Craig, from the Ascend news-only thread:
Cowen & Company
Chris Stix/Vijay Rajamani
617-946-3700
September 17, 1997
Ascend Communications (ASND: $33 5/8)
RATING: Neutral (3)
ASND's Q3 Tracking Below Plan. F97 And F98 Estimates Reduced. Neutral
Maintained.
============================================================================
EPS (FY Quarterly EPS
Dec.)
EPS Revision P/E Q1 Q2 Q3 Q4
F96E $1.01a none 33x $0.15 $0.23 $0.30 $0.32
F97E $1.19 -0.19 28x $0.31s $0.31a $0.27 $0.29
F98P $1.40 -0.45 24x
*Excludes the $0.09/share net charge from the NetStar pooling in Q3C96.
Excludes $18MM charge for the InterCon Systems Acquisition in Q1:C97.
Excludes charges of $249.1 MM from the Sahara acquisition. Excludes
charges of $150.3 MM from the CSCC and Whitetree acquisitions.
===========================================================================
Key Points:
1. ASND's Q3 Tracking Below Plan.
2. $25-$35MM NTT Win, For Cascade Product To Deploy Over 3 Years.
3. Cowen/Datamation Points To Slower US Enterprise Spending For Single-
User Remote Access.
4. Long-Term Carrier Demand For Access Concentrator Ports Likely To Slow.
5. F97 And F98 Estimates Reduced. We Maintain Our Neutral Rating On
ASND.
ASND's Q3 Tracking Below Plan. We believe Q3 is tracking below plan,
primarily on weak international sales. Japanese sales are particularly
slow as are European sales in general. We believe that International sales
could be as low as 50% of the $118MM achieved last quarter. The malaise in
international sales has hit both the access concentrator business as well
as Cascade's carrier class wide area switches. We believe that the
difficulty in implementing country specific R2 signaling for T3 service on
the TNT has contributed to the problem, and this is likely to be resolved
over the next two quarters. Also carriers and regulatory authorities are
going through an approval process on the TNT and its 56Kb technology, which
has slowed deployments. We also believe that the domestic business will be
flat to up modestly Q/Q. With revenues below expectations, we believe that
gross margins will be negatively impacted, as a result of the under-
absorption of fixed manufacturing costs. We are estimating 63% gross
margins, down from 65.1% in Q2. For Q4:C97, we are estimating a slight
(3.3%) uptick in sales, though we believe that gross margins will remain
depressed. In C98, we are estimating renewed growth for the company.
Based on these changes in our revenue and gross margin assumptions, we have
lowered our estimate for Q3:C97 EPS to $0.27 -$0.08; for Q4:C97 EPS to
$0.28 -$0.13 and for C98 to $1.45 -$0.45.
UUNet Likely To Deploy COMS And ASND Products Equally Following
CompuServe/ANS Acquisitions. We believe that UUNET, a division of WorldCom
will deploy ASND's TNT and COMS' Total Control Hub in roughly equal
quantities following the ANS and CompuServe network acquisitions. ANS and
CompuServe are currently COMS accounts and UUNET has been a loyal ASND
account. We also believe that CSCO will retain the vast majority of the
router business at UUNET, with ASND gaining a small position with its GRF.
ASND Gains A Modest Win At NTT. Last night ASND announced that NTT intends
to deploy 150 BSTDX 9000 frame relay switches (ASP about $150K) and a
number of ATM switches over the next three years. While we do not know the
size of the total order, (particularly the ATM component), the frame relay
portion of the order totals $22.5MM over three years, or $7.5MM per year, a
relatively modest amount.
New ATM/Frame Relay Switch To Announce Near InterOp. We expect ASND to
announce a new carrier class ATM switch, the next generation CBX 500. This
product will position ASND very favorably in the high end of the ATM core
switching market, with higher bandwidth than Newbridge Networks' 36170 and
with support for both Frame Relay and ATM on the same platform. The Sahara
multi-service ATM access device is in trials at numerous facilities and is
expected to ship for revenue in Q1 or Q2 F98. Engineering turnover at
Cascade, which is exceeding expectations, has the potential to delay
shipments of these products. This is one to two quarters later than the
company had previously indicated. The GRF high capacity router is tracking
below the company's expectations. Going into C98, we believe the company
is optimistic about renewed growth and our model reflects growth of 28.6%
for C98.
Cowen/Datamation Points To Slower Single-User Remote Access Spending. US
enterprises continue to indicate strong remote access needs: both single-
user as well as LAN-to-LAN. By 1998, some 70% of enterprises expect to
have a moderate or high need for single-user remote access. However,
spending intentions are much lower in our 1997 survey with a net 22%
planning higher single-user spending, compared to a net 45% indicating
higher spending plans in our 1996 survey. We believe this reduced spending
on single-user remote access is indicative of increased outsourcing as well
as increased saturation of dial ports. Organizations continue to out-
source their remote access needs with, about 8% of organizations planning
to out-source some portion of their remote access. Outsourcers of remote
access expect to move about 48% of their needs to third parties by the end
of C97, up from 39% in our Feb '97 survey. However, we continue to believe
that demand for central-site ports will slow down and growth will be
impaired, beginning sometime in C98. This will negatively impact ASND as
about 55% of its revenues comes from remote access concentrators.
Neutral Rating Maintained. Estimates Unchanged. As we have previously
stated, we believe that growth in the dial access market, which generates
roughly 58% of ASND's revenue, will slow by early C98, so we remain neutral
on the stock.
Cowen & Company makes a market in ASND securities.
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