Memory Commentary and Stock Updates

by: Avi Cohen

Acme Packet (NASDAQ:APKT) Update

With regard to the on-going discussion between stand-alone SBCs and/or integrated SBC with (router or Media Gateway). We have been able confirm through field intelligence that service providers testing Sonus Networks (NASDAQ:SONS) integrated solution, have experienced a 30% drop in performance of the Media Gateway. This means the Service Provider would need to add more capacity on their network for an integrated SBC solution and purchase additional equipment. This obviously would be good news for vendors with integrated SBCs as the carrier would need to purchase more equipment.

However, this is even better news for APKT position and speaks to how difficult it will be for competitors to displace APKT. The company has a broad customer base (540+ customers) and is in the top 24/25 carriers. Also here are some details with regard to APKT pricing. APKT prices it products on a per session basis; ALU pays $21 per session, which is 25% off ASP if they go direct to the customer. Also note that when APKT sells a net-net 4000/4250 the box is fully loaded at 4000 sessions. In 2Q08, 37% of APKT revenue was from two primary suppliers, ALU and Nokia-Siemens Networks. Direct and indirect channel revenue for 2Q08 was 30/70.

Weekly Memory Comments

Memory spot pricing for DRAM declined in the high single digits on average over the past week. NAND was mixed; SLC fell low single digits whereas MLC was up low single digits. While the stability in MLC pricing last week is encouraging we don’t think that it is a sign of a material change in supply/demand balance just yet.

From what we heard, a large vendor has been reducing supply to the spot market recently which then caused pressure on spot prices to ease. The steep decline in NAND pricing this year has definitely accelerated the move to higher density flash storage for most consumer electronics, with the most recent example Apple offering double the SSD storage (from 64GB to 128GB) for roughly the same price as before on its updated high-end MacBook Air announced on Tuesday. That said, demand is still below seasonal and we think the oversupply situation is not going to subside until mid 2009 as announced supply cuts take time to work through the system and credit tightness further discourages consumers from spending on discretionary items like memory cards and electronics. Yesterday, Intel announced that it has begun shipments of its enterprise SSD; the 32GB version of the drive is available for $695 which seems competitive with others out there, while the 64GB version will be available later on in Q1:09.

Datalink Corporation (NASDAQ:DTLK) Review; Implications for NetApp (NASDAQ:NTAP)

Datalink (DTLK) reported last night. Revenue of $49.5M came in 2% soft of expectations, and earnings were in-line. The company guided for Q4 sales of $49M-$53M.

Guidance was shy of expectations ($52.75M), however given the extent of concern around the impact of macroeconomic conditions on IT spend, we would view this forecast in a positive light for the storage industry. Datalink admittedly does not have much exposure to the financial services industry, however, its customer base is largely enterprise in scope and this forecast implies more robust spending trends than we would have expected.

Finally, we would note that Datalink’s largest partner is NetApp. While it is difficult to paint a positive picture for Netapp given management’s own tempering of expectations, this singular data point should be viewed as positive for Netapp.

Nokia (NYSE:NOK) Reports 3Q08 Results

Initial Take

  • Revenue of €12.24B is below our estimate of €12.79B and the consensus forecast of €12.94B.
  • EPS of €0.33 in-line with Avian/consensus estimate as higher gross margin (35.7% versus Avian estimate of 34.4%), primarily in Devices & Services, and modestly lower OpEx offset the top-line shortfall.
  • Device units of 117.8mm was below Avian/consensus at 120mm.
  • Industry units of 310mm for 3Q08 was spot on our 310mm estimate (Nokia implied market share of 38.0%).
  • Device ASP of €72 was below our €74 estimate.
  • Services revenue of €115mm (billings €140mm) modestly below our estimate of €120mm.
  • Devices & Services gross margin of 36.5% is 100 bps above our 35.5% estimate.
  • Devices & Services operating margin of 18.6% is generally in-line with our 18.7% estimate.
  • NSN revenue of €3.504B below our €3.650B estimate.
  • NSN gross margin at 31.2% generally in-line with our 31.0% estimate, operating margin at 5.1% modestly below our 6.0% estimate.
  • Navteq (NVT) revenue of €156mm generally in-line with our €150mm estimate.
  • Navteq gross margin at 88.5% (well above), operating margin at 18.5% (a little below).
  • 4Q outlook spot on with our expectations – company sees market share flat to up sequentially into 4Q08 on higher sequential industry volumes.
  • Company sees 2008 industry handset shipments of 1.26B, up 11% and suggesting 4Q08 unit sell-in of 352mm versus our 350mm forecast.

Net-net, 3Q08 not as bad as may have been feared, but weak nonetheless in our opinion. Outlook spot on with our expectations. We look to get additional detail on the conference call at 8am EST (dial-in: 888-636-1561, pass-code: 67678184).

Another One Bites the Dust - Zygo (NASDAQ:ZIGO

Electro Scientific Industries (NASDAQ:ESIO) has agreed to buy Zygo (ZIGO) in a stock based merger with 1.0233 shares of ESIO for each ZIGO share, or a 36% premium. ESIO is a photonics and test equipment company that offers products in the semiconductor space that provides various electrical and visual tests. Zygo's focus on small geometry optical inspection will give ESIO the technology to broaden its inspection system line at smaller line widths. ESIO acquired New Wave Research in 2007, which provides tools for the LED and LCD space (repair station components) which also makes sense as a focus for Zygo's OEM laser business. The deal is expected to close in 1Q 2009.

The Right Direction

Innolux, a 2nd tier Taiwanese panel producer cut expansion plans for its Gen 6 fab from 90k per month to 60k per month within the 2009 year. Our model has been 60k per month despite the company's guidance as equipment manufacturer contacts have never indicated any real interest from Innolux above Phase II (60k). While the concept of capex cuts in 2009 is certainly where the industry should be headed, we still believe that much of the rhetoric that is being passed by panel producers is intended to put a positive spin on the longer term prospects for the industry and has little to do with the day to day operation of the panel producers. Current utilization rates and pricing continue to be the most important metrics we follow.

Daily Memory Commentary

  • DRAM pricing was flat overnight
  • 128MX8 DDR2 667 remained at $1.10. W/W -8%. M/M -27%.
  • 64MX8 DDR2 667 remained at $0.60. W/W -8%. M/M -20%.
  • 32MX8 DDR 400 remained at $0.80. W/W 0%. M/M 0%.
  • NAND pricing was flat to down overnight
  • 16Gb MLC remained at $2.25. W/W 2%. M/M -6%.
  • 16Gb SLC fell to $11.40. W/W -4%. M/M -10%.
  • 8Gb MLC remained at $1.50. W/W 0%. M/M -6%.
  • 8Gb SLC remained at $4.80. W/W -3%. M/M -3%.

Disclosure: Avian Securities, LLC, its officers and employees may from time to time acquire, hold or sell a position in the securities mentioned herein in this report.