FOOL CONFERENCE CALL SYNOPSIS*
By Debra Tidwell (MF Debit)

Ascend Communications, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, CA 94502
(800) ASCEND4
http://www.ascend.com

UNION CITY, Ca., January 22, 1997/FOOLWIRE/ --- Ascend Communications released their fourth quarter and year end 1996 results after the market close last Thursday. The company had a great year and increased sales from $152 million last year to $549 million. Earnings per share went from $0.25 last year to $0.89. Their fourth quarter revenue went from $154 million last year to $177 million this year. Significant with regard to fourth quarter results, they chose not to take or recognize any revenue for their MAX TNT and GRF 400 products that started shipping in December. Also, they had a 30% price reduction on their Pipeline products.

ASCEND DID NOT RECOGNIZE TNT AND GRF REVENUES. The company explained that they have a very conservative revenue recognition policy and that unrecognized revenue does include more than just the TNT and GRF products. Not only do they not take revenue on initial products until they are very confident regarding customer acceptance, but they also won't take revenue on products shipped into the channel where there is a potential risk of return until those products have been sold by the channel. And, finally, they won't take revenue on initial customers until they've established a credit payment history with Ascend. If, in those isolated instances, Ascend has to provide any form of guarantee or other financial backing for customer credit that is extended by third parties, they would not take revenue. All of those cases are part of their deferrals, which they don't disclose. They will definitely recognize revenue on the TNT product in the first quarter. They are not yet sure with regard to the GRF product when they will be recognizing revenue.

AVERAGE SELLING PRICES (ASP). It is too early to lock on an ASP for the TNT because it can vary appreciably. When they first announced the product in September, they announced initial orders at that time that suggested an ASP of about $100,000. They think right now the ASP in the backlog is about $90,000, so no appreciable change yet, but they think it is still a little too early to use that as a solid benchmark.

IS TNT IMPACTING MAX PURCHASE DECISIONS. The company was asked if customers were delaying decisions on MAXs pending the availability of the TNT. They responded that they think it is having some factor, particularly given that the TNT was not available for volume shipments in the fourth quarter. Since the product has been released, many of the uncertainties with regard to product availability are clearing up. They were also asked about future growth for the MAX business. They said that, commencing in the second quarter and continuing for the balance of the year, that the GRF will pick up some amount of the total MAX business. Most certainly the MAX TNT units will pick up. The MAX TNT, to some degree, is going to replace MAXs where a customer historically might have deployed 2 or 3+ MAXs at a single site. In that case, it's sort of a swap-out -- TNT for MAX. In other areas, the TNT is a carrier class product which can be sold in the RBOCs and IXCs for value added services that the MAX previously was not qualified to offer. So, that is an incremental market opportunity for them. It's very difficult right now to look at the mix between those two opportunities for the TNT.

EXPANSION AT AMERICA ONLINE. The company was asked about AOL's announced expansion plans. They responded that they don't sell direct to AOL. They sell to BBN, an integrator that provides network ports to AOL. During the past few weeks, they have orders from AOL to BBN to expand their network. They don't know the magnitude of the expansion, but the orders are fairly good orders.

TNT DEAL WITH UUNET. TNT has been in production shipment and has been shipping fairly well. UUNet has endorsed the product and has started deploying it. The deal with UUNet involves 150 units to be deployed over the course of one year, and perhaps less time than that at this point. At this point they have over 700 units in backlog on shipments for the TNT product.

GRF RELEASE. Their GRF product has been received by customers fairly well. They have been shipping this product since December. PSINet has endorsed the product and they have given Ascend a multi-million dollar deal for it. On the GRF product at this point, as of last week they have over 150 units in shipment on backlog. As a whole, those two products are exceeding their expectation at this point and are doing fairly well. The market size for the GRF product is about $1.9 billion in 1999, for backbone routers and IP switching. The company was asked about rumors of a large GRF order from Microsoft for an internal network. They indicated that they won't comment on it at this point. They did indicate that several carriers are testing it at this time.

STONYBROOK ACQUISITION. During the last quarter they completed the acquisition of Stonybrook which had total network management capability that manages Ascend's and competitive products and devices in a network. So far it has been received fairly well and they are looking forward to rolling out their products with the Stonybrook technology in the Q2 timeframe. The product will manage their MAX TNT, GRF, and some areas of Ascend's Pipeline routers also. The advantage of this product is that it can manage third party equipment also. So, customers can install this network management system to control Ascend and other products. They will launch on UNIX and Windows.

