Synopsis from DLJ: 4Q Looks In-Line No rating change.
DLJ says that in their recent meeting with ASND management they learned that the fourth quarter appears to be on track, although back-end loaded. [Sector sez thats news to him]
DLJ adds that ASND is comfortable with consensus expectations for 1998 at the $1.45 billion revenue mark and $1.20 EPS. DLJ adds that the relatively strong showing for the quarter, is being driven by some large orders from major customers, having passed standards testing in most European countries, and strong ATM business.
Regarding Asia, DLJ says it again appears to be very weak, Japan in particular. Continued pricing pressure, offset in part by reduced manufacturing and component costs, could squeeze gross margins by 1% in 1998.
DLJ mentions that CSCC's next generation ATM switch, the 550, is currently in beta trials and the ASND sees production shipments and revenue recognition in the first quarter. DLJ says they are beginning to see some merger synergies working, specifically some early business in North American carriers for ASND through CSCC channels as well as international opportunities for CSCC through ASND channels.
Interestingly, DLJ comments that ASND recognizes the potential of
Layer 4 switching technology, and that a move into this area will be necessary. DLJ thinks ASND could develop internally but the most likely route would be through acquisition.
DLJ mentions two start-ups in this area, Xedia and Packeteer, as being the most likely candidates. [Anyone know if they are public?]
DLJ believes that expectations for an in-line or slightly better 4Q are already discounted in the stock which ran up 30% in two days last week.
DLJ thinks that visibility on the first quarter is much less than the fourth quarter, even with ASND's comments.
Regarding fourth Quarter Outlook, DLJ says that North America has been strong across all product lines, including remote access and core switching. They think that the carriers are spending the remainder of their budgets going into the end of the fiscal year.
Also, DLJ says a very large deal with UUNet that was announced in the third quarter is being filled this quarter.
DJL adds that Europe has been relatively strong in Q4 and Asia continues to be weak, Japan in particular.
Regarding products, DLJ says that the ATM business has been the strongest. In 1998 ASND sees moderate growth in both frame relay
and access concentrators, with ATM growing more significantly.
Regarding 1998: DLJ says that ASND sees aggressive street price discounting continuing to result in an estimated 20% industry revenue growth. In RAS ASND estimates modest industry growth in
the 15%-20% range with projected gross margin declines in 1998 to the 63% level from the current 64%, due to pricing pressures, partially
offset by better component pricing and cost reduced manufacturing.
DLJ says that the CSCC 550 is currently in beta and should ship in production volume during Q1, and ASND believes that the transition to the 550 will be smooth, with the 550 positioned as a high-end core switch. The 550 has actually helped sell the 500, rather than cause purchase delays. DLJ comments that while ASND has expressed comfort with 1998 estimates they think that visibility by quarter is significantly less than it has historically been for Ascend.
In the words of CFO Michael Ashby the company has transitioned from "hyper growth to managed growth", and DLJ thinks that going forward, each quarter will have to be won through solid execution on a daily and weekly basis without the large backlog "back stop" that the company has enjoyed in the past.
Regarding the merger, DLJ comments that ASND is beginning to see some signs of synergies, mentioning the North American carrier business for Ascend and international opportunities for the Cascade business.
They add that the carrier opportunities for Ascend have come easier than the international opportunities for Cascade as ASND faced greater obstacles integrating the sales forces internationally. They lost
a lot of Cascade people. Until very recently, the international sales offices did not have Cascade demonstration equipment on site.
DLJ comments that training has also been an issue, with staff training to be completed by the end of this quarter, and that the merger also appears to have taken a toll on Ascend's engineering efforts, adding that ASND experienced greater than normal attrition in the Cascade engineering staffs,losing many engineers to start-ups in Massachusetts and the Valley, as well as to Cisco. ASND had not added to its engineering staff for the 10 months prior to the third quarter, which hurt in the customization of the TNT for large customers.. But
now hiring has begun and ASND plans to ramp up for the next few months. |
