March 16, 1998, TechWeb News
Acquisitions Fuel Ascend's Ascent --
Product-line growth repositions vendor as
enterprise player
By Edward Cone
Ayear ago, Ascend Communications Inc. was a profitable, if somewhat
obscure, datacom vendor. But 12 months, one major acquisition, and a
stock-price roller-coaster ride later, Ascend is a $1.17 billion player in
WAN access and carrier-class data-transmission products.
"We've changed, and so has the market," says Robert Machlin, the Alameda,
Calif., company's VP of marketing. "These are suddenly sexy businesses that
are attracting a lot of interest."
For customers, Ascend's metamorphosis has been part of the expanding
competition in these rapidly growing markets. Dataquest expects sales of
backbone frame-relay equipment to double by 2001 to $2.2 billion.
"Ascend was the only game in town for a long time for carrier-class remote
access," says Kitty Weldon, a senior analyst at the Yankee Group.
"Everybody-the service providers and hardware makers-wants that installed
base. They're all gunning for Ascend."
Companies from 3Com to the telecommunications equipment giants loom in
different market segments. But no competitor casts a larger shadow than
Cisco Systems, with its broad product line and promise of one-stop
shopping.
"The Cisco guy here calls me daily," says Andy Knight, Windows NT
development manager at Landmark Graphics, a Houston software maker that
uses Ascend's products to give its software developers remote access to its
network and the Internet. Landmark has about 200 remote users in Houston
and also deploys Ascend's MAX WAN access switch and Pipeline products
in its Denver and Dallas offices. Despite Cisco's persistence, Landmark
Graphics has so far remained loyal to Ascend, Knight says.
Ascend turbocharged its growth via acquisition, targeting industrial-strength
data access and transmission products. The company made six acquisitions
from 1996 to early 1997. A year ago, Ascend made its biggest move yet-a
$3.7 billion stock deal for switching vendor Cascade Communications in
Westford, Mass.
The Cascade deal brought together Ascend's remote-networking business,
including the hugely successful MAX WAN access switch family, with
Cascade's carrier-class frame-relay, ATM, and IP switching products. With
strong-to-dominant positions in both access and backbone products, Ascend
now pitches itself as the logical vendor for enterprise customers who need
reliable high-volume data products. That should include just about everybody
as data traffic volume soars past voice traffic in the next few years.
Ascend's offerings are more focused than Cisco's-and that's its comparative
advantage, says Ascend CEO Mory Ejabat. "The carriers don't go for
one-stop shopping," he says. "They make money by providing service, and
they will buy the best product to provide their services. Customers on the
enterprise side want that quality, too, as they move to VPNs and other
outsourcing options."
Enterprise customers will start outsourcing networks to carriers, says Ejabat,
adding that these customers account for nearly one-third of the company's
revenue. "We already supply the equipment to the carriers, and we can give
enterprise customers who need access to them the security and manageability
to feel comfortable."
Ascend's ascent hasn't come without pain, especially with Cascade on the
East Coast. "We learned a lot from looking at failed mergers," says Ejabat.
"What they did, we didn't do." One key to success has been the willingness of
both companies to make it happen. "We had an implementation plan, and we
executed on it fast," says Ejabat. "We made our decisions, and 90% of them
were good."
Still, the merged company lost some salespeople and managers it would have
liked to retain. Most recently, chief financial officer Bob Dahl left the
company. Ascend also took several months to realize much marketing benefit
from the Cascade merger. "It was difficult initially to leverage our original
product lines," says Machlin.
Other problems were beyond management control. "We took our hit in Asia
a quarter before everyone else," says Ejabat. "About 20% of our business
was in Japan; that's down now to about 5%."
In September, Ascend posted third-quarter 1997 numbers of $270 million in
revenue with $40 million in profit, down from the same quarter a year earlier.
The company's stock got hammered, falling from a high of more than $70 a
share early in the year to less than $25 by late last year. Ascend was trading
at one-third of its pre-merger high when a group of disgruntled former
Cascade shareholders filed suit late last year.
Customers noticed. "We followed it from the stock perspective," says
Landmark's Knight. "We look at vendor stocks as a way of monitoring their
health."
Gradually, the Cascade merger has started to bring some benefits. "We saw
some significant wins in the fourth quarter in terms of former Ascend people
selling Cascade and vice versa," says Machlin. The company's numbers
picked up, with revenue of $293 million and profit of $48 million for the
fourth quarter ended Dec. 31. Ascend ended 1997 with a profit of $211
million-driven in part by the strong performance of the core systems group,
headed by former Cascade CEO Dan Smith. With the stock recently
rebounding to about $35 a share, Wall Street seems to be rediscovering its
fondness for the company. "I feel good about the stock, but not as good as I
used to," says Ejabat.
Richardson Electronics in Lafox, Ill., an Ascend customer for several years,
has been following the changes carefully. Richardson plans to swap its Cisco
WAN access products for Ascend's. "They're so cheap, I can put two of
them in the field for the same price as using Cisco," says communications
manager Mark Wolf. "That way, I have a backup and no maintenance cost."
But not everyone is convinced of Ascend's promise. "The management team
has some proving to do that they can come up with stability," says Hambrecht
& Quist analyst Joe Noel, referring to CFO Dahl's recent departure. Still,
Noel says, "The worst is behind them."
Ascend's products have to remain best-of-breed for the company to stay on
top. "Time to market is a major selling point in this business," says Ejabat,
who says the company plows about 14% of revenue-about $162 million in
1997-into R&D each year. "We come out with a new product every three to
six months and replace our products every year. Our technology advantage
will allow us to remain ahead of our competitors. Cisco is a long way back in
our rear-view mirror."
But Cisco is spending about $800 million annually on R&D across its diverse
product lines, and has put more than $6 billion into acquisitions in the last 18
months. The Yankee Group's Weldon says that raw performance isn't
everything. "Ascend has higher performance in measurable terms, but
customers think about more than the number of supported ports," she says.
"I'm not convinced that Ascend can hold on to its position forever. On the
other hand, it's not sitting still."
Ejabat hasn't had his fill of acquisitions. "We won't stop now," he says. "If the
right acquisition is there, we'll definitely do it."
Ascend could be a target, too. Rumors of a sale, usually to a big equipment
vendor like Lucent Technologies or Northern Telecom, have floated around
for months. "It's a logical fit for the high-end telco providers," says Weldon.
"They're excited about getting into data market."
Would Ascend sell? "There's a price," admits Ejabat. "But it would have to
be an additive to our business. One plus one has to equal three." With a
market capitalization of some $7 billion, Ascend wouldn't be cheap, but there
are companies that could afford it.
Regardless of who, if anyone, buys whom, it's a safe bet that in a year,
Ascend and its markets will look significantly different.
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SIDEBAR:At A Glance
Ascend Communications Inc.
Headquarters:Alameda, Calif.
CEO:Mory Ejabat
1997 sales:$1.17 billion
1997 net income:$211 million
Principle products:MAX WAN, Pipeline remote-access products,
carrier-class frame relay, ATM, and IP switching products
DATA:ASCEND COMMUNICATIONS
Copyright (c) 1998 CMP Media Inc. |
