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Ascend Communication is a very performant communication ISDN Equipment maker and one of the best NASDAQ performers for the last Two years. Ascend is a now a $ 8 billion Market Cap company. It will have about $550 M in Revenue for 1996, and 120-130 Millions of Income. Its High Market Cap and High PE ratio was justified by the company's past growth and by the hype the market has for this performer. Are so High Price/Sales ratio and PE ratio justified for 1997 ? Are so High Price/Sales ratio and PE ratio justified for 1997 ? Before answering let's make some comparisons : $8 billion is : - 14 times their 1996 Revenues - More than CISCO's 1996 revenues (about $6 billion) - About twice more than BAY networks Market Cap (Market Cap 4 billion Revenue 2,4 billion, Income 310 Millions) - More than US robotics Market Cap (Market Cap 7 billion. Revenue > $2 billion, Income 210 millions) - More than half 3COM market Cap. - More than Cabletron Market Cap I think that such an overvaluation is no more justified, for the following reasons : 1) Revenue and Income was made essentially with MAX's range a of products, high margins (Digital+Analog) IP Remote Access Switches that fit well for Internet Providers. Until 1996 3rd Quarter ASCEND was almost the only company to have such an offer. Abstract from ASCEND 3rd Quarter 10Q (issued November 1996) sec.gov "..ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) For the third quarter ended September 30, 1996, MAX products accounted for approximately 83% of net sales as compared to approximately 66% of net sales in the third quarter of 1995. For the nine months ended September 30, 1996, MAX products accounted for approximately 81% of net sales as compared to approximately 58% of net sales in the first nine months of 1995. Max Products revenues represents more than 80 % of total revenue. On these products, as from now ASND was the only one to offer such range of product, they could sell with extremely high margins. That explains the 25 % margin. ../" "..ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company believes competition in the Internet industry will increase significantly in the future and could adversely affect the Company's business, results of operations and financial condition .." .... Why did ASCEND's Management wrote that ? Because during 1996, Key telecommunication equipment makers (CISCO, BAY, 3COM, USR, Cabletron) and Challengers (SHIVA, CASCADE, GANDALF ) developped similar analog+digital Remote Access Servers Some of them are already competing with ASCEND in this segment, and winning market shares. Let's have a look at 1997 Players : ASCEND's MAX best Competitor : SHIVA's Lan Rover Access Switch SHIVA (NASD:SHVA). Market Cap : $650 Millions 1996 Revenue : about $180 Million. SHIVA is a leading company in the field of multi-protocol analog remote access servers : Its Lanrover product range won a lot of awards during 1995 and 1996. In 1995 : SHIVA decided to enter into the ISDN Market and acquired the European Company SPIDER systems, which was a pioneer of ISDN routers. During a year, SHIVA worked on the integration of SPIDER's Technology into its Lanrover Family. In june 1996, SHIVA launched the Lanrover Access Switch : A Digital+Analog RAS. This scalable product is a strong competitor of ASCEND's MAX. This product seems to have a good acceptance from Big corporations, Carriers, and Internet Providers SHIVA also sells it as an OEM product to IBM and Northern Telecom. In October 1996, Datacommunication Magazine tested 7 remote access servers from : Shiva, Ascend , Bay Networks, Northern Telecom, 3COM and US Robotics. SHIVA's Lan Rover Access Switch won the Datacomm Magazine Tester's choice. SHIVA had a disapointing Q4 1996, partly because of a consequent delayed order from IBM. The Market reacted and the stock price declined more than 40 % in a single day. At a $20 current price, (Market Cap $650 Million) SHIVA is 12 times cheaper than ASCEND and has a similar technology. Lan Rover Access Switch products are gaining Market share against ASCEND's MAX in the ISP Market. For more information Shiva's Web site : shiva.com Shiva Access Switch Product Description : shiva.com Shiva ISP's success at : shiva.com shiva.com An interesting Challenger : GANDALF Gandalf is a Canadian Company. Market Cap : $150 Million. Bad Revenues in 1996 (<100 $M) and Loss for 1996. Although it has some financial weakness, GANDALF is a company with a strong ISDN technology . During 1996 this company has improved its product range and launched two good products for the ISP market. XPressStack Internet Access Server Xpress Duo Both products Compete with ASCEND MAX product, allowing simultaneous Modem and Digital ISDN communications. GANDALF recently won some bids against ASCEND's MAX. GANDALF has also a SOHO ISDN router that competes well with Shiva's Access port, ASCEND's Pipeline, and other comparable products from other Vendors. On January 7th 1996 GANDALF has been named Editor's Choice by PC Magazine for its XpressConnect 5250i multiprotocol router. The XpressConnectr 5250i demonstrated superior performance in a lab test of ISDN routers, beating all competitors, including 3Com, Ascend, Cisco, Shiva and Bay Networks. For more information : GANDALF home page : gandalf.ca GANDALF Press Releases : gandalf.ca or Gandalf Forum on Silicon Investor. Cascade's AX Remote Access Servers : MAX TNT's Competition. With its powerful AX remote Access Products, Cascade (NASD:CSCC) could also do quite well in 1997. more information : casc.com In last Edition of Data Communications December 1996, page 56 : "With the introduction this year of Carrier Class access servers from Ascend Communications Inc . (alameda, Calif.) and Cascade Communication Corp. (Westford, Mass.) Net Managers will be able to out source their remote access needs to large ISPs, ridding themselves of the headaches brought on by a burgeoning population of dialup users." US Robotics ' Total Control Access Server This ISDN+ Modem Remote Access Server has also been tested in Datacom's Magazine. It performed well. The product recently received an award from LAN Times. News release : stocksmart.com:8810/ss-news/CX327444.html Product datasheet usr.com Cisco's New Universal