Synopsis from Salomon-Smith Barney: (SSB)
ASND: Upgrading Ascend from 3H to 1H
Comfortable with upside to our FY Q4 EPS estimates
Strengthening core switching market fundamentals improve FY 1998 outlook
SSB says that based on strengthening fundamentals within Ascend and an improving demand environment within the carrier equipment market for data networking infrastructure, they are increasingly comfortable with Ascend's ability to grow revenues and earnings over the next 18 months at a rate above the forecasted growth rate of 15-20%.
SSB reiterates their confidence in an FY 1998 EPS estimate of $1.16, and they are also initiating a FY 1999 EPS estimate of $1.40.
SSB says that the carrier market for networking infrastructure is now poised for a "positive inflection point" driven by the increasing competitive global telco environment, unabated demand for end-user bandwidth, the migration of voice-oriented traffic onto the data
infrastructure, and the increasing availability of long-haul bandwidth.
SSB cites Improved customer feedback on Ascend's service and product quality, reliability and predictability and the fact that new product introductions in both the access and core switching market segments should dramatically strengthen Ascend's competitive position.
SSB gives a 12 month price target of $35 [had to spoil it didn't they?], based on a PE of 25.
SSB says that based on recent checks with their ASND contacts, they are increasingly comfortable with modest upside to their FY Q4
1997 and FY Q1 1998 EPS estimates of $0.22 and $0.23, respectively, based on strong US and European core switching sales
and strong US dial access revenues.
SSB forecasts core switching revenue growth of about 15% quarter-to-quarter, bolstered by almost 100% quarter-to-quarter growth in ATM switching revenues, and 2-3% quarter-to-quarter revenue growth in the MAX product line. SSB says that while access sales were weak in Asia due to the economic turmoil, per-port pricing on the MAX was relatively stable during the quarter.
SSB adds that they believe ASND also built backlog during the quarter, particularly in the core switching product segment.
SSB gives Asia exposure as about 13% (8% to Japan, 5% rest).
SSB indicates they are confident that ASND will show sequential revenue and earnings growth in FY Q1 1998. and that sizable core switching orders from AT&T, Worldcom, Williams and NTT are all FY Q1 events which should offset anticipated Asian weakness, and should enable the company to meet the consensus FY Q1 estimate of $0.24.
[this is still very conservative, IMO]
In core switching, SSB believes several factors promise an improved macro-demand picture [they say the brightest in several quarters], enabling a sustainable re-acceleration in ASND's business over the intermediate term. They say these factors are, global competition within the carrier marketplace which has been sparked recently by the surge in telco merger and acquisition activity, the improved outlook for the local exchange carriers' entry into the long distance marketplace and the recent deregulation of the European telecommunications marketplace, will necessitate infrastructure upgrades in order to support guaranteed data service levels and new data-oriented applications.
A second macro factor cited is the migration of traditional voice traffic, such as fax, onto the data infrastructure will drive increased corporate and end-user demand for bandwidth.
The 3rd macro factor is the recent backbone upgrades by several large carriers, such as Qwest and UUNet, will reduce pricing for high-capacity bandwidth for corporations and smaller network service providers (e.g., PSINet and Frontier) which should further bandwidth demand.
RE: Improved customer service, product quality and reliability, SSB says that during the December quarter, they believe Ascend began an effort to scale its infrastructure to better address its customer requirements. As a result, Ascend has recently completed several initiatives to strengthen its competitive position:
1) Focused retention of top sales and engineering talent;
2) Re-structured its sales, service and support organizations in
order to improve the quality and reliability of its technical service and customer support offerings;
3) Re-focused its engineering team to deliver more controlled and higher quality software releases in order to deliver more predictable product results. SSB adds that they believe ASND has already begun to see the results.
SSB says that based on a recent informal survey of six of Ascend's large carrier customers, they have found a marked improvement in
customer feedback versus just six months ago.
SSB says they are" increasingly comfortable" with ASND's ability to maintain and potentially gain market share in its key market segments during 1998.
RE: New product momentum. SSB says that in the first half of 1998, ASND will be introducing several significant new product platforms which should drive accelerating revenue growth throughout calendar 1998.
In Q1 SSB says they expect ASND to commercially introduce its GX 550, a carrier-class ATM core switch. With significant enhancements to the
backplane capacity and software capabilities, the GX 550 should expand Ascend's market share and potentially enable Ascend to penetrate new applications (e.g., Williams Communications Group).
In Q2 SSB expects ASND to introduce the TNT II during May-June timeframe for commercial shipments. The next generation TNT will offer large telco customers a truly industrial strength access platform with higher port density, increased redundancy and an enhanced software platform. |
