Alex Brown
MAX and MAX TNT revenue grew by only 2% quarter/quarter--These products typically drive revenue growth and were obviously impacted by unavailability of the 56 kbps product upgrade. We believe that most investors will regard this as old news and will focus on prospective growth. On the positive side, the book-to bill ratio was above 1. Longer term, the Company stated that it expects the market to continue to grow by 30-50% annually. Near term, we would point out that the rate of port growth should exceed revenue growth rates due to steadily declining port prices. Overall, we believe that the Remote Access Server (RAS) market will be impacted by declines in port prices and its impact on market elasticity, and not port growth. In the fall, we expect that Cisco and 3Com will intensify competition with aggressive pricing and frequent new product introductions.
Cascade's Frame Relay business rebounds--Sequentially, Cascade's revenue grew by 10% to $99 million. More impressively, the book to bill ratio exceeded 1.1:1. We attribute this to renewed RBOC spending on additional frame relay ports and less cannibalization from sales of channelized T-3 ports. We continue to expect that frame relay and ATM revenue will be lumpy, and are reluctant to conclude that strong revenue in one single quarter marks a sustainable trend. Solid backlog, however, could assist in achieving 3Q's quota.
Japan snaps back. Japanese business was unusually strong, at 25% of revenue. Historically, Japan typically contributes 20% of revenue. In 1Q 1997, however, this proportion was only 15%, as solid revenue was eclipsed by U.S. ISPs' strong demand for the TNT. The reseller channel was unusually strong, but management was quick to state that the vast majority of products are shipped when end users are identified. In our view, this could quell investors' fears that inventory is building up in the channel.
Many questions, no smoking gun--In our opinion, it would be an understatement to declare that this was Ascend's most difficult quarter in its history as a public company. While questions remain, we believe that they do not approach the severity of Cascade's situation in January. Some investors could interpret strength in Japan or the reseller channel as management's attempt to deliver better results than the basic business supports. Neither situation, in our view, however, is particularly troubling, and we conclude that the basic tone of business remains strong. With the worst of the 56 kbps upgrade chaos behind it, the Company remains the leader in the RAS market, in our view. Furthermore, Ascend stated that it did not lose any customers due to this situation, which, in retrospect, appeared to be more attributable to Rockwell than to Ascend. Therefore, in the future, we believe that Ascend's most significant challenge could be competitive pressure from 3Com and Cisco.
We continue to reiterate our "buy" investment rating on the shares because of Ascend's leading market share position in a powerfully growing market and our confidence that the Company can defend itself from encroaching competitors.
VALUATION
We are maintaining our 1997 and 1998 EPS estimates of $1.38 and $1.73, respectively. We believe that 3Q will evince typical seasonal slowness in terms of revenue growth; however, we believe that demand and deployment for 56 kpbs solutions could start to accelerate. This could portend solid revenue growth in 4Q. Based on our 1998 EPS estimate, the shares trade at 32.1x. While the stock price has increased sharply over the past several weeks, it is still substantially below its 52-week high price of $80. As the 56 kbps market starts to gain momentum, we believe that there could be stronger sequential revenue growth, which could result in additional multiple expansion. |
