ADVA Optical Networking FY12 results

Transcription

1 ADVA Optical Networking FY12 results Cautious start to the year ADVA reported Q4 revenues in line with guidance and better than expected profitability. However, guidance for Q113 was below our expectations and we have cut our estimates accordingly. Medium-term growth drivers are still in place, but the timing of the rebound in the near term is hard to predict. ADVA continues to trade at a discount to peers, despite its strong balance sheet and good growth track record. Year end Revenue ( m) PBT* ( m) EPS* ( ) DPS ( ) P/E (x) Yield (%) 12/ N/A 12/ N/A 12/13e N/A 12/14e N/A *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Profitability maintained despite revenue drop As flagged at Q3 results, the trading environment is volatile, with carriers continuing to focus spending on 4G wireless projects. ADVA reported Q4 revenues in the top half of guidance and operating margins at the top of the 2-6% guidance range (6.0% vs 6.8% in Q312 and 8.9% in Q411) despite a 2.4% q-o-q (3.8% y-o-y) decline in revenues. Profitability was helped by better than expected gross margins and good control of operating expenses. The company continued to grow market share in the Ethernet Access Device market, despite the weaker environment. Outlook weaker; medium-term growth intact ADVA guided to weaker than expected Q113 revenues ( 72-77m vs our 78.4m), with an operating margin of -2% to 2%. We have revised down our revenue estimates for FY13, assuming weak revenues in H1 followed by a return to growth in H2, to achieve growth of 1.7% for the year. We continue to forecast 10% revenue growth in FY14 as we expect demand to recover; while capex can be deferred in the short term, carriers and enterprises wanting to remain competitive will have to make investments at some point. We have revised down our normalised EPS forecasts by 5% in FY13 and 14% in FY14. Valuation: Relative valuation remains compelling Although current trading is difficult and there is no clear near-term catalyst, we believe the medium-term investment case remains compelling: the Optical and Ethernet segments offer structural growth driven by the bandwidth strains felt by networks. With its exclusive focus on growth niches, ADVA is not compromised with legacy technologies; its strong balance sheet means new product development is enabling it to significantly expand its addressable market and offset some of the general market weakness; and in a difficult trading climate ADVA may benefit from sector consolidation. On a current year P/E of 15.3x and EV/sales of 0.5x, the shares continue to trade at a discount to peers and our DCF ( 5.31). 5 March 2013 Price 4.29 Market cap 205m Shares in issue 47.8m Free float 80.6% Code ADV Net cash at end FY m Primary exchange DAX Other exchanges Frankfurt Share price performance % 1m 3m 12m Abs (4.5) 3.8 (9.2) Rel (local) (5.2) 0.3 (18.3) 52-week high/low Business description ADVA is a Germany-based manufacturer and supplier of next-generation telecommunications network equipment specialising in Metro and long-haul fibre optic WDM equipment and Ethernet access and aggregation devices. events Q113 results 25 April 2013 Analysts Katherine Thompson +44 (0) Bridie Barratt Schmidt +44 (0) tech@edisoninvestmentresearch.co.uk Edison profile page Technology ADVA Optical Networking is a research client of Edison Investment Research Limited

2 Review of FY12 results In October, ADVA guided Q412 results to a revenue range of 77-82m and a pro-forma operating margin of 2-6%. ADVA achieved revenues in the top half of the range, and the combination of stronger than expected gross margins (41.8% versus our 39.3%) and better controlled operating expenditure resulted in operating margins at the top end of the range. The company is slowly increasing the proportion of software and services that it sells, from 11.7% of sales in FY11 to 12.7% in FY12, providing a small boost to gross margins. The reported tax charge benefited from the recognition of a deferred tax asset relating to losses in the US subsidiary. Exhibit 1: Q4 and FY12 results highlights Q412a Q412e Difference FY12a FY12e Difference Revenues 80,268 79, % 330, , % Pro forma operating profit 4,837 2, % 21,798 19, % Pro forma operating margin 6.0% 2.6% 6.6% 5.8% Reported operating profit 4,288 1, % 18,834 16, % Reported operating margin 5.3% 1.9% 5.7% 4.9% PBT (normalised) 4,401 1, % 21,469 18, % PBT (reported) 3,852 1, % 18,505 15, % Net profit (normalised) 4,537 1, % 16,338 14, % Net profit (reported) 4, % 16,722 13, % Source: ADVA Optical Networking Industry outlook As already highlighted at Q3 results in October, customer spending is very volatile. Carriers continue to focus on building out LTE infrastructure, and while this has not yet resulted in an uptick in backhaul capacity investment, it is likely to happen at some point as growing data volumes overwhelm existing capacity. The issue is forecasting when this uptick might occur. Carrier capex forecasts for 2013 are mixed, with some flat and others showing a small increase. Notably, Deutsche Telekom (one of ADVA s largest customers) has budgeted to increase capex in CY13 as it continues to build out 4G and optical fibre networks. Even if industry capex is flat, within that new technologies should still grow, which should benefit ADVA as it is not exposed to legacy technologies. Medium-term growth drivers for ADVA ADVA s focus on Ethernet access and aggregation and WDM products positions it well to benefit from carrier and enterprise demand for technology that enables them to transport ever increasing amounts of data as efficiently and cost-effectively as possible. In a weak market, ADVA has continued to win market share in Ethernet Access Devices (EADs), with Infonetics Research estimating that the company leads the market with a share of 21%. ADVA s collaboration with Juniper is unlikely to have a material impact on this year s revenues, as the integrated PTX platform is not likely to be ready until nearer the end of the year. In the longer term, this relationship should increase ADVA s presence in the long-haul WDM market and increase the company s penetration of the US market (currently 34% of revenues). ADVA s 100G Metro product has already won several new customers in 2012, and as pricing becomes more competitive demand is likely to grow. 2

