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

To: Mark Duper who wrote (57523)	11/25/1998 4:06:00 PM
From: Mark Duper	Read Replies (1) \| Respond to of 61433

Top Stories: Small Telecom Firms Find Themselves in the Financing Business By Kevin Petrie Staff Reporter 11/25/98 2:25 PM ET Small telecommunications-equipment makers have a new strategy for winning business: bankrolling their customers. Some larger suppliers, such as Northern Telecom (NT:NYSE) and Lucent (LU:NYSE), which have billions of dollars in revenue, have been financing customers for years. Now it is the smaller equipment makers that are entering the game. In the past year Advanced Fibre Communications (AFCI:Nasdaq), PairGain (PAIR:Nasdaq) and AceComm (ACEC:Nasdaq) have seen their stock prices erode as international turmoil, price competition and slowing spending by large telephone carriers took their toll. Managers at the companies emphasize they have to offer financing terms to customers in order to compete. These three companies build pipes and management tools for telecommunications networks. To increase revenue, Advanced Fibre and others are courting young carriers called "competitive local exchange carriers," or CLECs, in addition to their more established clientele. The CLECs have to spend big bucks to construct networks, but they find themselves short of cash because the private equity and debt markets dried up earlier this fall. So this quarter Advanced Fibre, PairGain and AceComm started arranging their first financing plans for CLEC customers. This fall Advanced Fibre, which provides network boxes for connecting subscribers, huddled with BankBoston to devise ways of lending money to CLECs, according to Peter Donahower, treasurer of Advanced Fibre. The company's revenues had declined sharply in part because of loss of business in China. Wall Street took a dim view and sent the company's market price down 77% since early summer. Now Donahower and his colleagues must review the credit-worthiness of their customers. Donahower says execs from both Advanced Fibre and BancBoston will study customers' books before approving any finance plans. "I think it's good news for Advanced Fibre," he says, as it will allow his sales team to compete on the merits of their product. Donahower fears his team might lose business without such finance packages. Others are less sanguine. "It probably increases the risk profile," says Mort Cohen, chairman of Clarion Partners, who recently covered a short position in AFC shares. "The question of how dramatically depends on the balance sheet" of the borrower. "Anytime you take less than 100% cash on delivery, there is risk," says Charles McBrayer, PairGain's CFO. Early next year, PairGain likely will launch deferred-payment or other similar financing plans. PairGain will probably have a bank or another outside party shoulder some of the liability, but it hasn't hammered out many details yet, McBrayer says. Thanks to tightening competition, winning new business from CLECs has assumed greater importance for PairGain. Falling prices have hurt the company's bottom line -- PairGain's earnings have flattened in recent quarters. No wonder then that the stock has lost half its value since early spring. Similarly, AceComm is arranging its first lease options for customers, including CLECs, this fall. Interim CFO James Eckler says a "third party," to be determined shortly, will review the borrower's credit and receive the bill. "It's more of a cash-management tool," which has been used by large players such as Northern Telecom. AceComm in particular has little room to take chances. Its market capitalization has drained from $160 million a year ago to $28 million today. Last quarter it sold $6.7 million in products and services, down from $8.7 million one year earlier. Early this month the company secured its own $4 million credit line with Silicon Valley Bank. One money manager invested in AceComm, who asked not to be named, believes the company is ripe for a turnaround, given its strong product and healthy customer demand. But he says financing small CLECs is chancy. Ascend (ASND:Nasdaq) sent a shiver down Wall Street by conservatively writing off loans of $8.7 million to five private CLECS last quarter. Ascend says it had to lend them the working capital in order to match similar offers from Cisco (CSCO:Nasdaq), Lucent and Nortel. CLECs are "a force to be reckoned with," says PairGain's McBraye. "We would be missing part of the market if we just tried to stick with the [Baby Bells]." However, it remains unclear how much young CLECs will drive the market. Analysts Conrad Leifur and Frank McEvoy of Piper Jaffray predicted recently that the 12 largest CLECs will increase capital spending 20% next year. They constitute roughly 70% of total spending. Small, private ones might spend similarly, but they are "hard to track," Leifur says. And young CLECs are fighting for survival as they lay fiber in small and medium-sized cities, bumping into one another. Mike Weingarten, consultant with Monitor Company, explains the outlook in biological terms. "No two species can occupy the exact same niche in the ecosystem and survive long term. Eventually one wins." Now PairGain, Advanced Fibre and AceComm have to make sure they pick the winners.