Alvarion Ltd. Rating: Buy

Transcription

1 TECHNOLOGY Kevin Dede, CFA Company Update June 11, 2008 Key Metrics ALVR - NASDAQ $7.95 Pricing Date 06/11/2008 Price Target $ Week Range $15.21-$5.20 Shares Outstanding (mm) 64.5 Market Capitalization ($mm) $ Mo Average Daily Volume 603,154 Institutional Ownership 28% Debt/Total Capital ROE Book Value/Share $3.44 Price/Book 2.3x Dividend Yield LTM EBITDA Margin EPS($) FY: December Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar A Q-Jun E Q-Sep E Q-Dec E FY E E P/E 56.8x 39.8x 17.7x Revenue($mm) Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar A Q-Jun E Q-Sep E Q-Dec E FY E E 1 Year Price History for ALVR Q2 Q3 Q Created by BlueMatrix Company Description: Alvarion Ltd. ( is a leading provider of last-mile point-to-multipoint and point-to-point wireless solutions that replace or supplement existing wireline communications infrastructure in low teledensity regions, or areas where broadband connectivity is not available Alvarion Ltd. Rating: Buy Nortel Strategic WiMAX Agreement; LTE Draws Attention Investment Highlights: WiMAX partnership. Early this morning, Alvarion and Nortel jointly announced a strategic agreement to develop and sell WiMAX equipment. Clearly, Nortel's strengths lie in areas of core network switching equipment, not to mention its worldwide sales, distribution and support organization established over decades of telecoms business. Alvarion has been around a scant 15 years and has focused solely on fixed wireless (until recently) transmission and access. However, it's a change in strategic thinking and rationalization of R&D dollars on Nortel's part that drove the combination, in our view, added to the hurdle of Alvarion's less-than-leading global OEM size. Noting at its analyst meeting, also this morning, Nortel said it sees the LTE environment developing more rapidly than it had before, and appears to be choosing to concentrate its internal development effort on that opportunity. Benefit for each. From Alvarion's perspective, we see the deal as more than a strict OEM arrangement, primarily because Alvarion now has access to key core technologies (MIMO was offered as an example on the call earlier today) necessary for developing a platform that meets m (next WiMAX iteration) early guidelines. In addition, and more importantly, Alvarion has the Canadian worldwide marketing and support muscle behind it in addressing larger deals, such as Clearwire in the U.S. (which could become an opportunity), Axtel in Mexico, and any one of the emerging service providers addressing Taiwan, Australia, and a host of other countries. Similarly, and relating to our recent research piece on the subject, the winners of the 2.5 GHz licensing rounds in Western Europe might be more inclined to consider building a WiMAX network when that spectrum is granted mobile WiMAX, available now, still has a considerable time-to-market advantage over LTE. Timing. While the deal announcement comes today, we don't expect any sales or earnings impact until 2009, and are not making changes to our estimates at this time as we have factored in greater than 20% sales growth for next year already in our $0.45 EPS estimate. We believe our sales estimate is conservative for next year; this deal makes it even more so. From a profitability standpoint, combined deal sales are expected to draw a lower gross margin for Alvarion, but on account of the lower supporting operating costs (such as marketing and even R&D), overall operating margins should be unaffected. Reiterate Buy. We reiterate our Buy with the belief the shares should approach $11. The Disclosure section may be found on pages 4-6 of this report. The Valuation section may be found on page 4 of this report.

