NEWS ARTICLE: "Profit warning rocks Newbridge"
(Globe & Mail)
Stock plunges $14.80 after firm reveals 2nd-quarter forecast
Wednesday, November 5, 1997
By Lawrence Surtees
Telecommunications Reporter
Newbridge Networks Corp.'s share price plunged $14.80 to $67.20 yesterday after the company warned that its second-quarter revenue and
share profit will be dragged down because of problems associated with an acquisition last year.
The warning marks the third consecutive quarterly downturn for the Kanata, Ont.-based high-technology company. And, for the third time,
Newbridge is attributing the blame to issues arising from its $100-million (U.S.) acquisition of UB Networks from Tandem Computers Inc. in
December, 1996.
Newbridge shares fell 18 per cent on the Toronto Stock Exchange in heavy trading of more than 5.4 million shares. It was the most active issue
in any Canadian equity market.
The decline came after the communications network equipment maker disclosed late Monday that its share profit for the quarter ended Nov. 2
will be up to 15 per cent lower than its first-quarter results, when the company posted a share profit of 37 cents (Canadian).
Newbridge also expects its revenue to be flat for the quarter just ended. That means second-quarter sales will likely be unchanged from the first
quarter at $435-million, yet 38 per cent above sales of $316-million in the year-ago second quarter.
Newbridge released the warning late Monday night, well after North American stock markets had closed and deadlines for business
newspapers had passed, prompting the frantic trading yesterday when equity markets opened.
The consensus earnings estimate for the second quarter is 44 cents a share, according to a survey of 11 analysts by First Call Corp.
Newbridge's statement places its profit between 30 to 32 cents. Those results are slated to be released on Nov. 25.
Newbridge's forecast also suggests that the company is continuing to have problems breaking into the corporate network market.
A sharper-than-expected drop in sales of UB Networks products was blamed for Newbridge's results faltering in the first quarter ended Aug. 3.
And a $29.7-million loss in the fourth quarter ended April 30 was because of a onetime $97-million writeoff of research and development
expenses associated with the UB Networks deal.
Newbridge spokesman John Lawlor said two factors account for the stalled sales and share profit drop in the fiscal 1998 second quarter: a
$25-million drop in sales of former UB Networks corporate network equipment from the previous quarter; and a delay in developing the new
Vivid MLS 500 product -- which will run a corporate network -- that Newbridge believes will improve UB Networks' flagging sales.
Yet for all those woes, the corporate network segment accounts for just slightly more than 10 per cent of Newbridge's sales. That segment is
forecast to have revenue of $45-million in the second quarter, down from the $69-million in the first quarter.
Despite Newbridge's problem tackling the corporate market, the 11-year-old company created by former Mitel co-founder Terence Matthews
remains one of the most successful global vendors of a new form of switching technology to run telephone company networks.
That technology, dubbed ATM (asynchronous transfer mode) not only boosts the capacity of a network by allowing voice, data and video
signals to be routed together on the same lines, but leads to greater savings for network providers by boosting the efficiency of existing phone
lines.
The ATM, or so-called "wide-area network," segment now accounts for almost half of Newbridge's sales and is forecast to bring in revenue of
$195-million in the second quarter -- a fivefold increase from a year ago.
That growth will more than make up for the stalled sales growth in Newbridge's oldest product line -- multiplexers that only boost the capacity
of an existing phone line. That segment is also forecast to account for $195-million in sales in the second quarter, the same as the previous
three-month period.
Newbridge said it is "disappointed" with the results, but does not believe a trend is emerging.
"We're not deterred and remain very bullish," Newbridge spokesman Mr. Lawlor said, referring to the explosive growth in the ATM market and
its expected launch of the new corporate network product in the third quarter.
Financial analysts who have watched Newbridge for several years also remain confident.
"To slip in a quarter or two with revenue growth, especially because of an acquisition, is not a big deal," said Gurinder Parhar, a technology
analyst at Canaccord Capital Corp. of Vancouver.
"But investors are not forgiving," Mr. Parhar said, adding: "Newbridge has a tradition of volatility with its share price" and has constantly
weathered wild share price swings.
Mr. Parhar said the big question is not so much whether Newbridge can overcome the difficulty of digesting UB Networks but whether "there
is anything fundamentally wrong with the company?" In an answer to his own question, Mr. Parhar said: "I don't think so."
Other analysts concur, adding that it may take a year before Newbridge fully tackles the corporate market.
Although Joseph Bellace of Merrill Lynch & Co. downgraded his near-term rating of Newbridge to "neutral" from "accumulate," his long-term
rating of "accumulate" remains unchanged. |