56K MODEM STRATEGY. During last quarter they also announced their 56K modem strategy. They will be shipping 56K capable modems this quarter, hard-coded and software upgradeable within Q1, probably during January or early February. Rockwell is ready to go with that product. Late in this quarter they are going to release their software capable 56K modem. At this point, they do not plan a limited test release to ISPs. They will just ship to people who want them. At this point, not many ISPs are asking for 56K because they don't want to deploy it. Ascend has to do the tests with the FCC for the high bandwidth on the product. Even thought they believe they don't need to do that test because of the performance with the chipset from Rockwell (it is under the threshold allowed by the FCC), they are going to go ahead and do it. Ascend has gone on the record and said that even though they provide 56K capable modem, they don't endorse this technology because they have lots of technical problems and people will not be happy to see worse performance (due to line noise and other conditions that affect modem connection speed) when they expect 56K. There is lots of market hype behind this technology and Ascend feels they have to support it and give it to their customers and they will do that. But, Ascend will not tell people that, for any case, they are going to get a 56K rate. On the channelized T3 interface, Ascend's schedule is to release it by the end of this quarter.

MULTI-DSL. During the last quarter they also announced their multi-DSL strategy on their product and especially their IDSL product which was a new product that works on the existing local loop and gives 128 bidirection speed for connection to the Internet or remote areas. MFS has selected that product and that technology to deploy at least for the first quarter in California and then other areas. They have been talking to several other carriers who are very interested in this product.

OTHER GENERAL THINGS. Last quarter they made several other announcements. They had a major deal for deploying their product into their network and they established a new channel for their products such as NEC and Alcatel. They have been playing very well in Ascend's area and are using Ascend products for their customers and infrastructure. Ascend's anticipation is that their relationship with those companies is getting stronger as the year goes on. There was some question about the ISP market and how well Ascend is doing in the market since several of their competitors announced relationships with ISPs. Their ISP business is growing and in the last quarter they have added more than 300 new ISPs as customers. As a whole they are very pleased with what they have done throughout 1996 and especially in the fourth quarter. They brought out the TNT product and converted some of their customers from MAX to TNT and also the acceptance of the GRF.

FINANCIAL DETAILS. For the year, sales were $549.3 million, an increase of 260% compared to 1995. Net income was $113.1 million, an increase of 311% compared to 1995. Net income per share was $0.89, an increase of 256% compared to 1995. For the fourth quarter, sales were $177.5 million, an increase of 189% compared to the fourth quarter last year and an increase of 15% sequentially. Net income was $41.1 million, an increase of 205% compared to the fourth quarter of 1995 and an increase of 65% sequentially. Net income per share was $0.32, an increase of 191% compared to the fourth quarter of 1995 and an increase of 60% compared to the third quarter of this year. Net income for the third quarter this year was adversely affected by one-time charges they incurred in connection with their acquisitions of NetStar and Subspace Communications. These one-time charges did reduce their previously reported third quarter results by about $0.08 per share.

CURRENT STATUS ON THE SOFTWARE SIDE WITH THE MAX TNT. The company is very pleased with the way the MAX TNT is behaving and how the software is working. They are not aware of any major bugs or software glitches in the product. It has been shipping and has been very stable for customers at this point. There are other trials and tests going on. The reports they are getting from those tests are good.

COMPETITIVE LANDSCAPE FOR TNT AND GRF. For the TNT, at this point the only product they have heard that has the port density to compete with TNT is a product from Cascade. They haven't seen that product, though, in any of their channels or at any of their customer sites. So, in terms of competitveness, Ascend feels it is in a better position because they are deploying the TNT product and it is in full production at this time. With regard to GRF, it's pretty much the same. There is not an integrated IP switch available in the market to compete with them with a higher performance. They traditionally compete with the conventional routers such as Cisco's 7500 family. The GRF's performance is much higher than those products though.

FOURTH QUARTER BOOKINGS. Once again they had a positive book-to-bill ratio in the fourth quarter and, as a consequence, their backlog continues to grow. They are particularly pleased with customer acceptance of their newest products, the TNT and GRF and as of a day ago they had some 700 units of the TNT in the backlog and a little over 150 units of the GRF in the backlog.

SALES PERFORMANCE. They are very pleased with continuing growth momentum, particularly given that they have chosen not to recognize any revenues in their fourth quarter for their newest products, even though they did commence initial production shipments of the TNT in the fourth quarter.

SALES MIX IN THE FOURTH QUARTER. By channel, the reseller market accounted for 54% of their business in the fourth quarter, that's up 3 points from 51% in the third quarter. ISPs contributed 24% to the fourth quarter's business as compared to 27% in the third quarter. Carriers and OEM equipment providers contributed 21% in the fourth quarter, unchanged from the third quarter. And, they sold 1% of their business directly to end user customer, unchanged from the third quarter. To the extent that they did commence production shipments of the TNT product in the fourth quarter, some of their channel mix, product mix, and international mix ratios may be a bit skewed given that they chose not to take any revenue for those products, but they don't think it will have a significant impact on the results. There really are no significant changes in the channel mix and they don't believe there is anything in these numbers that would indicate a permanent change in the trend of the business. They continue to be very optimistic about continuing growth in all channels of their business.

