Ascend Is Back On Track
Networking firm's stock has taken investors on a wild ride
San Francisco Chronicle - Wednesday, June 24, 1998
Alameda-based Ascend Communications is finally
living up to its name again, after costing many
investors their shirts in 1997.
Last year, a free-fall in the data networking
company's share price -- from a high of $78.75 in
January to $22.63 in November -- slashed $6 billion
off its net worth. This year, however, Ascend's
stock has doubled in price to $48.81 a share, giving it
a market valuation of $10 billion, just below last
year's peak of $10.2 billion. (The share price is
lower, but more shares are outstanding than last
year.) Most analysts now applaud the company's
prospects, and suitors are eyeing it hungrily as an
acquisition target.
The turnaround reflects Ascend's core strength in
the surging market for data gear aimed at telephone
companies and Internet service providers, who are
reengineering their networks to slash costs and offer
new services.
Ascend ''will be one of the most significant
infrastructure suppliers for the explosion in spending
on next-generation carrier voice and data networks,''
predicted analysts Chris Stix and Vijay Rajamani in a
report for Cowen & Co.
The company is the subject of hot merger
speculation, particularly in the wake of last week's
$7 billion takeover of Bay Networks by Northern
Telecom.
Marc Fabbi, an analyst with the Gartner Group, said
of Ascend, ''They have a lot of value and deliver
strong solutions, but are they truly big enough to stay
independent? Ultimately, we think tier-two vendors
(like Ascend) will disappear. Ascend's stock has
gone way up on acquisition rumors.''
Several analysts have picked telecommunications
equipment giant Lucent Technologies as the most
likely buyer. Last week, Bloomberg Business News
reported that Swedish telecom equipment supplier
Ericsson was in merger talks with Ascend. On
Monday, however, Ericsson suggested that it was
looking for smaller acquisitions, knocking Ascend's
price down a couple of dollars.
Ascend has prospered recently while many other
networking companies -- Cisco Systems excepted --
have foundered. Bay and 3Com Corp., which both
have more revenue but lower market caps than
Ascend, have suffered ruthless price competition in
the corporate networking market.
But Ascend is strong in the less-cut- throat public
network market, selling to companies like AT&T
and WorldCom that build Internet backbones and
other data networks to connect homes and of- fices
to one another.
Ascend has long been a leading seller of ''remote
access'' devices, which let Internet service providers
or corporations take incoming calls from computer
modems. In the past few months, Ascend has won
an impressive string of contracts to sell
data-switching equipment to some of America's
hottest telecommunications companies, including
Qwest Communications International, LCI
International, GTE Internetworking and Williams
Cos. These carriers are using advanced fiber optics
to carry voice, video and data together over
high-speed networks, slashing operating costs.
''The fundamental shift in the market is that data
now accounts for more than 50 percent of traffic on
many networks,'' said Hassan Ahmed, vice president
of Ascend. ''Customers are now thinking about
building their network first and foremost for data,
then letting voice ride along. This wave plays to
Ascend's strengths.''
Ascend's switches let carriers set priorities for what
kinds of traffic get through the network first, a
critical feature so that voice conversations can arrive
uninterrupted by bursts of data carried over the
same pipe.
While Ascend is on the upswing today, investors
who've stuck with the stock have ridden a wild roller
coaster worthy of the new Invertigo ride at Great
America in Santa Clara. Founded in 1989, Ascend
originally focused on remote-access equipment to
handle long-distance video-conferencing. But it
quickly shifted to ride the Internet tidal wave with its
dial-up remote access gear.
Investors entranced by the Internet fell in love with
Ascend as its equipment found a home in nearly
every large ISP. It went public in 1994 at a
split-adjusted price of about $1.60, then rocketed to a
speculative peak of almost $80 early last year. Then
fickle investors soured on the entire networking
industry, hammering Ascend along with blue chips
like Cisco. Ascend's decline accelerated in April
1997 after it announced plans to swallow
Massachusetts-based Cascade Communications in a
$3 billion stock deal.
Matters only grew worse last summer when Ascend
tossed too many buggy new products on the market,
forcing embarrassing recalls and shipping delays. It
had particular problems getting its remote access
equipment to work with the new breed of 56K
modems.
By the end of the year, Ascend's earnings per share
were up only a dismal 6.3 percent (not counting
acquisition-related charges).
But analysts say Ascend has since refocused the
company, putting in place a rigorous new
quality-control systems. ''They've had no snafus
since last summer,'' said Deb Mielke of TeleChoice.
''They are being conservative.''
The acquisition of Cascade -- a company Cisco had
eyed for its own portfolio -- als has proven a winner,
accounting for Ascend's big data-switch contracts
with major carriers this year.
On June 9, Ascend also got a boost when its shares
joined the Standard & Poor's 500 Index. Ascend's
stock rose $2 to $49, as index fund managers added
it to their portfolios.
But Ascend still faces major challenges -- reflected
in the fact that 8 percent of its shares were held by
short-sellers last month. An awesome array of
competitors, including giants such as Lucent, Nortel
and Cisco, are all vying for Ascend's major
customers.
Cisco recently announced new equipment aimed
directly at Ascend's high-end switches. UBS
Securities predicts that they will ''provide some very
stiff competition for Ascend.'' But Cisco won't ship
its products for several months. Until Cisco delivers,
Ascend officials say they aren't too worried. ''We
maintain a healthy sense of paranoia about Cisco,
but don't think they are a strong carrier player,''
Ahmed said.
Nortel's purchase of Bay Networks doesn't much
concern Ascend either. Bay's strength lies within
corporate networks, where Ascend isn't a player,
said Bob Machlin, vice president of marketing at
Ascend. But Lucent and Nortel both purchased
network equipment companies last year that could
put competitive pressure on Ascend's core
remote-access products. For now, though, Ascend
remains the clear market leader in that segment.
Asia is a wild card. Its economic woes have hurt
Ascend's sales but not catastrophically. Ascend does
most of its overseas sales in Europe, where business
is booming.
While the signs look good for the Alameda company
today, wise investors know its stock remains a
gamble, given the volatility and intense competition in
its industry. As a recent analysis by J. P. Morgan's
William Rabin noted, ''Ascend's business prospects
are as promising as they have ever been.'' But with
just one slip up, ''investor confidence could once
again be shattered, as we believe that its current
strength is still paper thin.''
c1998 San Francisco Chronicle Page B1
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