This is just in-
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08:00am EST 21-Feb-97 Alex Brown (G. G. HUNT) NN CSCC NNC.CA NNC
NN/CSCC:FRAME RELAY STILL A HEALTHY MARKET--..BUY
George G. Hunt (415) 477-4287 February 20, 1997
Alex. Brown
NEWBRIDGE NETWORKS CORPORATION/NASDAQ (NN)
CASCADE COMMUNICATIONS CORPORATION/NASDAQ (CSCC)
Frame Relay Still A Healthy Market--
Maintaining Current Estimates And "Buy" Ratings
Analyst 52-Wk
Stock Price Price FY Earnings Per Share Cal. Yr. P/E Indicated
Ticker Rating 2/20/97 Range End 1996A 1997E 1998E 1997E 1998E Div. Yield
NN 2 33 3/8 37-20 4 $0.87 $1.07 $1.35 26.5x NM $0.00 Nil
CSCC 2 30 91-30 12 $0.73 $1.10 $1.55 27.3x 19.4x $0.00 Nil
NN CY 1997 EPS estimate is $1.26.
SUMMARY
-- We expect 1997 to be a banner year for frame relay.
-- We do not believe carriers are experiencing a slowdown in
frame relay demand, which is highlighted in the enclosed frame
relay/ATM carrier matrix.
-- Frame relay, according to Vertical Systems, will increase
from a $1.35 billion market in 1996 to a $3 billion market in
1999.
-- Cascade is the frame relay market share leader but it does
not control the market.
-- Newbridge reported strong frame results for the quarter
ending January 24, 1997.
-- Carriers are currently in the port provisioning cycle and we
believe will add additional infrastructure equipment in 2Q-3Q,
1997.
-- ATM and frame relay are not mutually exclusive
alternatives--most networks are a combination of both.
-- We are reiterating our current Newbridge estimates of FY
(Apr.) 1997 revenues of $1.29 billion (+40%) generating EPS of
$1.07 versus $0.87 and FY:98 estimates revenues of $1.69 billion
(+31%) generating EPS of $1.35 and Cascade estimates of 1997
revenues of $560 million (+64%) generating EPS of $1.10 versus
$0.73 and 1998 estimates of revenues of $803.5 million (+44%)
generating EPS of $1.55. Both stocks remain rated "buy."
DETAIL
-- We expect 1997 to be a banner year for frame relay - Although
the rate of frame relay growth is decreasing due to the law of
large numbers, subscriber demand is stronger than ever before.
Applications that are expected to drive frame relay demand in
1997 include international growth of frame relay, voice and SNA
over frame relay, and high-speed T3 (45 Mbps) frame relay
service offerings from carriers.
-- We do not believe carriers are experiencing a slowdown in
frame relay demand - Independent research highlighted in the
following matrix indicates carriers will add more frame relay
ports in 1997 than was the case in any previous year.
-- Frame relay is a very healthy market - The frame relay
market, according to Vertical Systems, will grow from $1.35
billion in 1996 to $3.07 billion in 1999. In the most recent
survey of North American frame relay users, Vertical Systems
reports that every client surveyed planned to add more than 2x
the number of frame relay ports in 1997 versus the case in 1996.
-- Cascade is the frame relay market share leader but it does
not control the market - Cascade dominates the RBOC frame relay
market with 4 of the 6 RBOCs and GTE as frame relay customers
but does not have a presence in the big 3 IXC marketplace (AT&T,
MCI, and Sprint) or international (21% of 4Q:96 revenues were
international). According to Vertical Systems, Cascade has a
23.3% worldwide market share with Cisco/StrataCom #2 at 20.8%,
Nortel #3 at 7.9%, and Newbridge #4 at 7.7% Cascade is the
market leader, but with less than a 25% market share it does not
control the frame relay market.
