SBC Warburg Dillion Read maintains Buy and $45 price target in their report this morning. [sounds like the brokerage community took the Q1 Earnings and CC as comfort for their current opinions.]
Their EPS estimates are: 1997 EPS: $1.06 1998E EPS: $1.18 1999E EPS: $1.50 vs. Previous Estimates: 1998E: $1.20 1999E: $1.50, with a 5 year growth rate of 35%.
Their report states the following:
* Ascend Communications reported 1Q98 EPS of $0.26 on April 9. These results were $0.01 above our estimate (and consensus).
* Revenue for the quarter was $305.1 million, slightly better than our estimate of $304.5 million. The company saw a significant positive turnaround in its access switching business (which has been lagging somewhat over the past few quarters). Also encouraging was the company's book-to-bill ratio, which was greater than one across the different product lines as well as domestic and international markets.
* Revenues by product segment were roughly as follows: Access Switching - $134.9 million (up 7.8% sequentially); Core Systems - $125.4 million (up 1.1% sequentially); Enterprise Access - $30.2 million (up 7.6% sequentially); and Service - $14.6 million (down 4.4% sequentially).
* Although the company's access switching business is doing well, growth in the company's Core Systems business is expected to be exceedingly strong in the second half of 1998. As a reminder, the Core Systems business includes ATM, frame relay, broadband and high-speed routing products. The company estimates that this business will represent more than 50% of total revenues by 2H98 (up from 41.1% in 1Q98). The markets addressed by the Core Systems business are becoming extremely price competitive and require close monitoring while the access switching business has been increasingly price competitive over the last 12 months. Our current assumptions are that the company will be able to add enough functionality to its products to prevent significant price erosion.
Subsequently, we have left our current gross margin expectation for 1998 and 1999 at 63.5% and 62.1%, respectively (1996 GMs were 64.6%). [Interestingly, Gross Margin was not impacted in Q1 vs Q4 and was a favorable variance from analyst estimates.]
* The company did a good job in containing costs in the quarter, with operating margins reaching 26.8% (up from 25.4% in 4Q97). Sales and marketing expenses were markedly down sequentially, both as a percentage of sales as well as in dollar terms (in line with previous company guidance). Although R&D was significantly lower than expected, the company had noted on the conference call that R&D expenditures should rise significantly in 2Q to accommodate new hires that were added toward the end of 1Q and for its new development plant in India. G&A was a little above expectations, but is expected to decrease as a percentage of sales to the 3.0% level (it was 3.3% in 1Q98).
* As expected, international markets continue to be a bit weak. However, a positive book-to-bill ratio is encouraging. Europe RFPs reflect a strong interest in ATM and FR/ATM; Latin American RFPs reflect a strong interest in ATM; and the Far East RFPs (few as they may be) indicate a continued interest in ATM. Sales in the Far East are not expected to pick up until sometime in 2H98. Domestic interest in access concentrators was strong, particularly among the ISPs, regardless of size.
Valuation
Although we are extremely encouraged by Ascend's solid performance this quarter, we believe that much of this encouragement has already been incorporated in the stock price. We still, however, believe that there is some upside to the share price and are subsequently maintaining our Buy rating on Ascend shares with our current 12-month price target of $45.
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Seems to me the market action today is indicating this last comment is in the market's thinking about ASND right now. These folks completely missed the roll forward of revenues from in the Core Switching line of business. I have already posted my Q2 opinions.
Form your own opinions, do safe market, etc.
Dennis |
