Telecom Overview: Digesting Early Earnings Results Page 2 Examining Earnings Results

Issue 313: Wednesday, April 9, 2008

In This Issue

Page 1 Telecom Overview: Digesting Early Earnings Results Page 2 Examining Earnings Results

Page 5 Earnings Schedule

Page 7 The Telecom Connection Portfolio

Telecom Overview: Digesting Early Earnings Results

This week’s edition of The Telecom Connection is fairly straightforward with a decidedly earnings-related flavor. Research In Motion (RIMM) reported its February quarter last Wednesday evening and, quite frankly, I couldn’t have written a better script. The numbers were strong and the guidance was stronger, with little room for the bears to criticize.

Micron (MU) also reported last week. As I noted two weeks ago, no one was expecting much -- and that’s exactly what we got.

However, like any commodity company, the results are a historical reference to what supply and demand looked like. The stock and the fundamentals will change in relation to memory prices. Just as we know an oil company will have a great quarter with oil priced at $105 a barrel, when memory prices move up off the bottom, so will Micron.

While Riverbed Technology (RVBD) didn’t report its quarter, it did negatively preannounce. It appears to be macro-related, and we may see more of this when it comes to June-quarter guidance. As noted below, I plan to hold on to the model portfolio position in Riverbed for now.

Last, eBay (EBAY) is scheduled to report at this time next week, so there’s a brief summary of what to expect below. Along with that I have included the reporting schedule and expectations for all of the companies in the model portfolio, to the degree that information is available.

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PLEASE SEE IMPORTANT LEGAL DISCLAIMER ON LAST PAGE

Issue 313: Wednesday, April 9, 2008

Examining Earnings Results • Research In Motion had a great quarter and topped it off with guidance that was much stronger than Street expectations. Revenue in the quarter was $1.88 billion (up 102% year over year; up 13% quarter over quarter), and that was slightly above the high end of prior guidance. Earnings per share (EPS) were 72 cents vs. guidance of 66 cents to 70 cents. Gross margin was 51.4%, up 70 basis points from the previous quarter on slightly higher average selling prices (ASPs) of $348 vs. $342 in the prior quarter. Incremental gross margin (the margin obtained on each additional dollar of revenue) was 57.4%, demonstrating the leverage that exists within the company’s business model.

Operating margin was 30%, up 400 basis points year over year and up 70 basis points quarter over quarter with very solid operating expenses control. Cash from operations was a very strong $618 million, more than triple the levels from last year. The cash account was essentially flat at $1.6 billion. Accounts receivable gained $140 million, but days sales outstanding was flat at 56 days. Inventory was up slightly ($60 million), and days of inventory (DOI) increased two days to 39 days. Channel inventory was characterized as being “down slightly” to about four weeks.

Handset revenue was a whopping $1.53 billion in the quarter, up 123% year over year and 14% sequentially. The company shipped 4.4 million handset units (up 120% year over year; up 13% quarter over quarter) with activations up to 3.9 million, leaving the all-important ratio between the two at 1.13 vs. a bloated 1.26 last quarter.

In retrospect, the previous quarter’s increase was little more than a prelude to a strong fiscal fourth quarter. A recovery in this ratio also helps support the argument that there’s a strong upgrade market for existing subscribers purchasing newer hardware, vs. the claim that inventory was building in the channel.

From a subscriber perspective, Research In Motion added 2.18 million new accounts in the quarter, up 114% year over year and 32% quarter over quarter. Management commented that it sees no evidence of weakening demand from its enterprise customers (i.e., the financial services industry). More importantly, the company is making very strong inroads into the consumer markets. In the fourth quarter, non-enterprise-based sales soared to more than 50% of new subscribers.

Research In Motion continues to expand internationally, with revenue outside of North America at $621 million, up 138% year over year and 13% quarter over quarter. Management commented that some European markets were strong and that its products are finally shipping to China.

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Issue 313: Wednesday, April 9, 2008

As I noted in my preview a couple of weeks ago, there appeared to be a disconnect between the very strong subscriber growth preannouncement and the reiteration of prior revenue and EPS expectations. One of the explanations I offered was that the subscriber growth was late in the quarter, and that we would see a much stronger-than-expected fiscal first quarter.

