Alvarion Rides the WiMAX Wave


By Ari Bensinger The latest buzz in wireless technology is WiMAX, a wireless-broadband technology targeted for the metropolitan area network (MAN). More often than not, this sort of "disruptive technology," as researchers like to call it, ends up being more buildup than substance. But while many challenges lie ahead, we at Standard and Poor's think WiMAX, with its capability of transmitting network signals covering distances in excess of 30 miles at a theoretical shared data rate of up to 75 megabits (Mbps), may actually live up to its billing and change the competitive landscape for telecommunications.

Given its ability to rapidly introduce high-speed data access throughout a local loop without the cost or delay of wired plant upgrades, wireless broadband is quickly emerging as a legitimate local access technology. To lower equipment costs, the wireless broadband market is in a continuing process of standardization. The WiFi Alliance, a nonprofit international association, has promoted the 802.11 wireless local area network (LAN) standard.

WORKING TOGETHER. The newest specification, WiMAX, short for worldwide interoperability for microwave access, applies to any broadband wireless access network based on the 802.16 technology standard, which relates to the wireless MAN air interface. WiMAX makes fixed wireless more attractive to service operators since it supports larger-range outdoor access networks with more performance and dedicated high-end services.

Similar to the WiFi Alliance, the WiMAX Forum, a nonprofit industry organization, was developed to ensure interoperable 802.16 systems from multiple vendors. The initial version of 802.16d, approved in the fall of 2004, is designed for fixed (non-mobile) applications only, such as wireless replacements for home DSL or cable modem service and wireless backhaul operations. Intel (INTC

; ranked buy; recent price: $27.59) has been a major supporter of the technology, developing a WiMax chip named Rosedale, which we think should help lower equipment costs by fostering competition and volume.

Until now, the uptake of fixed-wireless technologies has been restrained by the lack of interoperability between the equipment of the industry's many manufacturers as well as the lack of availability of standards-based components. The coming standardization process should help fuel the market's growth potential.

DEVELOPING REGIONS. Initial vendor 802.16d WiMAX certification, which is needed to standardize equipment, is expected to begin during the second half of 2005. We believe that systems based on the mobile version of the standard (802.16e), which could start shipping in notebooks and personal digital assistants (PDAs) as early as 2006, will have far greater potential than WiFi to provide ubiquitous coverage to rival that of cellular networks.

S&P believes fixed WiMAX is best suited for developing geographic areas that lack a sophisticated wired infrastructure, since it provides a cost-effective alternative for service carriers to connect broadband, as well as enterprise customers in areas that wired broadband doesn't reach. We think Mobile WiMAX, conversely, will likely be targeted toward developed countries, where it can provide wireline carriers and cable operators with a wireless technology to compete with rival third generation (3G) service offerings, potentially becoming a true disruptive technology.

One company at the forefront of the broadband wireless access market is Alvarion (ALVR

; ranked strong buy; $9.69). It provides wireless broadband connectivity infrastructure -- point-to-point transmission through the air between stationary devices -- allowing telecom carriers and service providers to offer broadband data and voice services in the licensed and license-free bands.

INTEL ONBOARD. In developing regions, Alvarion targets low-density population areas that have limited telecommunications infrastructures. In developed regions, the applications are aimed at countries that are lacking coverage in their telecommunications infrastructures and are seeking mass deployment of technologies for voice and broadband services. According to independent research group Skylight Research, Alvarion was the clear leader in the broadband wireless access equipment market, with a 31% share, as of March, 2005.

Alvarion helped produce the 802.16a wireless MAN standard and became a principal founder of the WiMAX Forum. In addition, in July, 2003, when Intel announced its intention to develop an 802.16-compliant silicon chip, it chose Alvarion as its systems house vendor to test the equipment.

It's clear that Alvarion benefits from getting a first look at the evolution of the WiMAX standard. The company is one of the few vendors to commercially ship WiMAX-ready equipment, which should only require at most a simple software upgrade, to become WiMAX compliant. Given its leading market position and our view of its time-to-market advantage, we see Alvarion as best positioned to benefit from our forecast of widespread adoption of WiMAX wireless technology. We also view the company as an attractive takeover candidate.

BUMPS AHEAD. Still, we think investors should prepare for hiccups. It's important to remember that technological transitions take time and usually encounter many roadblocks before widespread commercialization. WiMAX is no exception -- it faces several challenges ahead, including timely product certification, the wait for lower equipment costs, spectrum availability, and regulatory policies.

One need not look farther than Alvarion to better understand the risks involved in the timing of WiMAX acceptance. On July 5, the stock price dropped over 20% after the company warned that second-quarter revenue will be down about 15% from prior guidance, largely reflecting what we view as customer-project delays.

Alvarion stated that smaller vendors have been petitioning carriers to delay deployment plans until they can gain official WiMAX certification over the next couple of quarters in order to be considered for network testing. The company also indicated that spectrum-allocation holdups in Europe are having a negative impact on results. Although this is disappointing, we prefer to focus on Alvarion's attractive long-term market opportunity due to its strong market position.

GAINING LEVERAGE. Following an estimated 7% sales increase in 2005, we see sales advancing 20% in 2006, to $260 million, reflecting increased demand for the company's wireless broadband products, primarily in developing countries with little existing telecom infrastructure. We expect WiMAX-related revenue growth to greatly benefit with Intel's introduction of lower-cost equipment during late 2005.

We see significant operating leverage in the company's business model, since we believe Alvarion's long-term goal of cutting total operating expenses to 35% of revenue, from the current 42%, is achievable over the next couple of years. Overall, we look for earnings per share to advance to 33 cents in 2006, from an estimated 5 cents in 2005.

We think Alvarion's current stock price doesn't fairly reflect the significant growth opportunity for its WiMAX products. Our 12-month target price of $14 is largely based on a forward p-e of 42 times our 2006 EPS estimate, excluding 15 cents of stock-option expense.

PREMIUM VALUE. Combined with our 20% long-term estimated EPS growth rate for the company, the target price represents a forward p-e-to-growth (PEG) ratio of 2.1, above the peer mean. We believe this premium is more than justified by the sizable growth opportunities we expect to become available to Alvarion as the industry moves toward WiMAX. On a price-to-sales basis, our target price represents 3 times our 2006 sales-per-share estimate, a multiple we view as in line with other next-generation equipment suppliers.

Risks to our recommendation and target price include delays in the deployment of the WiMAX standard, increased competition from larger equipment vendors that may decide to enter the market, and the loss of a major customer.

Required Disclosures

In the U.S.

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.

In Europe

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.

In Asia

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.

Globally

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index, in Asia the S&P Asia 50 Index, and in Malaysia the KLCI or KL Emas Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; in Sweden by Standard & Poor's AB ("S&P AB"), in Malaysia by Standard & Poor's Malaysia Sdn Bhd ("S&PM") which is regulated by the Securities Commission and in Australia by Standard & Poor's Information Services (Australia) Pty Ltd ("SPIS") which is regulated by the Australian Securities & Investments Commission.

The research and analytical services performed by SPIAS, S&P LLC, S&P AB, S&PM and SPIS are each conducted separately from any other analytical activity of Standard & Poor's.

S&P and/or one of its affiliates has performed services for and received compensation from INTC during the past 12 months.

ALVR is not a customer of S&P or its affiliates.

Disclaimers

This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. Analyst Bensinger follows telecommunications equipment stocks for Standard & Poor's Equity Research


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