The WAN Connection

PairGrain Technologies, Inc.

Pairgain Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAIR)") else Response.Write("(Nasdaq: PAIR)") end if %> jumped into the lead with xDSL products early, selling high bit rate DSL modem pairs to competitive local access providers, companies needing low-cost LAN extensions, and regional Bell Operating Companies (RBOCs) providing fractional T-1 service without the cost of frame relay access devices. Pairgain has more than enough time to develop or license ADSL solutions, which offer downstream (to the customer) bandwidth equal to multiple T-1 lines. It has been knocked for being behind in this competition, but with its xDSL expertise and telecom relationships, it stands a good change of being a leader in next-generation broadband consumer and enterprise access products.

The Financials

The second quarter saw sales growth slow sequentially at Pairgain. Nonetheless, revenue growth of 40% was still impressive. Gross margin dropped somewhat, leading to worries that the company will be fighting price erosion from competitive pressures coming from companies like ADTRAN, but that discounts the facts of life in the PC, disk drive, semiconductor, and networking industries, where year-over-year price declines are a normal phenomenon. Operating margin expanded, leading to an even larger increase in EPS of 60%. At 47 times trailing EPS and 35 times forward estimates, Pairgain is priced slightly above its growth rate but in line with a company that generated a near-100% return on invested capital over the last twelve months.

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