Synopsis from Bernstein: (BRN) Now we see what's holding ASND down
ASND WINS A BIG CONTRACT, BUT JURY STILL OUT ON TNT SOFTWARE FIX
BRN says that Ascend's October introduction of multiservice capability for its CBX500 ATM swiitch and its new OC48 capable GX550 core multiservice switch appears to have leapfrogged it into the leading position in the WAN packet switch market.
BRN adds that the announcement of a $150 Million deal with Williams Communications caps a series of contract wins including NTT and AT&T the world's two largest telecommunications companies. BRN believes that Ascend's share of this market will increase from 16.6% in 1997 to 18.8% in 1998, yielding 44% YoY revenue growth for the product line as WAN Packet increases from 33% to 36% of Ascend's sales.
BRN says that however Ascend's strong position in the attractive remote access concentrator market remains tenuous due to ongoing software stability problems with the flagship TNT and MAX product lines. A new software release (2.0 for TNT and 6.0 for MAX) dubbed the Golden Release is in Beta testing and is expected to resolve these remaining customer issues.
BRN says that the stakes are very high. Thus far, Ascend's blue-chip remote access customer base has remained loyal, not buying Ascend product, but not switching to competitive product either. Substantial switching costs, such as customized subscriber management software
and customer service personel trained specifically on Ascend equipment, have allowed Ascend to hold on to its top customers despite these substantial problems.
BRN believes that customer acceptance of the new software could unlock
significant orders for the TNT at major customers such as GTE and GlobalOne, but on the other hand, failure could lead to customer defections and permanent share loss.
BRN is cautiously optimistic about the software release based upon
the tone of conversations with Ascend customers, although non-disclosure agreements limit the availability of direct feedback until the software is in general release, sometime before the end of January.
BRN believes that the unexpected Williams Telecommunications order
could provide $0.03-0.05 EPS upside for Ascend in 1998.
BRN retains their market perform rating pending greater clarity on the software stability issue.
On the downside, BRN says loss of market share due to failure of this new software release could impact Ascend earnings by as much as $0.40, potentially driving the share price below $20. On the upside, Ascend could exceed the market share ramp-up assumed by BRN's model to return to 35% or better share by the end of 1998. This scenario would lead to EPS performance 10% higher than BRN's above consensus estimates. |
