM
2% -10%
NM
2% 10% 63%
5%
5% 31%
3% 23% 156%
0%
7% -18%
-2%
8% 42%
2% 14% -32%
2% 15% 119%
2% 29% 57%
Index
DJ Stoxx 600
337
339
275
3%
Nasdaq Comp
4352
4357
3155
4%
S&P 500
1874
1876
1525
1%
TWSE
8555
8669
7663
(1%)
Index: Relative to S&P 500/NASDAQ Composite for US stock, DJ Stoxx 600 for European and TWSE Index for Taiwan stocks
Source: Bloomberg; Index: Nasdaq Composite (US), S&P 500, TWSE, DJ STOXX 600, J.P. Morgan estimates
Note: Priced as of CoB March 4, 2014
JPM Analysts: Apple (Mark Moskowitz), Brocade (Mark Moskowitz), HTC (Alvin Kwock), Tripod (William Chen)
ERIC has PT end date Jun-14, NOK has PT end date Dec-15. Others have PT end date Dec-14.
Index: Relative to S&P 500/NASDAQ Composite for US stock, DJ Stoxx 600 for European and TWSE Index for Taiwan stocks.
Source: Bloomberg; Index: Nasdaq Composite (US), S&P 500, TWSE, DJ STOXX 600, J.P. Morgan estimates.
PT end date Dec-13. JPM Analysts: Apple (Mark Moskowitz), Brocade (Mark Moskowitz), HTC (Alvin Kwock), Tripod (William Chen).
15% 33% 19%
8%
2% 2% 2% (1%)
6% 15%
8% 35%
7% 22%
4%
8%
Relative to Index YTD QTD 1 Day 1 M 12M
-7% 0% -4% 8% 2% 20% -1% 15% -7% 1% 7%
-25% -1% -19% 1% -22% 0% -10% 1% -10% -1%
-9% 0% -9% 4% -3% -2% -19% 0% -17% 2% -11% 2%
-3%
2%
-2%
2%
-8% -19%
4% 34%
-2% -15%
0% -14%
4% -57%
-9% 10%
6% 90%
-2% -10%
2% 25%
-6% -7% 16% 14% -1% 5% -1% 23% -39% -4% -16% 16% 35% 14% -2% -10% 19%
-35% 2%
0% -8%
-19% 0% -3% 175%
-13% 1%
5% 33%
-15% 2%
2% -51%
-30% 1%
6%
8%
-24% -1% -3% 32%
-30% -1%
4% 31%
-6% -2% 22% NM
-57% 0% -17% NM
-33% 1%
2% 28%
-45% 4% -4% -4%
-13% 2% 14% 121%
6% -2% -2% -53%
-15% -4%
0%
7%
-31% 1%
6% -67%
-39% 0%
7% 84%
-10% 0% 21% 22%
8
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