After a tumultous 1997, during which it was beset by technical problems and the difficult integration of a company it acquired, 1998 is looking better for Ascend Communications Inc.

Following its announcement last month that it would beat analysts' earnings estimates by one cent on the strength of strong North American sales, the networking Products manufacturer has regained its image as a market favorite.

"A lot has happened with this stock in the past year," said Aydin Tuncer, Internet stock analyst for Standard & Poor's Equities. I had a 'Hold' on them last year, and the stock has done tremendously since then."

Most of Ascend's difficulties stem from the summer of 1997, as technical issues associated with the transition to the 56-Kbps standard forced delays in the release of its MAX TNT remote-access product and slowed sales. That, coupled with charges associated with Ascend's $3.7 billion acquisition of Cascade Communications, a leader in the development of frame relay, asynchronous transfer mode (ATM), and IP switching products, sent the stock into a steady decline from a January 1997 high in the $70s to the $20 range by the end of the year. The stock closed at $44.81 on May 13.

"They ended up missing the September quarter badly, and the stock really took a beating," Tuncer said. "But they had a decent December quarter as the Cascade business began to take off."

For 1997, Ascend did $1.1 billion in sales, up 31 percent from $890.3 million in 1996. And in the first quarter of 1998, sales rebounded to $305 million, while expected pricing pressures the company had hinted at earlier did not materialize.

"They were able to get beyond those problems really fast," Tuncer said. "The stock has moved ahead and has continued to be positive. Cascade has merged nicely into the company. Things look pretty positive at this point."

But there are still some questions about Ascend's future looming. These include how it intends to compete with new entries from Cisco Systems, 3Com, and Bay Networks in the remote-access market, and from Newbridge and Lucent Technologies in the frame relay and ATM markets, Tuncer said.

Ascend is also widely rumored to be ripe for a takeover. Many of its competitors have formed cross-marketing and research alliances with each other, but Ascend seems content to go it alone, Tuncer said.

Bernie Schneider, Ascend's vice president and treasurer, said companies tend to enter into such agreements to fill gaps in their product line, something that he said does not apply to Ascend.

"We have not found ourselves in the position of being behind in the market," Schneider said.

Addressing the increased competition in its target markets, Schneider said Ascend's products still have a good advantage over those from Cisco and others. "We are the only ones shipping a DS-3 interface that is critical to many of our customers. Companies like Cisco and 3Com may have more brand recogition, but to date we've been able to maintain an advantage in products," Schneider said.

Cisco and 3Com are both far larger than Ascend. Cisco had revenue of $6.4 billion for its 1997 fiscal year, which ended July 26, and 3Com reported 1997 revenue of $5.6 billion.

Schneider characterized the takeover talk as speculation. "That rumor has been around for a long time," he said. Ascend is aggressively looking for another acquisition opportunity, he said.

In April, Ascend acquired Whitetree Inc., a maker of high-speed LAN switches, for $71 million in stock.

And despite lingering questions as to how well Ascend has integrated Cascade, Schneider said the troubles associated with the deal are over.

"Many companies, when they make a large acquisition, are still feeling the digestion pains 12 to 24 months afterward. We closed that deal late last summer, and most of our customers say they feel that it's fully behind us. Every acquisition brings bumps in the road. The key is to get it done quickly," he said.

(in millions)
REVENUES, EARNINGS
Q1 1997 $202^*, $35^*
Q2 1997 $311.6^*, $62.4^*
Q3 1997 $270.3, $40
Q4 1997 $292.5, $47.5
Q1 1998 $305, $52.4
^* DOES NOT INCLUDE ADJUSTMENT ACCOUNTING FOR ACQUISITIONS.