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Technology Stocks : PairGain Technologies -- Ignore unavailable to you. Want to Upgrade?

To: helkel who wrote (25662)	8/26/1998 6:34:00 PM
From: Gary Korn	Respond to of 36349

hk, 1. ORCTF is the SDSL play that I mentioned earlier today. Its stock has been moving as of late, though I don't know today's close. 2. I called PAIR IR again to ask for copies of the analyst reports that had been mentioned to me. IR faxed me reports from (i) Furman Selz, (ii) SoundView, (iii) Volpe Brown and (iv) Lehman. I'll look at them and report. Gary Korn

To: helkel who wrote (25662)	8/26/1998 7:04:00 PM
From: Gary Korn	Respond to of 36349

The Furman Selz report I received from PAIR IR has a date of August 26, 1998 (today) and has a recommendation of STRONG BUY. It is an excellent report, received by PAIR this morning (8/26 at about 9:29 a.m.): Here is the report: "-Quarter surprisingly strong -RFP outlook remains uncertain Pairgain shares have remained under pressure recently with the stock being down 32% since second quarter was released, and estimates were reduced to take into account continued pricing pressure in the company's core HDSL product line (65% of sales in the most recent quarter). In recent discussions with management, we were pleasantly surprised at the upbeat tone of business in the current quarter that crossed essentially all of the company's product lines: -HDSL - Despite continued pricing pressures, which should continue in the upper single digits on a sequential basis, we believe that we will see sequential growth this quarter as the result of suprisingly strong unit demand. Unit demand continues to be driven by strong growth in T1 lines provisioned. We continue to believe that T1 services are growing at somewhere above 30% per year and with T1 tariffs dropping as the result of competition for customers between the CLECs and the RBOCs, we believe that this growth rate could accelerate. -PG Flex - Again, we are looking for sequential growth from this small Digital Loop Carier (DLC) product line. In the previous quarter, the majority of sales from this product line came from one customer. In the current quarter, we believe that there will be substantially greater customer diversification. -ADSL - While we are not expecting any meaningful revenues from this segment for the current quarter, we do believe that we are getting close to the point when this entire industry will start to see some dramatic growth. We would highlight that the cable modem suppliers are starting to see some demand for their products and that this should prompt the telcos to respond by deploying ADSL lines. While PairGain has been behind schedule in developing their ADSL system, we do believe that it should become available within the next several months. Also, Rockwell recently announced availability of xDSL chips based on PairGain Technology. -RFP's oucome creates some uncertainty. As we have previously discussed, there are two RFP's outstanding for HDSL, and they are at Bell Atlantic and SBC Communications. Currently, we believe that PairGain is the primary vendor at both accounts, with ADTRAN being the secondary vendor, and our estimates for PAIR assume no meaningful change in market share going forward. We currently believe that the same two vendors will be selected in the current RFP process, and would roughly assume that if PAIR did lose the primary vendor status (but kept the second source) at either account it would cost the company between $.05 and $.10 per share in 1999. While we do not expect this to happen, we would note that our worst case is the loss of primary status at both accounts resulting in flat 1999 EPS of $.65. We expect the outcome of these RFPs to be announced by the end of the current quarter. In conclusion, the current quarter is ahead of plan despite the continued pricing pressures in HDSL, and the RFPs that are due to be decided upon this quarter have been around for at least the last six months. While we acknowledge that the presence of the RFPs does creat some uncertainty, we believe that this is more than adequately reflected in the current stock price. Selling at 14x our 1999 EPS estimate of $.80, we continue to rate these shares STRONG BUY. (END OF REPORT).

