Here is H & Q and Everen these are facts not gossip
]Company: Ascend Communications, Inc. (ASND - $40) a/o 7:00am CDT Industry Networking/Telecom Int. Term Rating: 2 - Market Perform Target Price: $60 Long Term Rating: 1 - Outperform Target Price: $88 Suitability: High Risk
We believe there is some risk in Q3 and Q4 estimates, reducing near-term rating to Market Perform with a $60 target price. Maintaining long-term Outperform
Dividend: Nil PE1997: 31.5x Bk Value 97: $3.88 Yield: Nil PE1998: 21.7x ROAC 97E: 33.5% 97 ROE: 37% Mkt. Cap: $8.0 bil. Inst. Hldgs: 89% 5yr est. EPS growth rate: 23% Insider Hldgs: 5% Shares Outstanding: 200.1 million 52-Wk. Range: $80.25-$36.125 FY: Dec 31 Next Reporting Date: 10/97
EPS Previous Revised 1996A 1997E 1997E 1998E 1999E Q1 $0.15 $0.31(A) $0.41 $0.53 Q2 0.23 0.31(A) 0.45 0.56 Q3 0.29 0.35 0.30 0.47 0.59 Q4 0.32 0.39 0.35 0.50 0.62 Tot $0.99 $1.35 $1.27 $1.83 $2.30 Consensus: $1.35 $1.90
Revenue ($M) Previous Revised 1996A 1997E 1997E 1998E 1999E Q1 $148.1 $292.7(A) $417.4 $546.0 Q2 205.6 311.7(A) 456.5 580.9 Q3 248.8 339.7 315.0 475.7 611.3 Q4 287.8 381.7 350.3 513.1 645.6 Tot $890.3 $1,325.9 $1,269.7 $1,862.6 $2,383.9
1) Ascend Communications won't make third quarter estimates, reduced visibility for Q4.
2) Cisco Systems (CSCO, $71 3/4)announced at a Wall Street analyst conference that they were planning to take price cuts on the AS5200.
3) Cisco Systems also announced that its next-generation access concentrator will be introduced soon.
Our Opinion
1) The company has had to deal with several issues during the September quarter which has resulted in a back-end loaded quarter including seasonal weakness, 56K issues, and the cross-training of sales reps on remote access and WAN switching products. While the possibility still exists for the company to meet expectations, it appears that a shortfall is the more likely scenario. We believe the majority of the shortfall is due to weakness in demand for the remote access products in Europe. We believe both domestic remote access business and WAN switching business remains on track this quarter. We are adjusting our Q3 estimates to $0.30 from $0.35 to reflect this. The current First Call range is $0.30 to $0.39. We believe these estimates are aggressive and will have to come down.
2) At the Wall Street conference Cisco Systems had alluded to price pressures at the low end and increasing competition in the networking industry. There have also been suggestions of price cuts on the AS5200. While Cisco's management denies having made specific comments about the AS5200, we would not rule this possibility out. The AS5200 is a first-generation remote access concentrator that has only had minor successes. The last price cut on the AS5200 was taken in February of this year. With the planned introduction of its next-generation box sometime before the end of this year, this would be a likely course of action. While price reductions are the norm in the networking business, it would have an impact on Ascend's Max 4000 line. Remote access revenue accounts for 55% of its total. We estimate that this line accounts for about one-third of its remote access revenue.
3) Cisco Systems has been publicly talking for a year about its next-generation remote access concentrator. It has even stated in its last quarterly conference call that it plans to introduce it before the end of the year. This is not new news. While this does increase competition, we believe a key factor of Ascend Communications' success is its first-mover advantage. The company has an established presence in the major ISPs and carriers such as Worldcom's division of UUNET (WCOM, $35 3/8), GTE's BBN (GTE, $44 13/16), PSI, Savvis, Earthlink, Southwestern Bell (SBC, $56 7/16), Pac Telesis (PAC, $37 3/4), and Bell Atlantic (BEL,$77 3/8). Furthermore, 3Com Corporation's USR division also has an established presence. The two combined have greater than 50% of the remote access market. While we do estimate that Cisco will increase its 6% share of the remote access market, we believe a good portion of their success will come both in the enterprise market and at the expense of second and third-tier vendors.
Given the potential downside for Q3 estimates, we also have reduced confidence regarding its Q4 outlook. Given this, we are also adjusting our Q4 estimates to $0.35 from $0.39 and our intermediate term rating to market perform with a $60 target. We are maintaining our 1998 estimates given the fact that we believe these near-term issues can be addressed by the company and the overall remote access and WAN switching business remains solid. |
