DLJ Synopsis: ASCEND COMMUNICATIONS: Momentum Building. Upgrade to Buy
from Market Perform - 12 month target $55.
DLJ says they are upgrading shares of Ascend from market performance to buy, adding that although the stock is already up significantly for the year, they think it will reach the mid-fifties by year end.
DLJ says that proposal activity is high world wide, and they expect significant announcements over the next several months - of note are Bell South and an additional contract at Bell Atlantic.
DLJ says that continued wins will ultimately lead to higher numbers. [the thread has known this for months, Ashby refused to raise estimates, instead waiting for the analysts to see this - a smart move, IMO] They raised their revenue growth rate assumption for 1999 to 26% from 22% and EPS from $1.40 to $1.50 [still conservative, IMO].
DLJ says that "by its own admission, Core ATM is not Cisco's strong suit, so Ascend has continued opportunity to win large ATM deals on its technical merits." [so we can thank the CSCO CC for these upgrades]
DLJ thinks the stock will at least hold multiple and trade at 37 times their $1.50 estimate in early 1999, therefore their target price of $55.
DLJ says that when they talked with the company yesterday they discussed a number of issues including Asia, the roll-out of TNT2, and potential "lumpiness" of orders. Regarding Asia, ASND is confident that the region will re-accelerate in the second half, mainly because Japan is ready to start re-building after a lull of nearly one year. Even though economic conditions there are tenuous, activity levels for remote access is high which provides the visibility. Also, the Core division (formerly Cascade) has a significant contract with NTT from last fall which is still providing significant revenues. [So it's not just NTT] Japan is not the only bright spot. China and even Korea are seeing good activity levels as well.
DLJ says that TNT2, Ascend's next generation remote access platform will go into beta sites by the end of the summer. The company will not recognize revenue on the product until next year. DLJ thinks that product transition issues related to TNT2 are minimal. TNT2 will address very high capacity situations which the original TNT can not adequately address.
DLJ says that the only risk they see to the Ascend story is the lumpiness of orders that follows from participating in many more large deals than it had in the past. This could cause fluctuations in quarterly performance, but they think the company is trying to "smooth the lumps" and in general manage earnings. [this has also been discussed on the thread for months, even though some on the thread were concerned about the "low growth rate", which is clearly artificial] One way they are doing this is by essentially deferring revenue recognition on new products. We are hearing in the market place that the company could have legitimately recognized revenue on the 550 ATM switch in the first quarter, and that the deferral was more a way to manage earnings. We believe a similar strategy will be employed with TNT2 in the fall. [this is great to hear!]
DLJ states their standard disclaimer that they make a market in ASND and have periodic positions in the stock. |