To: helkel who wrote (25662)	8/26/1998 7:21:00 PM
From: Gary Korn	Respond to of 36349

I also received from PAIR today the SoundView research report, which PAIR received yesterday and which may account for the decline in the stock price yesterday. Here it is: SUMMARY Shares of PAIR and ADTN remain highly volatile over the past few days as Bell Atlantic's HDSL RFQ shows signs of coming to a close. Highlights: - Our guess is that the Bell Atlantic HDSL RFQ will be decided within the next few weeks. - Although there have been some rumors that Bell Atlantic has already made its decision, our research suggests that no final decision has yet been made by this important customer. - Our best guess is that Bell Atlantic will split the contract roughly evenly between the two vendors to attempt to keep the price war going indefinitely. Given that PAIR currently owns 100% of NYNEX and 50% of Bell Atlantic, we believe they have a bit more to lose than ADTN in terms of market share at this key account. We believe this is the main reason for the continued pressure on PAIR's stock price recently. -The pattern that is developing in the post-Bell-merger environment is that the Bells are using their increased size to muscle their vendors into providing much better pricing. This trend also suggests to us that SBC, which also has an RPQ outstanding, is likely to introduce a second vendor to extract similar price concessions. [IN THE FURMAN SELZ REPORT, IT IS STATED THAT PAIR AND ADTN ARE BOTH CURRENT VENDORS AT SBC...WHICH IS CORRECT?] Given that this is currently 100% PAIR's customer, we believe ADTN has some opportunity to gain share here as well. -Despite the potential market share gains for ADTN, the aggressive pricing that is being used to gain this share keep us on the sidelines on this stock as well. Investment Conclusion: Our long term buy rating suggests longer term enthusiasm based in part on a recovery due to a more favorable mix looking ahead as PG-Flex and PG-Plus continue to ramp. However, the on-going price war with ADTN combined with potential market share erosion not only at Bell Atlantic but also at SBC keep us on the sidelines for the time being."

To: helkel who wrote (25662)	8/26/1998 7:50:00 PM
From: Gary Korn	Read Replies (1) \| Respond to of 36349

Following is the Volpe Brown report. Notice that it talks about a possible buyout of PAIR by ASND, given the possibility that ASND may desire to remain independent (of LU). The report is dated August 18: "PAIR: Reiterate STRONG BUY Rating Two of the most prominent recent themes in the carrier infrastruture space, earnings volatility and consolidation, have been reasserted with authority in the last few weeks. This has been witnessed in recently announced or anticipated earnings disappointments at CIENA and Advanced Fibre, and with the recent acquisitions of Stratus, Summa Four, and Positron Fiber Systems. It is with this in mind that we reiterate our STRONG BUY rating on PAIR, based on recent information that suggests that the Company's third-quarter results are tracking to plan and that the Company has adopted a more proactive approach to strategic combinations. We continue to consider PairGain the most attractive take-out candidate in the group, which was the original basis for our positive view of the shares. -While the outcome of key RFPs with major RBOCs remains uncertain, we believe current business trends at PairGain are tracking in line with expectations. Our estimates for the third quarter call for earnings of $.16 on revenues of $75 million, essentially flat with the second quarter and with last year. We expect the familiar combination of price pressure in the HDSL business and strong growth in the small subscriber business to be at work here. We believe this result for the third quarter, although representing a continuation of the lackluster growth of the past several quarters, would be incrementally positive to current investor concerns reflected in recent share price weakness at PairGain and other suppliers such as ADC Telecom. -We reiterate our view of the potential combination of PairGain and Advanced Fibre as strategically sound. While the weakness in AFC's share price and numerous near-term operating issues clearly reduce the likelihood of any near-term activity, we continue to view the product lines, customer bases, core technologies, and management of each company as complementary. We believe PairGain has adopted an incrementally more proactive approach to strategic dialogue, and continue to view the Company as offering considerable value to potential acquirers in terms of RBOC customer relationships, installed base, core xDSL, and small subscriber carrier technology. -We further note that Ascend, which has expressed interest in further accessing carrier technologies such as xDSL, SONET, and digital loop carriers in addition to expanding its carrier customer presence, might well make hay while the sun shines. That is, the combined market cap. of AFC and PAIR, net of cash, now stands at just over $1.5 billion, down from a peak of over $6 billion. While visions of a Lucent-West may be considered California dreaming, given the Company's pending purchase of Stratus and upcoming integration and divestiture requirements, the combination of ASND and either, or both, AFC and PAIR makes sense to us from a strategic standpoint. We doubt, for example, that the TLAB-CIEN-Coherent troika was widely expected at the beginning of this year. We believe the ranks of other acquirers for one or both companies include ADC Telecom, ECI Telecom, CSCO, and the large global telecom equipment suppliers. -We continue to view PAIR as incrementally more attractive than AFC as a take-out candidate, although the nearly 40% slide in AFC's share price recently has brought it into valuation parity with PAIR. We continue to rate AFC neutral. We note that PAIR has been beset by one isolated issue in HDSL pricing, with the balance of the Company in terms of management and new product development activities intact. This contrasts with the several balls in the air at AFC at present, including the search for a new CEO. More importantly, PAIR offers a way into the access networks of some of the world's largest carriers in the RBOCs, versus a larger but more indepenedent telco-focused customer base at AFC. We note finally that PAIR, although with a slightly lower revenue run rate, maintains higher gross and operating margins and has $100 million more cash. Potentially offsetting some of this is the more system-oriented nature of AFC's products. (END)