3 Outlook and changes to forecasts Outlook For Q113, the company guided to a revenue range of 72-77m, equating to a year-on-year decline of % and sequential decline of %, below our 78.4m forecast. Management expects to achieve an operating margin of -2% to 2%, and guided to operating expenditure at a similar level to Q412. Based on a slightly improved environment over the last couple of weeks, management believes it is possible that revenues could return to growth in Q213. Changes to forecasts We have reduced our already below consensus FY13 revenue forecast, assuming that revenues fall 10% y-o-y to 73.5m in Q113, decline 3% y-o-y in Q2 and show growth in Q3 and Q4, resulting in FY13 revenue growth of 1.7% to 335.5m. We maintain our 10% growth forecasts for FY14 and FY15. As Q412 gross margins were stronger than expected, and the company expects to continue to grow the software element of sales, we have factored in higher gross margins for FY This partially compensates for the lower revenues. Although the company stated that it will manage discretionary spending in reaction to lower revenues, it also confirmed that there would be salary increases from the beginning of the year, which we have factored into our forecasts. Reported net income in FY13 and FY14 declines as we no longer factor in the impact of deferred tax assets. Exhibit 2: Changes to forecasts 2013e 2014e Old New Change Old New Change Revenues 342, , % 376, , % Revenue growth 4.0% 1.7% 10.0% 10.0% Pro forma operating margin 5.9% 5.9% 7.1% 6.4% Pro forma operating profits 20,106 19,809-1% 26,587 23,659-11% Reported operating profits 17,034 18,009 6% 23,457 21,848-7% PBT (normalised) 19,139 18,609-3% 25,921 22,678-13% PBT (reported) 16,067 16,809 5% 22,791 20,867-8% Net profit (normalised) 14,479 13,734-5% 19,084 16,418-14% Net profit (reported) 16,067 11,934-26% 18,098 14,607-19% Source: Edison Investment Research Valuation ADVA trades at a discount to its peer group on all metrics and trades below our DCF valuation of The current trading environment is tough across the industry, with most companies guiding to sequential declines for Q1 (although some of this is due to typical seasonality). ADVA s recent growth path has reversed in the short term and it is unclear precisely when growth will return. However, ADVA is well positioned with the newer growth technologies to benefit when spending does improve. We also note that ADVA has demonstrated its ability to manage costs in the light of weaker demand and we expect it to continue to do so through the course of

4 Exhibit 3: Peer group valuation Market Cap (local m) EV/S EV/S EV/ EBITDA EV/ EBITDA P/E P/E Sales growth current year Sales growth next yea. EBIT Margin EBIT Margin ADVA Optical Networking 0.5x 0.4x 3.4x 3.0x 15.1x 12.5x 2% 10% 5% 6% Ciena Corp 1, x 1.1x 17.2x 10.4x 106.5x 20.0x 8% 10% 2% 5% Tellabs Inc x 0.1x 5.0x 1.8x x 29.7x -14% 1% 0% 7% Alcatel-Lucent 2, x 0.2x 2.9x 2.3x -12.0x 20.3x -1% 1% 0% 2% Infinera Corp x 1.0x 32.4x 11.8x -66.0x 45.4x 17% 13% -2% 5% BATM x 0.6x 11.0x 6.1x 22.4x 12.6x 10% 10% 4% 7% Acme Packet Inc 1, x 4.4x 23.5x 15.9x 58.2x 35.3x 9% 21% 13% 15% Allot Communications Ltd x 2.1x 12.1x 8.4x 21.3x 16.5x 19% 18% 18% 23% Cisco Systems Inc 112, x 1.6x 5.3x 5.1x 10.6x 10.0x 6% 6% 28% 27% Juniper Networks Inc 11, x 1.8x 8.6x 7.4x 18.3x 15.8x 5% 8% 17% 17% Ericsson 240, x 0.8x 6.2x 5.5x 15.6x 12.9x 3% 4% 9% 11% Finisar Corp 1, x 1.2x 10.0x 6.9x 25.8x 15.9x -2% 12% 7% 10% JDS Uniphase Corp 3, x 1.6x 10.8x 8.8x 23.4x 16.6x 2% 10% 10% 13% Oclaro x 0.1x -1.3x -3.4x -1.0x -1.9x 59% 13% -17% -7% Source: Bloomberg, Edison Investment Research. Note: Peer data as at 25 February