-- Newbridge reported strong frame relay results on February 18
for the quarter ending January 24, 1997. Frame relay order
intake for F3Q 1997 increased by approximately 45% compared with
the levels in the previous quarter. Frame relay 36170 sales
accounted for more than 20% of the total 36170 product revenue,
which represents a doubling of frame relay sales over the
previous quarter's levels. In the Newbridge quarterly conference
call yesterday, the company stated that while it was seeing a
slowdown of frame relay at ISPs and in single-purpose frame
relay products (products that support frame relay only), it was
not seeing a slowdown in frame relay demand from carriers,
especially for multipurpose platforms that support frame relay
and ATM on the same switch. We note that frame relay and ATM
offered on the same switch is only an advantage if there is no
performance penalty to support both services. The 36170, which
supports up to 8 shelves with 1.6 Gbps switching capacity per
shelf, has the processing power to support both frame relay and
ATM on the same switch. We believe this feature is an advantage
for carriers and will be particularly attractive to ISPs, which
we believe are migrating from frame relay to ATM, and in third
world countries where infrastructure is not yet in place
(offering frame and ATM on the same switch will be a migration
and cost advantage here). Newbridge management also stated in
the conference call that it believes it is capturing frame relay
market share.
-- Carriers are currently in the port provisioning cycle - We
believe carriers are currently in the port provisioning cycle
and are signing up users on their existing infrastructure
equipment and will add infrastructure switches in the second
and third calendar quarters of 1997 to gear up for the next wave
of demand for frame relay.
-- ATM and frame relay are not mutually exclusive alternatives -
Carriers are installing frame relay in their core networks to
trunk large amount of leased line and frame relay traffic. Frame
relay switches are also being added as access switches and
backbone switches surrounding the core ATM switches. Frame relay
and ATM function well together in the same network. Very few
networks are all ATM or all frame relay with most being a
combination of both.
-- We are reiterating our current Newbridge estimates of FY:97
revenues of $1.29 billion (+40%) generating EPS of $1.07 versus
$0.87 and FY:98 estimates revenues of $1.69 billion (+31%)
generating EPS of $1.35 and Cascade estimates of 1997 revenues
of $560 million (+64%) generating EPS of $1.10 versus $0.73 and
1998 estimates of revenues of $803.5 million (+44%) generating
EPS of $1.55. Both stocks remain rated "buy."
Carrier Frame Relay ATM
Service Offering Service Offering
AT&T Cisco/StrataCom Lucent Globe View 2000;
BPX/AXIS Final ATM vendor not
selected
Frame Relay
Capacity Plans
--Network expands by 100% every 18 months
--Strong demand for frame relay
--grew from 15,000 ports in 1994 to 50,000 ports in 1995
--grew from 50,000 ports in 1995 to 100,000 ports in 1996
--projected to grow from 100,000 ports in 1996 to 200,000 ports in 1997
MCI Domestic- GDC APEX
Bay Networks routers; Nortel Vector
International-
StrataCom IGX
--Frame relay network growth peaked in June of 1996
--Still adding frame relay ports but at a slower rate
--ATM growth second half of 1997
--ATM will find market share at all speeds
Sprint Alcatel NEC/Hitachi
--Strong demand for frame relay
--Frame relay ports will increase 50% in 1997
LDDS/ Cascade 9000 Cisco/StrataCom
WorldCom AXIS/BPX
--Strong demand for frame relay
--ATM demand in 1998
Ameritech Lucent Globe View 2000 Lucent Globe View 2000
NYNEX Newbridge 36150 Cascade 500
Bell Cascade 9000 Cascade 500
Atlantic
--Strong demand for frame relay
--grew from 4,000 ports in 1995 to 12,000 ports in 1996
--projected to grow from 12,000 ports in 1996 to 24,000 ports in 1997
Bell South Cascade 9000 Fujitsu 150
U S West Cascade 9000 Newbridge 36170
--Strong demand for frame relay
--grew from 14,000 ports in 1994 to 24,000 ports in 1995
--grew from 24,000 ports in 1995 to 40,000 ports in 1996
--projected to grow 40,000 ports in 1996 to 60,000 ports in 1997
SW Bell Newbridge 36150 Fujitsu 150
--Strong demand for frame relay
--grew from 2,800 ports in 1995 to 5,700 ports in 1996
--projected to grow from 5,700 ports in 1996 to 8,800 ports in 1997
Pac Bell Cascade 9000 Newbridge 36170
Newbridge 36150
GTE Cascade 9000 Newbridge 36170
Additional Information Available Upon Request
Alex. Brown & Sons Incorporated maintains a net primary market
in the common stock of Cascade Communications Corporation.
Within the past three years, Alex. Brown & Sons Incorporated has
managed or comanaged a public offering of Cascade Communications
Corporation.
Cascade Communications Corporation and Newbridge Networks stocks
are optionable.
The author of this comment has a long position in the common
shares of Cascade Communications Corporation.
First Call Corporation - all rights reserved. 617/345-2500
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