News World: PairGain Warns of Q3 Shortfall

PairGain Warns of Q3 Shortfall

By Brian Graney (TMF Panic)
September 13, 1999

Digital subscriber line (DSL) carrier equipment supplier PairGain Technologies (Nasdaq: PAIR) lost some ground today after warning that its third quarter results will fall below the Street's expectations. The company's press release on the development was short, sweet, and effectively useless. Fortunately, though, shareholders can gain some insight into what is going on at the firm by listening to a replay of management's conference call this morning with analysts. The call is accessible at (800) 633-8284 and the reservation number is 13141178.

On the call, PairGain CFO Charles McBrayer roughly quantified the revenue shortfall as 15% to 20% below what analysts had been expecting. Most of the blame fell to lower-than-expected business pick-up for the company's T1 access and subscriber carrier products lines during the period. Specifically, McBrayer said sales of high bit rate digital subscriber line (HDSL) products are off "by a couple of million dollars." As a result, gross margin will slide "at least a couple of percentage points" from the 41.4% seen in the second quarter, which itself was down much more than just a couple of percentage points from last year's 50.8%

But instead of dwelling on the recent past and pummeling the firm's shares today, investors are looking ahead. The company is on the verge of launching its much-awaited Avidia multi-service DSL platform, which goes into full production this month. "I do believe [the Avidia] platform is the key to PairGain moving forward in terms of staking out a very strong value-added broadband access position," CEO Michael Pascoe told The Motley Fool in a StockTalk interview earlier this year. The stress on value-added products is crucial, since the recent margin erosion is largely due to serious price competition in the company's core DSL access products.

If all goes according to plan, the Avidia product (which is referred to in telecom-speak as a digital subscriber line access multiplexer or DSLAM) will help shore up PairGain's margins while also acting as a magnet for new incumbent carrier and competitive local exchange carrier (CLEC) clients. Pascoe indicated on the conference call that approximately a dozen carriers have expressed an interest in Avidia and customer wins will be announced once deals are approved.

PairGain would not confirm whether one of those potential customers is MCI WorldCom (Nasdaq: WCOM), which is rumored to be close to selecting the company as its DSLAM-mer of choice. A Dain Rauscher Wessels analyst called the MCI WorldCom win "imminent" in a report late last week, sending PairGain's stock up 23% on Friday -- its biggest one day percentage gain since last November. Grabbing the MCI WorldCom business would be a huge coup for PairGain, which will face some tough DSLAM competition in the form of telecommunications equipment giant Lucent Technologies (NYSE: LU).

Just last week, Lucent launched its own carrier-class DSL platform called Stinger, which will compete head-to-head with Avidia. "The timing... is upon us now," Pascoe said on the call in reference to the Avidia launch. Actually, the timing has been here for a while, judging from the rapidly increasing demand for advanced DSL products. At any rate, Avidia is lined up to either make or break the company. By all accounts, how much market share Avidia can manage to grab without being "Stung" will determine PairGain's share price direction in the near-future.

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