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

To: Dennis R. Duke who wrote (1367)	4/13/1998 4:07:00 PM
From: Dennis R. Duke	Respond to of 1629

The co-author of "the Gorilla Game" and BancAmerica Robertson Stephens analyst on ASND Paul Johnson writes his post CC report and reiterates a "buy" rating this morning, saying the CC was upbeat. They also raised their estimates by the one penny to FY98 $1.18 and FY99 $1.46. From their report are the following: Key Points: Ascend reported first-quarter results of $305.1 million in revenues and $0.26 EPS, slightly beating our and Street consensus estimates of roughly $303 million and $0.25. Surprisingly, the strength in the quarter was primarily from the Remote Access and Enterprise Access product lines which each grew roughly 8% sequentially. Both of these product lines benefitted from stable pricing and solid end-user demand in the quarter. The core switching product lines which grew over 24% sequentially in the December quarter grew by only 1% sequentially in the first quarter. While this number is somewhat lower than expected, bookings for core switching in the quarter were very strong, and visibility into June is excellent. Accounts receivable DSOs were roughly flat sequentially at 72 days, and are within the company's model of 70-75 days. Ascend's inventories showed some improvement, but were also roughly flat in the quarter at 84 days. The continued high inventory levels were due in part to demo units shipped in the quarter; management commented that they expect inventory levels to decrease in the June quarter. The company's financial performance, as measured by its ROIC, continued its modest upward trend indicating the positive business trends at Ascend. We reiterated our rating recently due to an acceleration in demand for the company's core switching products and a more stable business environment---in terms of pricing and unit demandfor Ascend's traditional businesses, both remote access (MAX TNT) and frame switching (STDX 8000/9000). These trends were highlighted in the quarterly financial performance. As such we are raising our estimates slightly to reflect the upside in the quarter and the positive outlook for business going forward. We are reiterating our Buy rating. SUMMARY: Ascend reported first quarter results slightly higher than our and Street consensus estimates. Surprisingly, the strength in the quarter was primarily from the Remote Access and Enterprise Access product lines which each grew roughly 8% sequentially. Both of these product lines benefitted from stable pricing and solid end-user demand in the quarter. The core switching product lines which grew over 24% sequentially in the December quarter grew by only 1% sequentially in the first quarter. While this number is somewhat lower than expected, bookings for core switching in the quarter were very strong, and visibility into June is excellent. Management was very upbeat on the call regarding the demand outlook for both remote access and core switching. The most critical aspect of Ascend's business opportunity is the accelerating demand for WAN ATM equipment. After several years of disappointments and as many false starts, carriers are finally beginning to install full scale ATM-based networks. Whether the carriers offer native ATM services or not, they are deploying ATM in the core as a high-speed transport because ATM is currently the only technology that can seamlessly carry any kind of digital traffic (voice, video, and data---particularly Frame Relay and IP) For this reason, we believe there is little doubt that wide-area ATM will be one of the fastest growing sub-segments in the networking industry as carriers begin the deployment of next-generation broadband ATM networks. Into this market, Ascend's CBX 500 and GX 550 wide-area ATM switches have truly emerged as "killer products" within the carrier customer base. While the CBX 500 is a core switch in its own right, the GX 550 offers such a high density of OC12 and OC48 links that carriers who deploy the 550 often use the 500 as a fan out or edge switch. The combination of these two products' scalability, density, and feature sets is extremely attractive to carriers. Williams communications announced plans to purchase $150 million worth of ATM switches from Ascend in the quarter. While this was a big win from Ascend's perspective, we believe that Williams could take significantly more than the announced order. Additionally, management commented on the call with analysts that it did not recognize any revenue for the 550 in the quarter and has yet to recognize any Williams revenue. Both of these facts add considerably to the company's visibility going forward. Keep in mind that we only have $380 million in revenues from ATM switching modeled for Ascend in 1998. [WOW, If the Core Switching is going to cross over in the near term to be more than 50% of revenues as Michael said in the conference call there is upside in BARS's EPS estimate] Ascend also has a product line inherited from Cascade's Sahara acquisition that compliments the core switching effort with a high-end multiservice ATM switch. This product line was up sequentially in the quarter (albeit off a small revenue base) and has the potential to add to revenues in the second half of 1998. We reiterated our rating recently due to an acceleration in demand for the company's core switching products and a more stable business environment---in terms of pricing and unit demand for Ascend's traditional businesses, both remote access (MAX TNT) and frame switching (STDX 8000/9000). These trends were highlighted in the quarterly financial performance. As such we are raising our estimates slightly to reflect the upside in the quarter and the positive outlook for business going forward. Given our expectations, our current estimates are probably too low. While we expect Ascend will have a strong second half in 1998 we feel the first half of the year may be tempered by the increasing seasonality seen in the networking. As such our estimates will remain conservative given our enthusiasm for this space and Ascend in particular. ---------- This report indicates that there cold be good upside if the Core Switching products take off as it appears that they are. IMHO, Dennis