2 Combination Should Prove Beneficial Over Time As a further Alvarion benefit, Nortel is discontinuing its mobile WiMAX R&D effort and throwing all of its eggs behind Alvarion, meaning that it can expect to be drawn into every Nortel deal going forward, whereas the deal is not exclusive for Alvarion, who may choose to use other partners such as Cisco Systems or Hitachi, depending on specific circumstances; although, Alvarion did make the point that it expects, over time, that Nortel's core network equipment should become so intertwined with the Alvarion access gear, most customers could be expected to choose the combined offering. Although the quantity and terms were not disclosed, we expect that Alvarion could see Nortel R&D development dollars as part of the combined WiMAX development. Interestingly enough, Nortel benefits as well on two fronts as we see it. First, Nortel can approach the service providers it is currently in WiMAX negotiations with on working e access radio gear from Alvarion, discounting the notion that it doesn't have working equipment. Second and perhaps more importantly from a strategic perspective, Nortel can focus its radio R&D dollars (Canadian) on LTE. Of course, what works for the goose, works for the gander. Deals that have previously been viewed as too small to address may now include Nortel gear, wherein Nortel would not have spent the time before. Similarly, with working radio access gear, Nortel becomes a much more attractive supplier to potential customers such as Clearwire. Prior OEM Agreements Back in January of 2005, Alvarion struck an OEM deal with Lucent Technologies. At the time, it drew great attention, primarily because it pointed to a resurgence in interest in broadband wireless since the telecoms downturn and pointed to the promise of WiMAX. As an aside, there had been countless OEM agreements prior to the downturn, and one deal Lucent announced with Netro Corporation, significantly (read incredibly significantly) added to Netro's market capitalization on the date of the announcement. However, the case in each of these deals was that not much came of them, and Netro was sold off to a competitor for pennies on the dollar. Alvarion has gleaned little from its Lucent deal, and Alvarion referenced Lucent's sale to Alcatel and Alcatel's own WiMAX development effort in response to questioning yesterday. But that deal wasn't announced until more than a year after the Alvarion-Lucent OEM deal. While we remain staunch Alvarion bulls, and we like this combined offering in concept, we are leaving our estimates intact. Our view on the deal's accretiveness could improve sharply once we hear of the company's progress on deal wins. Public companies mentioned in this report: Clearwire Corporation (CLWR - $ NASDAQ) Alcatel-Lucent (ALU - $ NYSE) Nortel Networks Corp. (NT - $ NYSE) Cisco Systems, Inc. (CSCO - $ NASDAQ) Hitachi Ltd (HIT - $ NYSE) 2 MORGAN JOSEPH & CO. INC.

3 Quarterly Income Statement & Forecast ($'s millions) ALVR--FYE Dec. 31 Net sales COGS Gross Profit R&D Selling & Market Gen. & Admin. Total Op. Expenses Operating Income Other Inc. Pre-Tax Income Income Tax Expense Net Income EPS Shares Outstanding 12/31/07 A 12/31/08 E ESTIMATE ESTIMATE Q1A Q2A Q3A Q4A YEAR Q1A Q2E Q3E Q4E YEAR YEAR 03/31/07 06/30/07 09/30/07 12/31/07 12/31/07 03/31/08 06/30/08 09/30/08 12/31/08 12/31/08 12/31/09 $52.08 $57.55 $60.61 $66.34 $ $67.17 $69.00 $75.00 $80.00 $ $ $0.02 $0.03 $0.04 $0.05 $0.14 $0.03 $0.03 $0.06 $0.08 $0.20 $ Margin Analysis Gross Margin R&D Ratio Selling Gen & Admin. Operating Margin Pretax Margin Tax Rate Net Margin Percent Change Total Sales Cost of Revenue Gross Profit R&D Expenses Selling Gen & Admin Operating Income Pretax Income Net Income Share Count EPS Source: Company and MJ estimates. 50.7% 50.9% 49.7% 49.0% 50.0% 49.1% 48.6% 48.1% 47.5% 48.3% 46.0% 21.9% 21.9% 20.2% 20.1% 20.9% 21.7% 21.4% 20.0% 18.8% 20.4% 17.3% 23.5% 23.0% 23.6% 21.9% 22.9% 21.1% 20.7% 19.2% 18.8% 19.9% 17.3% 5.9% 5.2% 5.1% 4.7% 5.2% 5.7% 5.5% 5.1% 4.9% 5.3% 4.4% -0.6% 0.8% 0.9% 2.4% 0.9% 0.7% 1.0% 3.8% 5.1% 2.8% 7.0% 2.6% 3.4% 4.0% 4.7% 3.7% 3.0% 2.6% 5.2% 6.4% 4.4% 8.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.6% 3.4% 4.0% 4.7% 3.7% 3.0% 2.6% 5.2% 6.4% 4.4% 8.3% 19.4% 30.7% 38.7% 32.0% 30.3% 29.0% 19.9% 23.7% 20.6% 23.1% 21.2% 16.8% 29.6% 42.4% 40.0% 32.3% 33.2% 25.4% 27.6% 24.1% 27.3% 26.7% 22.0% 31.9% 35.2% 24.6% 28.3% 24.9% 14.6% 19.8% 16.9% 18.9% 15.4% 34.2% 41.2% 28.7% 27.0% 32.5% 28.0% 17.2% 22.6% 12.8% 19.8% 2.7% 22.5% 29.2% 28.7% 18.9% 24.7% 15.5% 7.8% 0.9% 3.4% 6.5% 5.7% 33.2% 3.8% 13.4% 18.4% 16.4% 23.7% 27.7% 22.8% 25.2% 24.8% 1.9% % 192.8% % 99.6% 199.5% % 53.7% 457.2% 160.3% 263.3% 202.6% -12.4% 100.4% % 49.1% 94.4% 53.8% -8.8% 59.3% 64.0% 45.0% 129.3% -12.4% 100.4% % 49.1% 94.4% 53.8% -8.8% 59.3% 64.0% 45.0% 129.3% 6.2% 5.8% 6.8% 6.4% 6.3% 0.9% 1.1% -0.1% 0.3% 0.5% 1.3% -17.6% 89.5% % 40.1% 82.8% 52.4% -9.8% 59.5% 63.5% 44.2% 126.3% 3 MORGAN JOSEPH & CO. INC.