Access Server : AS5200 A New RAS product, that integrates Microcom Modem Technology, and will soon integrate the MICA Digital Modem Technology that CISCO acquired from Telebit in June 1996. When CISCO has the good product, there is no doubt that it is able to sell it. AS5200 datasheet : cisco.com 3COM's Remote Access Server : Access Builder 5000 3COM Access Builder 5000 beta version has been tested in October 1996, by Datacommunication. and performed quite well. When it integrates ISDN PRI Access (1Q 97) , This product will be a serious competitor for ASCEND MAX's. Accessbuider 5000 datasheet : 3com.com BAY Networks ' Remote Access Server : Remote Annex 6300 A product coming from Xylogics Corporation, a UK Company acquired by Bay in 1995 It now integrates the Penril Datacom Digital Modem technology (Company acquired in 2Q 1996 by BayNetworks). xylogics.com This product has been tested by Datacommunication Magazine and had good performances, although some features were missing comparing with Ascend's or Shiva's product. Bay Internet Market division is managed by Bruce Sachs, former President of Xylogics. This man knows the ISDN Market quite well. BAY could perform well in 1997. Cabletron 's Cyberswitch Family. Cabletron decided to enter the remote Access Market in 1996. It developped the Cyberswitch products that have interesting features. For more information . cabletron.com cabletron.com COMPAQ could also be a competitive player in this battle. Although nothing has been revealed, I assume that COMPAQ is preparing something to enter in the ISP Market. I think that it is preparing a ISDN+digital Modem+Firewall PC based Remote Access Server.. During 1996, COMPAQ revealed that it wanted to enter in the Networking business. Recently, it lauched a WAN router that included CISCO's IOS software technology. In Q2 1996, COMPAQ acquired about 5% of Public Company RAPTOR, specialised in Firewall software, IN Q2 1996, COMPAQ Signed an OEM Agreement with ITK, a German private ISDN Company itk.de. I assume that COMPAQ now thinks about a RAS product that would integrate RAPTOR's software, and ITK's ISDN+digital Modem+GSM suprimo technology itk.de itk.de Of course this last is only hypothesis, but if it came to be true, it would shake seriously the ISP Market. 2- With this competition coming , even if ASCEND's products still have some technical advantages, Margins will probably fall Abstract from ASCEND 10Q Issued November 1996. [From EDGARD's DATABASE] "The Company expects that its gross margins could be adversely affected in future periods by price adjustments as a result of increased competition. In addition, the Company also expects that its gross margins could be adversely affected in future periods by increased sales of its Pipeline products as a percentage of net sales. These products have lower gross margins than the Company's other products 3- In 1996, ASCEND has had low R&D expenditures : During the first nine month of the year ASCEND spent only 8 % of its revenue in Research and Development. Companies like CISCO, USR, BAY, 3COM all spend more than 10% in Research and Development, while beeing much bigger Keeping this relatively low R&D, ASCEND might not be able to keep its technological leadership. For 1997, I guess that : A- As competition increase on (Digital+Analog) Remote Access Server, Margens will fall on MAX products. B- The global Market increasing demand will probably not be enough for ASCEND to maintain the same Income/sales extremely high ratio. According to Data Communications Magazine, Issued December 96, page 56 about the Worldwide Remote Access Servers Market : "The Remote Access hardware Market, which comprises remote access servers and concentrators, communication servers, and terminal servers ... was 2.15 billion in 1996 and is expected to hit 4,3 billion next year" With about $400 million of MAX sales, we can consider that ASCEND has about a 20 % of this Market in 1996. Let's assume that ASCEND will keep its Market Share in 1996. In this case, revenue from this range of product won't exceed $ 800 millions for ASCEND, with lower margins, because of increased competition. C- Ascend Other Range of products will probably not compensate the MAX lower margins. - Pipeline : SOHO remote access products are facing a strong competition (from CISCO, 3COM, BAY, GANDALF, SHIVA, ACC, MOTOROLA + Many German Companies ...) and are low margins products. - IP Switches GRF 400 could take some quarters to generate high profits. Even if ASCEND is able to market its IP Switches, It would probably not live again the same extraordinary success as it has with its MAX. In this area, the leading company is IPSILON, a privately held Company. 3COM, Ericsson, Digital, HP, IBM, General Datacom, RADCOM are finishing the development of IP Switching Technology. In 1998 : The Situation could even be more difficult 1998 will probably see new Emerging High speed WAN technologies such as ADSL and Cable Modem, more take off. These technologies allow rates that are more than 100 ten times Faster than ISDN. It can be very useful for High Speed Internet Access.. ASND is not a leader neither in ADSL nor in Cable Modem technologies. The natural conclusion is : ASND PRICE SHOULD FALL IN 1997 Who can guess when it will happen and how much the stock will decrease ? All I can say is that when the Market realises that a stock has an unjustified overvaluation, it reacts. I Would not be surprised to see good results for 1996 4th quarter. But Gross Margins and Income/Sales ratio will probably start to decline. 1997 quarters results will probably show : 1) Lower Gross Margins 2) A 1997 vs 1996 Sales growth that won't exceed 100 % 3) A Income/Sales Ratio going between 12 and 15 %, instead of 25 %. Then the Market will bring the stock price to where it has to be. Of course, ASCEND has good products, the market knowledge, the installed base customers ... and could compete quite well. But almost all its competitors listed above are not too bad in Technology, Marketing and Sales. And they now have products to compete with ASCEND's MAX . I Hope the information above will be helpful for the careful investors. Let's talk about this, and wait for Next Quarters results. | ||||||||||||||
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