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To: SteveG who wrote (1766)	4/15/1999 3:08:00 AM
From: SteveG	Respond to of 1998

PAIR: REPORTS 1Q 1999 RESULTS--BUY Bankers Trust Research/BT Alex. Brown Research Christopher Crespi,Alexander Williamson April 14, 1999 --------------------------------------------------------------------------- ---- PAIRGAIN TECHNOLOGIES, INC. [PAIR] "BUY" Reports 1Q 1999 Results --------------------------------------------------------------------------- ---- Date: 04/13/1999 EPS 1998A 1999E 2000E Price: 12.5 1Q 0.16 0.06A NE 52-Wk Range: 24 - 6 2Q 0.16 0.07 NE Ann Dividend: 0.0 3Q 0.16 0.10 NE Ann Div Yld: 0.00% 4Q 0.05* 0.12 NE Mkt Cap (mm): 931 FY(Dec.) 0.53 0.34 0.48 3-Yr Growth: 32% FY P/EPS 23.6X 36.8X 26.X CY EPS 0.53 0.34 0.48 Est. Changed Yes CY P/EPS 23.6X 36.8X 26.X --------------------------------------------------------------------------- ---- * Includes charges HIGHLIGHTS: --Located in Tustin, California, PairGain is a market leader in the design, manufacturing and marketing of communications systems based on high-speed digital subscriber line technology known as xDSL (digital subscriber line). --PairGain reported first quarter 1999 revenue of $60.9 million and fully diluted EPS of $0.06. Our estimates were revenue of $59.0 million with EPS of $0.06. The First Call consensus EPS estimate was $0.07. If PairGain had used our tax rate of 36.5% instead of 34% the Company would have reported EPS of $0.05. --Interest in the xDSL space appears to be accelerating as a result of increased carrier emphasis on bandwidth access technologies, which has put the xDSL equipment vendors in play. However, we believe that the fundamentals will not show improvement until the second half of calendar year 1999. --We maintain our "buy" investment rating on the stock because we continue to believe that PairGain is an attractive acquisition candidate due to its strong customer relationships and technology. --We are slightly lowering our 1999 quarterly estimates and are introducing year 2000 estimates of $316 million in revenues and $0.48 per share. DETAILS: PairGain reported first quarter 1999 revenue of $60.9 million and fully diluted EPS of $0.06. Our estimates were revenue of $59.0 million with EPS of $0.06. The First Call consensus estimate was $0.07 per share. The reported tax rate for the quarter was 34%. Had the Company used our expected tax rate of 36.5%, PairGain would have reported EPS of $0.05. The following table compares the reported quarter with our estimates and the year ago quarter. Variance refers to the difference between the reported quarter and our estimates. ($Mil, except per share data) 1Q99 BTAB Est. 1Q98 Variance Revenue $60.9 $59.0 $72.6 $1.9 Gross Profit $25.5 $26.1 $36.9 ($0.6) Gross Margin 41.9% 44.3% 50.8% (2.4%) Operating Profit $3.9 $5.3 $17.1 ($1.4) Operating Margin 6.4% 9.0% 23.5% (2.6%) Net Income $4.2 $4.8 $12.2 ($0.6) Net Margin 6.9% 8.1% 16.7% (1.2%) EPS $0.06 $0.06 $0.16 $0.00 Shares Outstanding (MM) 74.5 75.1 75.2 (0.6) Source: Company data and BT Alex. Brown Incorporated. Gross margins decreased to 41.9% from 42.0% in 4Q 1998 and from 50.8% in the year ago quarter. Gross margin declined 240 basis points from our estimate of 44.1%. The decline continues to be the result of price erosion in the Company's T1/E1 access business. Management expects gross margin to trend in the low 40% range for 2Q and 3Q 1999, eventually increasing to the mid 40s by 4Q 1999 as the Company's higher margin Avidia product begins shipping in volume quantities. International sales accounted for 10% of total revenue in the quarter compared to 13% in 4Q 1998. Sales to Europe were strong whereas sales to Latin America were weak. The Company is currently looking for a new VP of International sales and expects to hire someone in the next few weeks. Cash decreased by approximately $6 million sequentially to $228 million compared to $234 million in 4Q 1998. Cash declined as a result of the repurchase of 200,000 shares of the Company's stock during the quarter as well as a $5 million minority investment in ANDA Networks, a privately-held manufacturer of next generation access technologies. Since October 1998, PairGain has repurchased a total of 1.2 million shares. DSOs increased over the quarter to 38.1 from 30.0. Inventory turns increased to 4.3 from 3.9. Products HiGain The Company's HiGain HDSL products accounted for 54% of total revenues, down from 58% in 4Q 1998 and down from 68% in 1Q 1998. The decline is primarily the result of stiff price