Synopsis from Bernstein ASND: GOOD NEWS AS FAR AS THE EYE CAN SEE
Bernstein says that their meetings with Ascend management have "confirmed our optimism for this stock." They believe Ascend has confidence, based on a strong book of contracts and blue chip customer relationships, that if can beat consensus estimates for the rest of 1998 with plenty of "wiggle room" should an order or two slip to subsequent quarter.
Furthermore, Ascend management learned it's lesson during the Dark Days of 1997 and now employs extremely conservative revenue recognition policies. When combined with the long term nature of
Ascend's ATM/Frame relay contracts, these policies mean that Ascend will deliver much more linear and predictable quarterly performance. [the analysts all seem to get the unspoken message now!]
Bernstein says that sequential revenue growth in June should nearly double March's 4.3% accelerating to double digits in September and December. A primary driver of strong top-line growth is the book of new ATM/Frame relay contracts. Ascend has won 8 of 10 new carrier contracts awarded in the last 6 months, and is poised to win several others. The announcement of a contract award with Bell South is imminent and additional contracts at Spring, Southwestern Bell and MCI
are considered likely. Contract wins are less likely but still possible at level 3 and several European PTTs. Each of these 10-14 contacts is expected to deliver $30-$80 million over the first 12 months.
Bernsteins says that Remote access will also substantially contribute to growth. Ascend has a blue-chip carrier customer base locked into its products by prohibitive switching costs. Major customers such as UUNet, GTE, PSINet, Earthlink, Deutche Telekom, France Telecom and NTT are beginning to order again after ceasing purchases during Ascend's software stability crisis in the second half of 1997. Remote access sales were up 8% in the seasonally weak first quarter, and should accelerate throughout the year. Voice over IP, now in beta testing should drive significant additional deployment -- ISPs could increase their installed base of access ports by as much as 10-15% to
accommodate these applications.
Bernstein says that ASND will begin to ship double density cards for the TNT, now in beta testing, within 8-10 weeks. These cards will improve the footprint of Ascend's remote access platform, and markedly reduce costs. However, Ascend does not intend to reduce its per port prices. As a result, product margins should improve. A new remote access platform, the TKO, is expected in the October time frame. This product will have triple density cards, a beefed up backplane, improved routing, multifunction ports able to handle modem and ISDN connectors, and integrated voice and fax capabilities. Existing TNTs will be able to connect to the TKO as an added shelf. Bernstein expects this product to move Ascend well ahead of its competitors in product density, performance functionality and cost.
Bernstein says that they have included little revenue for Ascend's GRF router product in their model. However, Ascend is devoting considerable resources to the next generation product, expected to route OC-48 at line speeds. Ascend promises that this product, due in 1Q99 will not repeat the mistakes of the original GRF, where incompatibilities with existing base of Cisco routers soured many would be customers. If the product delivers on this promise, it would find an enthusiastic market, eager for a credible alternative to Cisco. We believe that this product could provide a significant upside to our 1999 projections if successful.
Bernstein says that Ascend has given official guidance that it expects
declining gross margins. However, privately, management concedes that margins are more likely to hold flat, and could increase further down the line as higher density access concentrators and high margin ATM switches become a greater percentage of sales. We believe all of this will add up to strongly accelerating earnings and stock performance. They expect 1998 EPS of $1.25 vs. $1.17 consensus and 1999 earnings of $1.76 vs. $1.49. Bernstein's target price is $60. |
