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Technology Stocks : Ascend Communications-News Only!!! (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: Tech Bull who wrote (778)	12/17/1997 12:29:00 PM
From: Sector Investor	Respond to of 1629

Synopsis from Goldman Sachs (GS): CSCO,COMS,ASND : Raising Cisco to Rec. List; Lowering 3Com & Ascend to MO GS is raising their rating on Cisco to U.S. Recommended List from market outperformer and lowering their rating on 3Com and Ascend to market outperformer from their recommended list. GS cites the following reasons for CSCO upgrade: CSCO's recent correction in response to concerns over growth in Asia, insider selling and an increase in finished goods inventory is overdone [ha!] CSCO is at the early stages of a strong new product cycle Visibility into January quarter is good as business trends are strong [ah, there's the rub!] Growth in CSCO's market segments in the networking industry while having decelerated remains strong. GS estimates that the market sectors CSCO addresses should grow in total between 25-40% for the next couple of years. As the leading supplier in most of these segments, CSCO is well positioned to benefit from this growth. [specifics please? Sounds superficial to me] GS continues to expect that both COMS and ASND will outperform the market from current valuation levels. GS 'highlights' that they are not suggesting that either company is likely to disappoint relative to current expectations. But they are reducing their weighting on the group overall to 'market weighted' from 'moderately overweighted' given the uncertainty surrounding international growth particularly in Asia and the pricing / competitive environment. GS prefers to emphasize CSCO which has considerably less uncertainty regarding its outlook in 1998. [Visibility again, plus the CSCO line seems to be taken for granted] GS says their rating changes reflect a higher level of confidence in CSCO the leading company in most of the markets it serves. While COMS and ASND are strong in their segments, they do not have quite as strong a position as CSCO. [amazing!] GS ASND estimates for 1998 is $1.05 and $1.20 for 1999 [incredible!] GS comments that after a year of surprisingly slow growth for the data networking industry in 1997 (they est 15%), they expect stronger growth of about 20% for the industry overall in 1998 as the comparisons are a lot easier and the secular trends driving the industry remain intact. GS adds that although they expect stronger growth in 1998, the growth rate remains well below the 50+% growth that the industry had experienced in each of the six years from 1990 to 1996. GS cites several factors, such as macroeconomic weakness overseas, slower growth in capital expenditures by Internet Service Providers (ISPs), longer sales cycles from confusion about backbone technologies that leads them to believe that the extent of the slowdown in 1997 was an aberration. GS cites some other factors, such as an increasing trend towards ASICs resulting in a faster rate of cost and price declines, and heightened competition among existing suppliers which indicates to GS that the industry could be transitioning from its rapid growth phase to a period of still strong growth (est high teens to mid 20s range). Amazingly GS adds this: A catalyst such as a new market like the Internet or new technology like LAN switches which were significant new opportunities in 1995 and 1996 could meaningfully reaccelerate the overall growth rate. [The Internet a NEW market? Switching as a NEW technology? COULD accellerate? Where do they get these people - and only for 750K/yr too!] GS also says that the trend toward integrating voice over packet switched data networks could gain significant momentum later in the year. GS adds this hedge that making broad generalizations about the industry is difficult since fundamentals for specific product sectors and company-specific exposure to these sectors will continue to vary significantly. They continue, saying at the highest level they expect a stronger environment in the service provider segment as compared to the enterprise segment of the market. [Wait! CSCO = enterprise level, ASND = service provider, but CSCO gets upgraded at it's price level while ASND gets downgraded at theirs? It all comes down to visibility and management respect, doesn't it?] GS closes with the statement that they have the highest level of conviction in CSCO since it is the strongest company in almost all the product sectors in which it participates. [Let's see here. Routers-YES, RAS-NO, F/R-NO, ATM-NO, FE/GE-NO - what does that leave?] GS also says that the sectors addressed by CSCO have better fundamentals in terms of growth and competitive dynamics as compared to the industry overall, and they expect 32% growth in CSCO's target markets. In a more uncertain environment, we prefer to guide investors to the company with the most visibility and best execution despite a higher a valuation. [More. This @#$%^* thing goes on and on] GS says that CSCO is in the early stages of a strong new product cycle in almost every segment of its business which should result in strong growth in 1998. In the router market, the company began shipping the high-end Gigabit Switch Router (GSR) in the October quarter. GS thinks that product should result in accelerated growth (about 49%) in the router business which has been flattish for the past four quarters. GS also believes that CSCO may also introduce a scaled down version of the GSR which is more applicable in enterprise networks and could benefit from a meaningful upgrade cycle in the corporate market. Regarding RAS, GS says the AS 5300 is allowing CSCO to increase its presence in the service provider market from a relatively strong position in the enterprise market and they estimate that remote access concentrators are about 6% of revenues or $110-120 million a quarter. In LAN switches GS mentions the recent introduction of several low-end products targeted at the small / medium business market, new token ring switches and continue to enhance its high-end 5500 series with new higher density modules and chassis with faster backplanes. GS also mentions a low-cost 10/100 autosensing switch that is likely to be introduced towards the end December and that gigabit Ethernet and ATM switches should be available in the first half of 1998. GS continues that in the WAN switching market, new products include the 3800 series of voice/data integration products. Higher capacity ATM and frame relay switches have not yet been officially announced but given that it has been sometime since new products were introduced, GS believes it likely that the company will enhance its product line in the next couple of quarters. [An awful lot of vaporware here and betting on the come. Sounds like they are 6 months to 1 yr behind in GE, F/R and ATM] Regarding INTERNATIONAL growth, GS says this has been a drag on CSCO for 4 qtrs. Europe is expected to show stronger growth. While the situation in Asia appears to be deteriorating, the CSCO's exposure to the most affected countries is minimal, with 7% from Japan, 1% from Korea, 1-2% from Malaysia, Indonesia, Philippines and Thailand) and 2-3% mainly from China, Hong Kong and Singapore. GS adds that the Japanese market has already been flat and should improve relative to these levels. GS says that recent insider selling by the company's CFO and CTO should not be viewed as red flags. as they have more grants and have not sold in a while. Regarding Inventory levels, GS says thAt finished goods inventory increased to $69.7 million at the end of October from $21.7 million at the end of July. and that the increase has caused significant concern among investors that demand has been below the company's expectations. GS glosses over this by saying that typically they would be alarmed at the increase but we are not concerned about it at this point, because CSCO is one of the few that recognizes revenues on sell through of its products in the distribution channel. Therefore, inventories of products shipped to the distribution channel for initial stocking appear on the company's balance sheet. The increase in inventory is consistent with the company's increased focus on the medium and small business market especially since CSCO is currently experiencing strong double digit sequential revenue growth in this segment. GS says that order rates have "pricked up" [sic] across the entire product line and business trends so far in the quarter appear to be tracking ahead of expectations. GS believes CSCO could show a modest positive earnings surprise while continuing to build backlog. Regarding risks, GS says that pricing in certain sectors of the industry such as LAN switches and access concentrators has been declining well above historical levels. This is being driven by increasing ASIC content which allows faster cost reduction and a more competitive environment. The major risk going forward is that some of the weaker suppliers in the industry become even more price competitive in an attempt to retain market share. [I think CSCO is lowering prices to get sales for 5200/5300 that they can't otherwise get] [Get this!] GS says that CSCO's historical seasonal pattern largely reflects the buying patterns of corporate enterprise customers. As the company's mix shifts towards the service provider market, the spending pattern of service providers, which typically show a very strong year-end buying period followed by a sequential decline in spending in the first calendar quarter, is likely to make the CSCO's existing seasonal pattern more pronounced. GS says the risk is that estimates on a quarterly basis may not reflect this change in seasonality. Slower than historical growth in the April quarter could be misconstrued as an indicator of a change in the market or the company's position in the market. [Wow! GS is already positioning to gloss over a weak CSCO April quarter that hasn't even hit yet! Ya gotta love it.]