To: helkel who wrote (25662)	8/26/1998 8:02:00 PM
From: Gary Korn	Read Replies (2) \| Respond to of 36349

Following is the Lehman Bros. report. Note that while it has a neutral rating on PAIR, it has a price target of $18. I think the report came out on 8/11: "-We are initiating coverage of PAIR with a 3-Neutral Rating. -Our price target is $18. -We are forecasting FY 1998 revenues of $301 million and EPS of .65. -We are forecasting FY 1999 revenues of $346 million and EPS of .74. -PAIR is the leading vendor of HDSL products and systems being used by telcos to deliver high-speed services T-1 over plain copper wires. Additionally, a growing percentage of the company's revenues come from small subscriber systems designed to cost effectively provision telephone services in low-density geographies. While PAIR continues to be the dominant N.A. supplier of HDSL systems, the company has been impacted lately by pricing pressures on its main HiGain HDSL product line that have been more severe than expected and lingered longer than predicted. On the positive side of the equation, the company has begun to ramp-up sales of its PG Flex and PG Plus small subscriber systems to meaningful levels. These products are critical to PAIR's growth, in our opinion, because they are system level products in the rapidly growing access segment of the telecommunications equipment industry and can dramatically increase PAIR's addressable market. Four of the five RBOCs (SBC being the exception) have approved the company's small subscriber systems, and all four have started taking shipments of the products. PAIR has also positioned itself to ride the next wave of bandwidth enhancing, copper-based technologies generally referred to as tnext generation DSL, "NG"DSL, or xDSL. Earlier this year the company licenses its core chip level ADSL technologies to Rockwell, which in turn expects to leverage its existing base of modem vendor customers tin order to capture a significant share of the market for these new broadband communications devices. Rockwell is paying PAIR slightly less than $2 million per quarter in licensing fees and advances on per-unit royalties. This revenue stream is expected to last through the end of 1998, however, further payments from Rockwell will be dependent on that company's ability to sell ADSL chip sets to its vendors. We are initiating coverage on PAIR with a HOLD rating. We foresee the company growing its top line by only a modest 7% to $301 million this year, with the bottom line declining 3% to .65 share. 1998 has been a challenging year due to pricing pressures in HDSL and the lower than expected sales of the company's Campus HDSL products. For 1999, both the sales and earnings figures are estimated to expand as the pricing pressures subside and sales levels of PG Plus and PG Flex grow, resulting in top and bottom line growth of 15% to $346 million and 15% to $.74, respectively. Our confidence in these figures has waned of late, however, as the HDSL pricing pressures have been more persistent than anticipated. We can envision a slight expansion in PAIR's P/E multiple but not until PAIR's revenue growth begins to accelerate. Thus we expect the stock to continue to tread water until at least the end of the year. For investors looking for profitable companies - PAIR has operating margins above 20% - that are potential takeover candidates and are selling at seeminly low multiples of earnings - less than 20 times our 1999 EPS estimate - PAIR might seem attractive. Our view, however, is that for the next six months or so the upside potential is not worth the downside risk of additional earnings estimate cuts. (END)