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Ascend faces sales slowdown

Struggling with product delays and a slowdown in sales, Ascend Communications will chalk up its third-quarter results and try to leave its problems behind.

    Ascend Communications (ASND) today brought closure to a rough quarter faced with product delays and a slowdown in sales.

    The company reported $40.1 million, Ascend at a glance or 20 cents per share, compared to a net income of $45.2 million, or 23 cents per share, for the third quarter of 1996.

    Analysts' revised estimates expected 18 cents a share, according to First Call. The company warned during the quarter that earnings would fall about 33 percent below expectations, with profits of 18 cents to 20 cents per share. Prior to the warning, analysts had the company pegged at 31 cents a share.

    Shares of Ascend have fallen about 22 percent since the company's warning late last month that it would miss expectations. During trading today, the stock held steady to close even with yesterday's close of 33-1/8.

    Revenue was $270.4 million, up from revenue of $248.8 million recorded in the third quarter of 1996. The company previously announced that revenues for the third quarter also will fall short of expectations--hovering at a range of $260 million to $270 million. Historical financial results have been restated to reflect the pooling with Cascade Communications.

    "This has been a challenging quarter for us," Mory Ejabat, Ascend's president and CEO, said in a statement. "There were several factors which contributed to this shortfall, including delays in international deployment of our MAX TNT product, weakened demand in southern Europe and Japan, and delays in the receipt of orders during the quarter.''

    But challenges still lay along Ascend's path, said James Wade, an analyst at BT Alex. Brown, in a recent research report.

    Wade said that while the remote access server market continues to grow rapidly, pricing is becoming more competitive. And although Ascend has sufficient leverage to lower its prices and compete effectively, such aggressive pricing will continue to impact top-line growth.

    The company said its ATM business showed very strong growth during the quarter, and said new product announcements will enhance its competitive position in this rapidly growing market. Ascend continues to gain market acceptance of its GRF line of routers by Internet service providers and carriers, although the company does not expect the GRF to contribute substantially to revenues until the first half of 1998.

    So while this has been a difficult quarter, Ascend believes it is making progress in addressing internal issues, and believes it is poised to resume growth going forward, said Ejabat.

    The company's warning followed what analysts called an "unusual" filing with the Securities and Exchange Commission, in which the company gave an even earlier warning that its sales and net income for the month of July had failed to meet expectations.

    Ascend said the 31-day period ending July 31 generated a net income of about $2.9 million and sales of about $62.8 million, or about 18 percent of the expected revenues for the quarter. That was down from the 25 percent the company had expected for July.

    The announcement caused the stock to drop 10 percent.

    Wade said that, "an increasingly aggressive pricing environment, the threat of networking behemoth Cisco entering [Ascend's] core market, and the uncertainty surrounding geographic revenue growth" all contribute to the upcoming hurdles that face the company.

    And the competition is waiting in the wings if Ascend can?t get production back on track.

    "We believe that Ascend's most formidable opponent is 3Com (COMS)," Wade said. "This is another company that can leverage its, in our view, impressive manufacturing and distribution proficiencies. Cisco's (CSCO) recently announced Cisco AS5300 Series appears to be competing with Ascend for the midsized corporate entity; however, we do not believe that Ascend has encountered Cisco's product in more high-end situations,"

    Ascend today also named David Misunas vice president of strategic business development. He will focus on mergers and acquisitions and product-planning activities, as well as coordination of technical strategies and direction across product lines. Misunas will report to Ascend CEO Mory Ejabat and will replace Bernie Schneider, who becomes vice president and treasurer. Misunas joins the company from Northern Telecom's (Nortel) Micom communications division, where he was vice president of product-development.