competition in the T1/E1 access market. Last quarter, PairGain lost primary supplier status for HDSL at Bell Atlantic to Adtran. Management expects a further decline in HDSL sales to Bell Atlantic but noted that the Company enjoys healthy sales to Bell Atlantic for its PG-Flex and PG-Plus product lines. Unit shipments of T1/E1 products were up 8% over the year ago quarter but revenues declined 34% reflecting the impact of price competition. The Company's higher margin HiGain98 product has met approval from most customers with sales expected in the current quarter. Management also noted that it expects to ship its HDSL2 product line in the current quarter, with sales ramping in 3Q 1999. Management noted that its Wideband 3190 product has received a favorable endorsement from Nextlink and Level 3 with deployment underway. PG-2/PG-Plus/PG-Flex All small subscriber line products (PG-2/PG-Plus/PG-Flex) represented approximately 31% of total sales, up from 27% of total sales in 4Q 1998. This reflects an increase of 75% year over year and a 15% increase sequentially. Management expects these products to grow to a $100 million business in 1999. xDSL Megabit Access products include the Company's modem and DSLAM product lines as well as the Company's new Avidia platform. Megabit Access products and campus products accounted for approximately 8% of total revenue in the quarter. Avidia trials were successful in the quarter and the product is currently in the certification process. There were no Avidia trials among the RBOCs and the product is currently being targeted to the independent telcos, CLECs and IXCs. MCI WorldCom and Sprint are evaluating the product. Avidia sales are expected to ramp up in the third and fourth quarters of 1999. Rockwell Royalty revenue from the Company's relationship with Rockwell increased to approximately $4 million from $3 million in the fourth quarter of 1998. Management expects this to decline to roughly $1 million per quarter for the next several quarters. OUTLOOK Renewed interest and speculation regarding xDSL has contributed to the recent increase in PairGain's shares, in our view. The xDSL space has recently been in play and the equipment providers have benefited more from positive sentiment than from improving fundamentals. We believe that there is increasing pressure on the RBOCs to deploy xDSL service from both the AT&T/TCI front as well as from the data CLECs (Covad and Frontier). However, we believe the RBOCs are unlikely to make a serious commitment until the second half of calendar year 1999 and into year 2000. As a result, we expect PairGain to show revenue and earnings acceleration towards the second half of 1999 as reflected in our model. We continue to believe that PairGain is an ideal acquisition candidate based on its solid technology platform, strong customer relationships and profitable financial position. Primarily for this reason, we are maintaining our "buy" investment rating on the stock. With respect to our model, we are slightly revising quarterly estimates for 1999, and are introducing year 2000 estimates of $316 million in revenues and $0.48 per share. Our revised estimates and quarterly 1999 estimates follow: Previous Estimates 2Q99 3Q99 4Q99 FY99 Revenue (MM) $64.2 $70.8 $76.8 $270.8 EPS $0.08 $0.11 $0.12 $0.38 Revised Estimates 2Q99 3Q99 4Q99 FY99 Revenue (MM) $62.5 $68.0 $73.4 $264.8 EPS $0.07 $0.10 $0.12 $0.34 Introducing year 2000 estimates: Year 2000 FY00 Revenue (MM) $316.0 EPS $0.48

To: SteveG who wrote (1766)	4/15/1999 3:14:00 AM
From: SteveG	Read Replies (1) \| Respond to of 1998

NBMO - PAIR: March revenues in line; EPS below estimates. Positive ADSL story remains. - March revenues in line; EPS below estimates. - Small Subscriber business remains strong. - More important, the outlook remains solid for the company's Avidia platform, the primary driver of upside for the stock, with (1) product currently in several trials; (2) decisions expected to be made in 2H99; and (3) significant revenues expected this year. - Lowering 1999 estimates; No change to 2000 estimate. Investment Opinion. Despite yesterday's lower-than-expected EPS results, the primary driver of upside for the stock (potential for Avidia success) remains unchanged. There is no change to our 2000 EPS estimate of $0.55, which we believe may prove conservative. More important, we believe that if Avidia proves successful, investors will begin to attribute significant value to this asset (note recent and upcoming offerings in the xDSL space), rather than penalize the