To: Dennis R. Duke who wrote (1364 ) 4/13/1998 2:29:00 PM From: Dennis R. Duke Read Replies (1) | Respond to
Salomon Smith Barney reports this morning Ascend reported revenues of $305.1 million and EPS of $0.26 for FY98 Q1. Operating results were slightly ahead of our est. They are modestly raising their estimate, but they comment that the stock may be weak given recent run-up in expectations.As expected, we are raising our estimates for FY 1998 and FY 1999 slightly. Our FY 1998 EPS estimate is $1.17, versus our prior $1.15 and our FY 1999 EPS estimate is now $1.47 versus our prior $1.45. We believe these estimate revisions were largely in the stock ahead of the earnings announcement, which could put some pressure on the stock today. Our positive investment thesis remains intact and would use any weakness in the stock as a buying opportunity. We believe there are three catalysts to the stock in the intermediate term: (1) Acceleration in the core switching business led by the introduction of the GX 550 this quarter and continued adoption of ATM in the backbone; (2) Continued strength in the access business led by the rollout of the new TNT software and the commercial launch of the MAX 6000 this past march, and the commercial introduction of the TNT II this fall; and (3) A strong rebound in Ascend's European business (both core and access) led by Worldcom's aggressive European buildout plans, the completion of a number of RFPs due in the second half, and Ascend's improved competitive positioning in the European markets. While we have not revised our estimates to the degree we historically have in the past with Ascend, we believe the forward estimates are believable and that the company is on track to dominate the broadband buildout of the PSTN in 1998 and 1999. We reiterate our Buy rating and our 12-month price target of $45-$50. While the revenues came in at the low-end of the "whisper" range, [maybe the whisper numbers caused market disappointment.] we believe there were a number of positives during the quarter, including: (1) Access revenue growth; (2) Flat gross margins; (3) Reduced customer concentration -- one 10% customer versus two last quarter; (4) Strong bookings growth in all product segments; and (5) The balance sheet continues to show improvement in a seasonally challenging quarter. access business led the way with revenues up 8% sequentially, which represented the first growth quarter for the MAX family in four quarters . The MAX business was driven by strong orders from the Ascend's traditional ISP customers (PSI, BBN and UUNet), which have all adopted the TNT now, and the introduction of the MAX 6000, which strengthens the company's competitive position in the small-to-mid ISP market segment. The core switching business, was consistent with the company's pre-quarter guidance of "flattish growth", posting only 1% sequential growth. We believe that a couple of large core switching orders slipped into the second quarter [were not to be recognized until Q2 - they might have been partially shipped.], including the Williams Communications Group large order for GX 550s, which contributed to a positive book-to-bill. Ascend's ability to exceed consensus estimates despite the lumpiness of the carrier business demonstrates Ascend's improved execution, more distributed businesses and customer segments, and strengthened customer relationships. We view these factors as major fundamental positives and underlie our confidence in the forward estimates.Williams Communications has already chosen Ascend for their infrastructure network and we believe the remaining emerging alternative carriers' in the US (Qwest and Level 3) will finalize network decisions in the next several weeks and deployment will fuel additional growth in core switching for the latter half of 1998. These alternative carriers are creating additional competitive pressure in the traditional carriers therefore hastening their infrastructure upgrade investments as well. On the international front, telco deregulation in Europe is materializing into viable sales prospects in the European market while Japan is feeling the squeeze of constrained bandwidth and investing in core infrastructure as well as remote access, and we believe will continue to invest heavily through the remainder of 1998.