5 Exhibit 4: Financial summary '000s e 2014e 2015e December IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 232, , , , , , ,004 Cost of Sales (132,851) (170,501) (177,429) (196,820) (201,083) (220,911) (240,972) Gross Profit (pro forma) 99, , , , , , ,032 EBITDA 0 29,986 37,568 45,116 47,767 52,769 61,854 Operating profit (pro-forma/normalised) 6,102 13,288 17,283 21,798 19,809 23,659 29,883 Intangible Amortisation (2,443) (2,141) (2,493) (1,620) (600) (585) 0 Stock compensation expense (1,378) (1,848) (1,583) (1,344) (1,200) (1,226) (1,263) Other exceptionals Operating Profit 2,281 9,299 13,207 18,834 18,009 21,848 28,620 Net Interest (672) 1, (329) (1,200) (980) (955) Profit Before Tax (norm) 5,430 14,979 18,080 21,469 18,609 22,678 28,928 Profit Before Tax (FRS 3) 1,609 10,990 14,004 18,505 16,809 20,867 27,665 Tax - reported (289) (3,983) 2,935 (1,783) (4,875) (6,260) (8,300) Profit After Tax (norm) 5,141 11,931 14,197 16,338 13,734 16,418 20,628 Profit After Tax (FRS 3) 1,320 7,007 16,939 16,722 11,934 14,607 19,366 Average Number of Shares Outstanding (m) EPS - normalised ( c) EPS - normalised and fully diluted ( c) EPS - (IFRS) (c ) Dividend per share (c) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets 78,483 84,500 99, , , , ,605 Intangible Assets 47,593 51,622 61,930 69,774 76,163 82,725 90,051 Tangible Assets 30,807 32,778 37,455 39,240 39,450 39,759 40,771 Investments Assets 118, , , , , , ,659 Stocks 25,400 39,588 36,536 41,339 42,024 46,227 50,849 Debtors 38,648 47,926 54,874 55,464 56,383 62,022 68,224 Cash 50,882 54,085 59,110 70,625 61,591 64,312 65,716 Other 3,584 8,023 9,990 6,870 6,870 6,870 6,870 Liabilities (67,220) (72,301) (85,391) (91,684) (78,874) (83,621) (99,658) Creditors (54,216) (70,814) (75,058) (76,928) (77,702) (82,448) (87,668) Short term borrowings (13,004) (1,487) (10,333) (14,756) (1,173) (1,173) (11,990) Long Term Liabilities (28,507) (46,407) (38,519) (38,502) (37,357) (36,211) (24,248) Long term borrowings (15,379) (27,948) (17,614) (14,269) (13,124) (11,978) (15) Other long term liabilities (13,128) (18,459) (20,905) (24,233) (24,233) (24,233) (24,233) Net Assets 101, , , , , , ,359 CASH FLOW Operating Cash Flow 29,105 21,100 40,871 46,158 48,126 48,900 57,512 Net Interest 182 (1,493) (1,535) (1,348) (1,200) (980) (955) Tax (435) (613) (1,135) (1,002) (4,875) (6,260) (8,300) Capex (19,191) (24,071) (33,027) (34,167) (36,357) (37,793) (41,572) Acquisitions/disposals (782) Financing 1,389 7,228 1,307 1, Dividends (4,136) Net Cash Flow 11,050 2,151 6,513 10,700 5,695 3,867 2,550 Opening net debt/(cash) (11,449) (22,499) (24,650) (31,163) (41,600) (47,295) (51,162) HP finance leases initiated Other (0) Closing net debt/(cash) (22,499) (24,650) (31,163) (41,863) (47,295) (51,162) (53,712) Source: Company accounts and Edison Investment Research 5

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