Netro (Nasdaq:NTRO) saw its shares fall another 20% last week after the company warned that its earnings for the fourth quarter would disappoint. Altogether Netro shares have lost 95% of their value in the last year. CFO Sanjay Kahre at Netro, an Israeli developer and producer of point-to-multipoint broadband access systems, admits that the company's business is expected to slow down. He says the fall-off in gross profits is expected to continue through 2001 and adds that analysts were slow to correct this year's earnings estimates.
Netro CEO and President Gideon Ben-Efraim insists that Netro is solid and that its general figures are excellent. He says he believes that company's shares will rise sharply over the coming year. But so far there appears to be little evidence to back up his optimism.
The macro figures look great. The growth rate for IP-based broadband networks is 400% per year and the global rate of frequency allocation is on the rise. Although by the end of 1999 only Germany, Spain and Portugal allocated frequencies in our relevant range, 10 to 26 gigahertz, that is no longer the case. During the last few weeks France, the United Kingdom and Greece have also joined this list. Latin America is also involved in allocating frequencies in this range. There is no doubt that our products have great presence in the marketplace, Ben-Efraim claims. . Kahre indicated that income in 2001 would be lower than analysts had predicted. He says this fall-off is due to the reduction in vendor credit and the decline in new network installation. In response, Ben-Efraim says he won't provide estimates for 2001, instead he'll wait until a Netro conference call scheduled for three weeks time. But, he insists that he is not expecting a reduction in the company's growth.
BenEfraim's high expectations seem rather odd in view of the general business slow-down in the network supply sector. Not to mention the inability of newcomers to raise capital for expansion.
Netro focused on communications providers backed by financial heavyweights such as Comcast, and Red Vision in Spain. This approach has proved itself, not one CLEC of Netro's clients has gone out of business. On the contrary, some of them have begun gobbling up other communications providers. CLEC is the name for Competitive Local Exchange Carriers, which, as the result of deregulation, now compete against the better-known phone carriers.
Ben-Efraim predicts that 2001 will be a good year for Netro, one in which the firm will fortify its position as an industry leader. He says Netro will penetrate new markets and enter new frequency ranges, such as 3.5 giga hertz and the 28 giga hertz, which match the European ETSI standard.
So, if everything is so great, how come Netro's shares have dropped like stone since August, from $83 a share to $8 a share?
Ben-Efraim: The market's mood affects our share price. It reflects a weakness in communication infrastructure companies and in the general telecommunications sector. This weakness is mainly due to American communication providers, which have accumulated tremendous debt, and DSL companies that suffered from the fact that the sector didn't grow at the expected rate. But Netro's situation is different. We have hardly any competitors, and the technological entrance barrier to this niche market is high. Our sector is still in its infancy. Netro's problem is that Lucent has postponed orders. We are hoping that Lucent will recuperate and revue its growth by third quarter of 2001, he said. By relying entirely on Lucent's marketing efforts, Netro's sales have fallen substantially in the fourth quarter. Ben-Efraim agrees that Netro should have reduced its dependency on Lucent, which currently comprises 85% of Netro's sales. But this will change towards Q3 2001. Ben-Efraim foresees a substantial increase in sales to Nokia from mid 2001 as the two companies are cooperating on a project in China. According to Ben-Efraim, this is Nokia's biggest market.
Six weeks ago Nokia unveiled a wireless accesses system called CityHopper, which is based on a Netro product, that meets the European ETSI standard, and allows communication providers to offer services such as fast rate data communications, and high quality video and audio services. The system has already been tested successfully by the Chinese Cellular company Unicom.
Ben-Efraim estimates that Netro's link with Nokia will cement the company's position as China's leading wireless communication equipment provider. A similar contract has been signed with Cisco Systems. Netro also claims to be making inroads into the Latin American market. But Netro's lack of growth is only one of the factors causing the company's share price to collapse. CFO Kahre points out that gross profit margins have also dropped from 20% to 18% and may continue to erode during 2001. This he says, results from an increase in the sale of end units, which are bought for a lower price than base stations.
In that respect it appears that Netro's position has not significantly improved compared to last year. It seems as though Netro is unable to reduce the cost of manufacturing its products to a level which would give the company profitability.
There is no magic formula for reducing costs, it's a process that takes time. An improvement in gross profitability will come we increase our production, he concluded.