WILLIAM BLAIR & CO. PAIR, Thoughts From Recent Visit With Mike Pascoe May 17, 1999: MAINTAIN HOLD (highlights only)
*Pairgain's fundamentals are improving.
*Price declines in PairGain's core HDSL T1 business are finally moderating, however, the full effect of market share losses has not yet materialized.
*Product development and marketing efforts for Avidia are beginning to show signs of impending success, translating to long awaited growth in sales and earnings.
*We maintain our Hold at this time awaiting further evidence of sustainable business momentum, but view the stock as increasingly interesting.
In each of three categories (1. stabilization in core HDSL T1 business, 2. Significant upside surprises in PG Flex/Plus, and 3. Strong market acceptance of PairGain's Avidia product) there is encouraging evidence of improving fundamentals. There are still some transitions to work through, mainly the shift of HDSL T1 business at SBC away from PAIR to ADTRAN and the ramp up of Avidia sales. Hence PairGain's recovery is still under way. We expect this recovery to last roughly two quarters.
Significant Upside Surprises from PG-Flex and PG-Plus: "After a disappointing December quarter, PairGain reported good sales of PG-Flex and PG-Plus during its March quarter, beating our estimate by nearly $1 million. Sales of PG-Flex and PG-Plus have taken longer than expected to ramp. But with the recent upside surprise and shipments underway to four large carriers - Ameritech, Bell Atlantic, Sprint, and BellSouth, we are increasingly optimistic that PairGain will achieve steady sequential growth in sales. We forecast sales to grow from $15.4 million in the March 1999 quarter to $25.5 million in the December quarter, adding up to $80 million in 1999 sales, or 31% of total revenue".
Strong Market Acceptance of Pairgain's Avidia Product: "PairGain is repositioning itself around its Avidia product. After a year of development since the acquisition of Avidia, PairGain is emerging with, in our view, one of the most competitive products targeted at the carrier xDSL market opportunity. The Avidia product is more than just a DSLAM; it is a multiservice ATM edge switch with strong traffic management capabilities and superior port density. These features clearly differentiate PairGain and allow the company to sell the product based more on features and functionality rather than price".
"We expect PairGain's initial sales success to be with independent telephone companies, such as Frontier and CenturyTel, and CLEC's instead of the RBOC's which by now have chosen their initial suppliers. In particular, PairGain's NEBS compliance, scheduled for late July, will be one of the final 'gating' factors to penetrate the CLEC market. Additionally, we are becoming increasingly optimistic that PairGain will be selected by MCI Worldcom and/or Sprint as these carriers step up their xDSL deployment efforts in the latter half of 1999. Lastly, in early 2000, we think the RBOC's will begin their search for a 'next generation DSLAM'. While it is expected that other vendors will improve their product offerings during the next 8 - 12 months, we believe that PairGain has a clear lead with its feature-rich multiservice Avidia product".
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