4 Required Disclosures Rating and Price Target History for: Alvarion Ltd. (ALVR) as of /21/05 I:Buy:$12 07/31/06 Buy:$10 11/02/06 Buy:$11 07/31/07 Buy:$15 05/06/08 Buy:$ Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q Created by BlueMatrix Price Target Our price target is $ Valuation Methodology Our $11.00 price target is based on a 25x P/E multiple. Alvarion's historical track record does not point to a clear future of strong earnings growth, primarily on account of the nascent yet emerging WiMAX market, the company's sale of its mobile infrastructure business, and high level of R&D spending; hence, our 25x multiple must be based on expected future growth. Over the next couple of years, we expect Alvarion to post net income growth well above 25% given the rapidly evolving WiMAX market; however, we are far more comfortable basing a valuation calculation on longer-term growth in the 25% range. Comparative valuations are also not necessarily meaningful, in our view, given that few comparable wireless equipment companies could see sales and earnings growth launched by a rapidly adopted new technology. We believe Alvarion stands alone in this regard, with only Airspan Networks (NASDAQ: AIRN $0.98) offering any close comparison, in our view. On these facts, valuation methodology is largely subjective. We have set what we believe to be conservative assumptions based on the broad acceptance Alvarion has seen to date, and other factors including large contract awards won by other vendors, such as Motorola's Clearwire and Sprint wins. Our $11 price target is based on a 25x multiple and our $0.45 FY09 EPS estimate. We expect to see 23% sales growth in 2008 (within the company's 20-27% range) and about 21% for 2009, which we believe to be especially conservative as Alvarion expects growth to accelerate in Risk Factors Israel-based operations assume greater geopolitical risk. The open WiMAX standard attracts competition, including wireless broadband equipment manufacturers and wireless WLAN (wide area network) equipment manufacturers. Broad market acceptance of the WiMAX standard is essential for Alvarion's survival. Timing of WiMAX deployments is difficult to predict due to the emerging nature of the technology and the relative infancy of the standard. Nearly all of Alvarion's revenues come from international customers (those outside Israel; North America was responsible for approximately 20% of Alvarion's 2006 revenues). In many cases, the company relies on distributors that have no contractual obligation. 4 MORGAN JOSEPH & CO. INC.

5 Alvarion has been acquisitive in the past and may make acquisitions in the future that could change its financial model. Rating and Price Target History for: Airspan Networks Inc. (AIRN) as of /11/06 I:Buy:$6 11/29/07 Buy:$2.5 04/16/08 D:Buy:$ Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q Created by BlueMatrix I, Kevin Dede, CFA, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2008 by Morgan Joseph & Co. Inc. 5 MORGAN JOSEPH & CO. INC.

6 Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY Tel Fax Sales and Trading New York Tel Fax Pittsford Tel Fax MORGAN JOSEPH & CO. INC.