MIX OF BUSINESS BY PRODUCT. Their MAX family of products continues to be, by far, the largest contributor to revenues. The MAX family of products was 84% of their business in the fourth quarter compared to 83% in the third quarter. The Pipeline family of products accounted for 10% of the business in the fourth quarter as compared to 12% in the third quarter. The Multiband product family accounted for 5% of the business in the fourth quarter as compared to 4% in the third quarter. And all other products and accessories accounted for 1% of their business in each of the last two quarters. A brief comment on the Pipeline trend -- in absolute dollar terms, Pipeline dollar sales were about unchanged and, given that they did introduce a 30% price reduction for their Pipeline family of products, unit volumes did increase during the quarter. They are not significantly concerned with that minor change in the product mix in the fourth quarter.

MIX OF BUSINESS GEOGRAPHICALLY. In the fourth quarter the international business unit accounted for 53% of their sales. That is up from 48% of the business in the third quarter. North America accounted for 47% of the business as compared to 52% of the business in the third quarter. The strength internationally is in all geographic sectors. Japan continues to be a very strong contributor to the business, accounting for 19% of revenues in the fourth quarter, compared to 20% in the third quarter. In Europe, the Middle East, and Africa there was substantial growth. Europe/Middle East/Africa accounted for 26% of business in the fourth quarter as compared to 15% in the third quarter. The increase quarter over quarter is primarily in Germany, Scandinavia, and Italy. The rest of the world markets which includes other parts of Asia, the Pacific region, Australia, New Zealand, and Latin America accounted for 8% of the business in the fourth quarter as compared to 13% of the business in the third quarter.

SALES PERFORMANCE. No single customer accounted for more than 10% of sales during the quarter.

GROSS MARGINS. Gross margins improved 0.5% in the fourth quarter to 65.6%. That improvement is attributable primarily to the increasing composition of the international business, coupled with the continuing strength of the MAX product family which is margin-wise the more profitable of their product families. Margins can differ depending on product, geography, and channel. The only guidance they are inclined to provide going forward with regard to gross margins is that they will be in the range of 64-66%. If anything, because of competitive pressures and how they plan internally, they tend to look on the more conservative front. The company was asked going forward if the TNT product would become a bigger part of the mix and if it is a higher gross margin product than the MAX. They responded that it will become a greater part of the mix, but that they don't know if it is correct to assume that it is a higher gross margin product than the MAX. The MAX is a pretty profitable product and is, far and away, the most profitable member of Ascend's product family today. They have very little experience with regard to the pricing environment they will be dealing with with the TNT. The company was asked if the GRF product was a higher gross margin product than the TNT and MAX products. They replied that it is not at this point, but they have cost reduction plans in place to increase the gross margin on the product.

OPERATING EXPENSES. Operating expenses were virtually unchanged quarter over quarter in the fourth quarter. Operating expenses expressed as a percentage of sales were 30.2% as compared to 29.4% in the third quarter. The modest increase is primarily in R&D and in the sales and marketing areas.

OPERATING INCOME. Excluding merger costs, the one-time merger costs sustained in the third quarter, operating income was 35.4% of sales in the fourth quarter compared to 35.7% of sales in the third quarter. Net income was $0.32 per share or 23.2% of sales in the fourth quarter as compared to net income in the third quarter, adjusted to exclude merger costs, of $0.28 per share or 23.3% of sales.

FINANCIAL POSITION OF THE COMPANY. They continue to maintain a very health financial position. Cash and investments grew $76 million in the quarter to reach $409 million as of the end of the year. The $76 million increase includes $33 million of cash generated from operations and $43 million of cash generated from employee exercises of stock options and the tax benefits accruing to the company in connection with the exercise of those options. Accounts receivable DSOs were 52 days at the end of the year as compared to 54 days at the end of the third quarter. They were pleased to see this happen given the fact that they international business mix increased. They are still in a position where they are able to sell their products internationally on the same commercial terms and conditions that they sell in the US. They still sell in dollar denominations and are fortunately not in a situation where they have to deal with foreign currency. They said, however, as they become a more significant player in these various markets, that will change. Looking forward, DSOs will probably creep up modestly to reflect the higher international contribution. Inventory turns at the end of December were 5 times as compared to 5.2 times at the end of the third quarter, which they consider to be exceptional performance given the buildup of inventories in anticipation of the increase in production unit shipments for TNT and GRF in the first half of 1997. There were no long-term borrowings.

PEOPLE. Headcount at the end of December was 721, an increase of 59 in the quarter. Of the 59 people added, a little over 40 were in the R&D area.

SUMMARY. Ascend is very pleased with the financial performance on all fronts in the quarter, particularly given that they chose not to take revenues on their newest product segments until they were confident with the degree of customer confidence in the product. Despite that, they were able to report very solid financial results.

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