What Are the Trends in the Demand for Instinet Products and Services Across Its Lines of Business?

1. What are the trends in the Demand for Instinet products and services across its lines of business?

What is their product? Existing and potentially addressable product market - its underlying factors and outlook? Customer base attritions and additions / switching costs?

OutReach Networks (ORN) provides wireless networking products and solutions for the unlicensed radio frequency (RF) spectrum, such as high-performance radios, antennas, and management tools. Due to the expensive build-outs and long lead times of wired networking solutions, ORN mainly targets people that had little or no Internet access. Even in developed countries, there will be a large number of people have no access to the Internet in 15 years. Moreover, with the boom in internet traffic and the proliferation of mobile devices, the demand for internet access, the essential product of the industry, continues to grow dramatically. In relation, ORN makes use of the free and effective unlicensed RF spectrum, not only lowering costs of its customers, but also improving the availability of high-speed internet access. The company is expected to expand its coverage in the market in the following years.

The wireless Internet service providers face fierce competitions from both traditional cable broadband companies and new wireless networking companies, such as cell phone companies. It’s easier for customers to choose advanced products and services with lower costs. The switching costs for customers are low. If ORN can keep innovating its products and services, the company can decrease its customer base attritions to some degree.

2. What is the Regulatory landscape across their businesses and the outlook for it?

Order of importance (i.e. how much is highly dependent on regulatory interventions?)? antitrust / intellectual property right protection? Customer protection?

The wireless Internet service providers industry is regulated under U.S. Federal Communications Commission (FCC). FCC’s permission greatly increased the effective range of an 802.11 signal, giving ORN and even the whole industry a promising future. Antitrust laws prohibit predatory acts and corporate mergers, which are designed to reduce the competitive vigor of the market or maintain monopoly power. The 1934 Communications Act emphasizes net neutrality, not only constraints tariffs, but also helps small companies receive equal treatment and compete relatively fairly with established Internet companies at the initial stage of business. Intellectual Property Protection Act gives economic incentive to companies with the ability to design and innovate. Customer protection ensures the rights of consumers, as well as fair trade, competition, and accurate information in the marketplace. These laws provide greater opportunities for innovative emerging companies, like ORN, and guarantee a fair and orderly market.

3. What has the Competition looked like? Direct and indirect? Outlook?

Incumbents/ their spare capacity, new entrants / barriers to entry? Market shares trends? Marketing effectiveness and intensity?

Companies comparable in valuation data are Acme Packet Inc., Aruba Networks Inc., Aviat Networks Inc. and Cisco Systems, all of which given their betas higher than one, appear to be more volatile than the market.

Though all of these companies report revenues higher than ORN, Cisco and Acme in particular have EBITDA margins very close to ORN’s, hovering around 30 percent.

Cisco, with a market capitalization of $100,206 million seems to control the market for telecommunications more than ORN would. Cisco operates on a similar level to AT&T and Verizon, yet shares core competencies more accurately with ORN, making it a more viable competitor than the other large companies. Because a large company like Cisco is considered a competitor for ORN, this suggests that new companies such as ORN may have some difficulty retaining presence within the industry.

4. How has the production technology been evolving?

Production costs, operating leverage, scalability, technological cycle

Scalability:

Service providers at large sought to expand into underserved markets as a means of scaling up. However, even developing markets were becoming more demanding as internet usage rapidly grew, making it difficult for providers to both expand their scope and satisfy their current customers. ORN was able to minimize production costs by using commodity hardware and proprietary software in tandem. This decrease in capital needed gave the necessary leverage to expand into underpenetrated markets. Their products were uniquely attractive to entrepreneurial WiFi carriers, giving ORN larger flexibility and cost efficiency than their competitors using the traditional large company carriers such as AT&T and Comcast.

Production Costs:

It is important to recognize that ORN, unlike many other technological startups, generated high profit margins from its very inception. The main reason is their choice to engage in indirect marketing as opposed to direct-sales efforts. Though they lacked some level of consistency in their marketing, preventing them from compiling the data necessary to make adequate forecasts,they were able to minimize their marketing costs while still accessing growing communities focusing on WISP innovation. Moreover, ORN’s choice made a large sales force unnecessary, allowing them to retain even more of their profits.

Overall, ORN seems to be more concerned with sustaining consistent profits rather than expanding their profit margins. Though their revenues have increased dramatically from $9 million in 2009 to $525 million in 2017, their costs have also risen to accommodate their growing consumer base. Their EBIT margin hovers consistently at around 30 percent throughout all the years from 2009 to 2017.

Operating Leverage:

The operating leverage for ORN per year can be found by dividing the percent change in EBIT from year to year by the company’s percent change in sales. Moreover, a company with a high gross margin resulting from low variable and fixed costs will have a significant amount of leverage.

In 2009, the operating leverage is (2.38)/(1.44), meaning that if ORN’s sales increase by 144 percent, its retained earnings will increase by 238 percent, as shown by a operating leverage degree of roughly 2. In 2017, the operating leverage degree has decreased to 1.1, meaning that an increase in sales has less of a dramatic increase in retained earnings, something to be expected when a company reaches a more