That’s certainly the way it has played out, with the May quarter guidance coming in well above Street consensus. Revenue is expected to be in the $2.23 billion to $2.30 billion range, or up 18% to 22% sequentially, with hardware units expected to be approximately 5.3 million with ASPs of about $345. Net new subscribers should be about 2.2 million as the impact of holiday promotions wanes. Gross margin should be flat sequentially with operating expenses up slightly and a tax rate in the 29% to 30% area. This should yield EPS of 82 cents to 86 cents. The current Street consensus is calling for revenue of $1.99 billion and earnings of 76 cents.

Research In Motion’s product cycle is working in its favor, and the company is doing an excellent job of penetrating a new market (consumers) as well as expanding geographically. While the stock is up since it preannounced the higher subscriber rates, it really hasn’t broken out. If you don’t currently have a position in Research In Motion, now would certainly be a good time to initiate one.

• Micron’s fiscal second-quarter results were largely as expected, even though they were slightly below consensus. Consensus means little when the sell side is literally flying blind (due to no guidance from the company).

Revenue in the quarter came in at $1.36 billion, down 5% from last year and 12% from the prior quarter. Gross margin was negative, and the GAAP (generally accepted accounting principles) loss per share was $1.01 and included a goodwill impairment charge of $463 million. On a pro forma basis (excluding the impairment charge), the loss per share was 41 cents. Cash from operations remained solidly positive (which is very important) at $282 million and about flat with the prior quarter. The cash account was down about $180 million to $1.85 billion given the company’s front-loaded capital spending program. Accounts receivable declined $170 million, with days sales outstanding down four days to 59 days. Inventory was essentially unchanged from the prior quarter, but given the lower revenue, days of inventory jumped eight days to 93 days.

During the quarter, ASPs for DRAM declined about 15%. The company believes, as I do, that DRAM prices have bottomed. When viewed from the perspective of contract prices on DRAMeXchange, the online chip clearinghouse, prices ticked up slightly in January and have remained essentially flat since that point. NAND flash ASPs in the quarter declined about 30% and, at this juncture, no one is calling a bottom. The deteriorating ASPs necessitated a $15 million inventory writedown (vs. $62 million last quarter), and most of that was NAND flash- related. Management was quick to point out that DRAM was actually gross margin positive in the quarter and, buried in the weak numbers, the company reduced DRAM costs by 15% quarter over quarter and NAND flash costs by 25% quarter over quarter.

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Issue 313: Wednesday, April 9, 2008

Micron will continue to reduce its cost basis as it ramps up its new processes on 300 mm wafers. There are also unconfirmed reports that memory chip name Hynix is in the process of decommissioning (i.e., taking off-line) its 200 mm DRAM lines because they are no longer cost competitive for the company. If that’s true, it represents about 5% of worldwide supply. Now if only Hynix would take its NAND flash supply off-line, that would be a real boost for the industry.

The important point to keep in mind with Micron is that the fundamentals will trail price changes as well as changes in the stock. No one was surprised by the results because everyone has been looking at the same data (see the chart below). However, we are also seeing that DRAM pricing has remained flat through early April, which is the seasonally weakest period of the year.

Micron Stock vs. DRAM Pricing $16 $80 $14 $70 $12 $60 $10 $50 $8 $40 $6 $30

Stock Price Stock $4 $20

$2 $10 1 Gb Module DDR2 $0 $0

2 3 /4 3/1 19 4/9 30 7/ 1 9 /24 15 1/7 28 19 3/ 4/ 5/216/11 7/238/ 9 11/5 1/ 2/ 3/103/31 10/ 11/2612/17 Source: Yahoo Finance, DRAM eXchange

Then add to that the negative preannouncement from Novellus (NVLS), a semiconductor capital equipment company. Before the open Tuesday, Novellus announced that revenue would be at the low end of expectations and EPS would be below targets. Novellus is a supplier of equipment with a heavy emphasis on memory manufacturers.

The company mentioned during its previous conference call in January that it was seeing push- outs of orders from DRAM companies. With Tuesday’s pre-announcement, management indicated that it was again DRAM customers who cut back from previous expectations. (If we could get more pull-back from the NAND customers, that would be great.) The implication here is that this is capacity that was planned and, at least for the foreseeable future, will not come online. That’s a good thing!