company for its sunk investment. In this environment, we would continue to expect expansion in the company's valuation multiples and significant stock appreciation over the next 12 months. - March revenues in line; EPS below estimates. Yesterday, after the close of trading, PairGain reported March quarter revenues that were in line with expectations at $60.9 million (slightly above our estimate of $60.7 million, and essentially flat sequenially). However, gross margin for the quarter that was lower than expected (41.9% vs. our estimate of 44% and slightly below last quarter's 42.0%). This was primarily the result of continued stronger-than-expected pricing pressure in the company's HiGain (HDSL) market, in which ASPs declined 8% sequentially. In addition, operating expenses were above expectations, accounting for 35.5% of revenues vs. 33.3% last quarter. Consequently, the company's EPS of $0.06 came in below both our estimate of $0.08 and consensus estimate of $0.07. - However, Small Subscriber business remains strong. PairGain continues to see strength in its Small Subscriber line of business (comprised of the PG Flex/Plus line of products), with revenues from these products up over 15% sequentially to $18.9 million, or 31% of total revenues. - More important, the outlook for the company's Avidia platform, the primary driver of upside for the stock, remains solid. Despite the current difficulties in the company's core historical market (HDSL), we continue to believe that the outlook remains very positive for the company's Avidia ADSL DSLAM platform, which we expect will be a primary driver of upside in both earnings and valuation multiples over the coming year. - Product currently in several trials. The company noted that its Avidia platform is currently in trials with several dozen customers, where the process is in the RFP/RFQ stage. While the company expects that the RBOCs are perhaps ready to enter another cycle of evaluations in the DSLAM business, we expect that the company will continue to focus its efforts on the IXCs and CLECs. - Decisions expected to be made in 2H99. The company noted that some smaller customers may be able to announce vendor selections in the next quarter, and it remains a possibility that PairGain will be able to announce some successes prior to upcoming conferences. However, PairGain noted that announcements by larger vendors (including MCI and Sprint) will likely take longer. - Revenues expected this year. PairGain reiterated that they expect to see revenues from Avidia sales in 1999, noting that the company's targets remain around $20 million in 1999 and more than twice this amount in 2000. - Lowering 1999 estimates; No change to 2000 estimates. Based on company guidance, we have elected to lower our estimates for the June quarter to $0.06 (flat sequentially) from the prior estimate of $0.10. There is no change to the EPS estimates for the September or December quarters; our new 1999 EPS estimate is therefore $0.35, which is in line with estimates on the Street. In addition, there is no change to our 2000 EPS estimate of $0.55. Investment Opinion. Despite yesterday's lower-than-expected EPS results, the primary driver of upside for the stock (potential for Avidia success) remains unchanged. The product remains in trials with dozens of potential customers, and interest in Avidia remains strong. In addition, PairGain remains confident that Avidia's strong feature set (multiple uplinks, flexibility, etc.) should appeal to a broad array of customers, and continues to anticipate significant ADSL revenue growth beginning in 2H99 and extending into 2000. We continue to believe that significant opportunity exists for upside appreciation in the stock. There is no change to our 2000 EPS estimate of $0.55, which we believe may prove conservative, should either (1) the Avidia surpass current expectations, or (2) unit growth in PairGain's HDSL business picks up, as pricing pressures should begin to moderate going forward. More important, we believe that if Avidia proves successful, investors will begin to attribute significant value to this asset, rather than penalize the company for its sunk investment. Along these lines, is worth noting the recent appreciation in several ADSL companies shares as well as additional expected offerings in this space. All of these are expected to continue to focus investor attention on the ADSL space. In this environment, we would continue to expect expansion in the company's valuation multiples and significant stock appreciation.