Morgan Stanley Dean Witter, this morning, rates ASND an Outperform with a price target of $45 and increases full year estimate by the penny over estimate that was reported in Q1 actual (FY98 estimate $1.16). They also reduce to 20% on sales and 25% on EPS their long term growth outlook for ASND.
Their report highlights are below:
KEY POINTS
Ascend reported 1Q EPS of $0.26, beating our estimate by $0.01 due to
lower than expected R&D spending. Management built backlog, with bookings up in access and core switching.
Ascend executed on plan [There's Michael's word - The analyst heard it, we are moving back to being a respected financially managed company], reaffirming that the company is getting back on track. We believe much of its integration issues and lack of focus may be behind them, which should lead to revenue acceleration in the second half of this year. The stock is no longer inexpensive. [sounds like room to up EPS later]
However, we maintain our Outperform rating and target price of $45, 31
times our 1999 estimate of $1.45. [Cisco's PE is 51]
DETAILS:
Summary and Investment Conclusion
Ascend reported 1Q EPS of $0.26, beating our estimate by $0.01 due to lower than expected R&D spending [interesting that they should pick the R&D as the explanation for the positive performance]. Revenues came in at $5 million above our $300 million forecast, led by access switching primarily in North America. Management focused on 4 key issues: (1) demand trends remain strong for access and core switching, (2) access switching pricing has stabilized (for now), (3) customer consolidation is a positive competitively, and (4) focus on best of breed vs competitor's end-to-end strategy paying off. Book-to-bill was over 1.0, leading to improved visibility.
We maintain our Outperform rating and target price of $45, 31 times
our 1999 forecast of $1.45. The stock is not as inexpensive as it was
4 months ago when we began highlighting its steps to recovery. We
believe that Ascend's sustainable top-line growth should be about 20%
with bottom line growth of 25%. Ascend should sell at about a 20%
premium to its bottom line growth rate due to its technology edge, we
believe. We are lowering our 5 year EPS growth rate projection to 25% from 40%; fair value should be about $45-$48.
First Quarter Highlights
ORDER GROWTH WAS SOLID, WITH A BOOK-TO-BILL ABOVE 1.0. Revenue rose 4% year-over-year [A, gentlemen, that's the Quarter-over-Quarter number!] and sequentially to $305 million. Decent North America sales grew 5.6% year-over-year offset by only 0.8% growth internationally. The geographic breakdown was: North America at 74% and International at 26%. Japan represented a little under 10% of revenue, driven by orders from one customer. Europe was a bit over 10% of total revenue. Management expects international sales to represent at least 30% of total by year-end and perhaps 40% of total revenue by 1999. Worldwide, ATM over SONET/SDH appears to be gaining favor as the backbone of choice, management believes. [nice to see that stats in the CC show up in the analyst report]
Although GX 550 (carrier class ATM core switch) units shipped in the quarter, revenue recognition was delayed until 2Q, resulting in core switching sequential growth of only 1.1%. The MAX 6000 shipped late in the quarter with minimal revenue recognition. The access switching and enterprise segments of the business showed 7-8% sequential growth.
The product breakdown was: access switching at 44%, core switching at
41%, enterprise at 10%, and service at 5%. Core switching should
continue to grow as a percentage of revenue. The customer breakdown
was carriers at 36%, ISPs at 41% and distributors at 23%.
On the V.90 software upgrade, the company is involved in interoperability trials with numerous vendors. A beta version should
ship by mid-April with broad shipment in May.
LATER THAN EXPECTED R&D HIRING IN THE QUARTER RESULTED IN A PENNY UPSIDE. R&D was 13.4% of revenue versus our forecast of 14.5%; we
would expect this percentage to rise through the year. The gross
margin was solid at 36% with normal pricing pressure. Management
achieved its target 25% operating margin, a quarter early. SG&A was
in-line with our forecast at 22%; management's goal is below 20%.
Headcount increased by 127 to 1,969 sequentially; employee turnover is
now at normal levels. Management's guidance for 1998 was: R&D higher
than 1Q of 13%, SG&A under 20%, G&A at 3%, and operating margin at 25%
THE BALANCE SHEET WAS SOLID. DSOs were flat sequentially at 72,
reflecting strong shipments in January and March, we believe. DSOs
should move up through the year as International sales with longer
terms grow as a percentage of the total. Cash finished at $691
million, up $114 million. Half of the cash increase was due to
operating cash flow with the balance from option exercise and deferred
taxes.
Outlook: Gradual Improvement
OUR 1998 EPS FORECASTS BUMPS UP TO $1.16 DUE TO THE $0.01 UPSIDE.
Our 1999 estimate remains unchanged at $1.45. In 1998, we look for 16%
top-line growth to $1.36 billion, a gross margin of 37%, and an
operating margin of 25.5%. In 1999, we forecast 22% revenue growth to
$1.65 billion, a gross margin 35.5%, and an operating margin of 27%.
ASCEND'S RECOVERY APPEARS ON TRACK. The integration of Cascade (core
switching) appears complete and employee turnover has stabilized. The
GX550 is receiving significant interest and positions the company
extremely well, especially against Newbridge Networks (NN, $27). We
are hearing of a number of evaluations under way at this time. [indicating lots of business on the horizon] In access switching, software issues with the MAX TNT are over and demand has recovered. The next generation MAX TNT should ship late this year. International should provide a further boost in the second half of the year. Ascend's voice-over-IP products (announced last month) are shipping and management stated that live traffic is running over its customer networks today.
Generally, most of their report comes directly from the CC, and those that listened to it or read my summaries have heard much of what is include above. The good news is the word is getting out to the investing public and ASND is being viewed as On Track.
Dennis |