Shares of Micron have bounced off their most recent lows, but will likely be range-bound for a few more months leading into the build up ahead of back-to-school. We should begin to see DRAM prices react in late June to early July. If there is movement before that point, the stock could move up quickly. So if you have been on the fence about Micron, now is the time to decide.

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Issue 313: Wednesday, April 9, 2008

• Riverbed didn’t report earnings during the past week, but it did take some time out to inform us that the quarter will be below expectations. Revenue is expected to be in the $72 million to $73 million range vs. Street consensus of $81 million. Pro forma EPS should be 8 cents to 10 cents vs. expectations of 12 cents.

Management held a conference call following the preannouncement and disclosed that four or five large domestic deals were expected to close in the quarter, but didn’t. They were not in one particular vertical market, nor were they product-specific. These deals haven’t “gone away,” but were pushed off the chain of command at the various customers for higher-level approval.

Obviously, shares of Riverbed sold off on the news. However, I’m going to reserve judgment on what to do with the model portfolio position until there are more details made public on the April 24 conference call.

Model Portfolio Reporting Schedule and Consensus Estimates The only company in the model portfolio scheduled to report during the next seven days is eBay, which will be releasing numbers as you receive next week’s newsletter. Over the course of the past month or so, eBay’s stock has outperformed the broader market by about 20%.

As we exited the December quarter, there was a lot of uncertainty surrounding the company as it implemented a number of changes (including layoffs). Part of the changes included different listing fee structures, which created some public backlash against eBay by a number of sellers. Despite that, we’ve seen a wide array of sell-side analysts raise their estimates and/or ratings on the name over the past four to six weeks, suggesting that their research points to an upside surprise in the March quarter.

Let’s hope those analysts are correct because with the stock up 22% in the past three weeks- plus, there are a lot of positive expectations built into it. New CEO John Donahoe “officially” took the reigns April 1, but the changes put in place over the past 90 days have been at his direction. While most restructurings take time to bear fruit, it would be wonderful to see some positive signs this early in the game.

I’ll have additional previews for several model portfolio names in next week’s newsletter, but for now, here is the reporting schedule as it currently exists.

(The earnings schedule appears on the next page)

Issue 313: Wednesday, April 9, 2008

Model Portfolio Reporting Schedule and Consensus Estimates Current Consensus Conf. Call Estimates Date Time (EDT) Revenue EPS Apple Computer (AAPL) April 23 -- $6.95B $1.06 Alvarion (ALVR) -- -- $65M $0.02 Clearwire (CLWR) -- -- $49M ($0.94) Cisco (CSCO) May 6 -- $9.75B $0.36 Cypress Semiconductor (CY) April 17 11:30 a.m. $415M $0.14 Dell (DELL) May 29 -- $15.65B $0.34 eBay (EBAY) April 16 5:00 p.m. $2.06B $0.39 Google (GOOG) April 17 4:30 p.m. $3.61B $4.52 Motorola (MOT) April 24 -- $7.79B ($0.07) Microsoft (MSFT) April 24 5:30 p.m. $14.49B $0.44 Micron Technology (MU) -- -- $1.44B ($0.33) Netlist (NLST) -- -- $16M ($0.07) Nokia (NOK) April 17 -- $19.94B $0.57 NeuStar (NSR) -- -- $114M $0.26 Research In Motion (RIMM) -- -- $2.24B $0.84 Riverbed Technology (RVBD) April 24 -- $74M $0.10 SPWR April 17 1:30 p.m. $245M $0.35 Microtune (TUNE) April 24 -- $25M $0.04 MEMC Electronic (WFR) April 21 -- $509M $0.87 Source: Thompson Financial, company reports

