RE: analyst opinions on 56k...BancAmerica/Robertson Stephens
Ascend Communications (ASND, $22-5/8, LTA)
Although management dedicated a large portion of its formal comments to the positive longer-term trends in the market for public data networks and remote access, the audience's primary interest focused on
near-term business trends. After Ascend reported disappointing financial results for the September quarter, investors have focused on looking for evidence that business has stabilized and demand trends
are improving. Management indicated that orders in October were the best first-month orders of any quarter this year, that visibility had increased from the weak third-quarter level, and that the company is
on track to meet analysts' expectations for the December quarter.
Despite these seemingly positive statements, we remain concerned that although visibility may be higher than it was earlier in the year, the general level of visibility remains quite low. Revenues in the December quarter are being aided by high demand from UUnet, which announced a large new contract with Ascend several weeks ago, but international revenues will be weak this quarter because the MAX TNT is not shipping in all of the international markets. International demand may rebound somewhat in the March 1998 quarter once TNT is finally released outside the U.S. at the end of this year, but the U.S. market usually shows some seasonality in the early part of the year, so overall demand remains uncertain for the March quarter. In addition, the international standard for 56Kbps modems is expected during January 1998. With the standard coming, market demand may stall a bit as customers wait for standard-compliant products later in the quarter. Ascend's management indicated that it will take the company 6-12 weeks to produce the necessary software code to support the final standard once it is approved. In our opinion, this only adds to the uncertainty in the quarter.
In our view, the most important incremental news in the meeting was a discussion related to the increasing competitive pressures throughout the market. Ascend has seen increased competition at the low end of the remote access market from Cisco (CSCO, $81-13/16, Buy) and Livingston (to be acquired by Lucent Technologies (LU $82-1/2), as recently announced). The high end of the access market is being affected by increasing consolidation among ISP and traditional carriers, which appears to be delaying purchases by some of the vendors. Ascend's management has stated its belief that list prices in the market for both access concentrators and frame relay switches would be under pressure in the early part of 1998, with "list" prices falling as much as 20-30% next year in both markets. Management is confident, however, that "street" pricing will not fall as much as list prices next year, because street prices have been under pressure for the past several quarters and list prices have not kept pace with this pressure. Ascend's management believes that list prices will have to decline to catch up with the reality of current market pricing. |