Issue 313: Wednesday, April 9, 2008

Date Cost Basis No. of Amount Current % IXTC at IXTC Company Name Initiated per Share Shares Invested Price Gain/Loss Buy Date Return Apple Computer 2/15/06 $100.56 300 $30,168.00 151.44 50.6% 235.36 -2.54% AAPL Alvarion ALVR 2/22/07 $8.98 2,510 $22,538.00 6.89 -23.27% 244.9 -6.34% Clearwire CLWR 11/12/07 $13.50 500 $6,750.00 14.21 5.26% 257.91 -11.06% Cisco Systems CSCO 3/30/05 $18.03 300 $5,409.00 23.53 30.5% 182.8 25.48% Cypress (put options) CYRD – 20 contracts 3/13/08 $2.13 2,000 $4,260.00 0.35 -83.57% 229.23 0.07% eBay EBAY 2/22/06 $34.40 625 $21,499.25 31.58 -8.19% 218.91 4.78% Google GOOG 2/9/06 $454.68 45 $20,460.60 464.19 2.09% 233.84 -1.91% Motorola MOT 4/12/06 $23.20 1,000 $23,205.00 9.31 -59.88% 226.48 1.28% Microsoft MSFT 9/25/02 $27.57 1,800 $49,626.00 28.89 4.79% 166.67 37.63% Micron Technology MU 2/14/08 $7.16 5,000 $35,800.00 6.77 -5.45% 230 -0.27% Nokia (put options) NAYST – 20 contracts 3/13/08 $3.80 2,000 $7,600.00 3.4 -10.53% 229.23 0.07% Netlist NLST 2/14/08 $1.46 3,500 $5,095.00 1.51 3.73% 232.75 -1.45% NeuStar NSR 11/30/06 $27.16 1,500 $40,740.00 26.33 -3.06% 226.04 1.48% Research In Motion RIMM 11/19/07 $105.65 75 $7,923.75 118.16 11.84% 265.61 -13.64% Riverbed Technology RVBD 7/26/07 $32.56 450 $14,654.25 12.49 -61.65% 244.32 -6.11% SunPower 2/14/08 $83.55 150 $12,532.50 89.42 7.03% 227.24 0.94% SPWR Microtune (call options) 3/27/08 $0.50 2,500 $1,250.00 0.3 -40% 228.06 0.58% TQTIA – 25 contracts

(The model portfolio continues on the next page)

Issue 313: Wednesday, April 9, 2008

Microtune 2/8/07 $5.23 2,500 $13,075.00 3.6 -31.17% 244.96 -6.36% TUNE Dell (call options) VPZAD – 20 contracts 12/6/07 $6.80 2,000 $13,600.00 2.03 -70.15% 259.97 -11.77% MEMC (put options) ZETMQ – 50 contracts 2/28/08 $18.20 5,000 $91,000.00 18.1 -0.55% 238.26 -3.73%

The Telecom Connection Portfolio – Performance Performance results listed here reflect values of stocks as of the Total Average Return -12.00% close of the most recently completed trading day, and do NOT take into account dividends paid, interest earned or commissions. Results are updated overnight and posted prior to the market open the following business day. Sales are taken from the most recent 2008 YTD Return -25.93% purchase of that stock unless otherwise stated. The 2008 YTD Return figures reflect changes since the beginning of 2008. The Total Average Return figures reflect changes since inception on 8/14/2001.

Nasdaq Telecom Index Performance % Gain/Loss Since 2008 Portfolio Inception Open Level Current Level Portfolio Inception YTD Return Nasdaq Telecom Index (IXTC) 8/14/2001 262.84 229.38 -12.73% -12.62%

At the time of publication, Mr. Faulkner was long CLWR, MU, TUNE, TUNE calls.

To see the full Telecom Connection model portfolio, including closed positions, visit http://www.thestreet.com/k/tc/portfolio.html

Issue 313: Wednesday, April 9, 2008

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Robert Faulkner, writer of The Telecom Connection, is a regular contributor to RealMoney, the premium subscription site of TheStreet.com. TheStreet.com, Inc. is a publisher and has registered as an investment adviser with the U.S. Securities and Exchange Commission. The Telecom Connection contains Mr. Faulkner’s own opinions and is provided for informational purposes only. You should not rely solely upon The Telecom Connection for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in The Telecom Connection constitutes, or is intended to constitute a recommendation by Mr. Faulkner or TheStreet.com, Inc. of any particular security or trading strategy or a determination by Mr. Faulkner or TheStreet.com, Inc. that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

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