Newbridge investors anxiously
await results
Due Nov. 18: Company has come up short in
five of last nine quarters
Jill Vardy
Financial Post
OTTAWA - Investors
in Newbridge
Networks Corp. are
nervously waiting to
see if the company's
second quarter, which
ended at midnight on
Hallowe'en, will be
friendly or frightening.
And that nervousness
is expected to play
havoc with the
company's stock this
week as it tallies the
numbers and finds out
if it's going to be
forced to send out an
earnings warning for the sixth time in 10 quarters.
Analysts expect Newbridge to report earnings around 19½ (US) a share.
But markets were jittery last week that Newbridge would miss that
consensus estimate for its second quarter, which ended Oct. 31. In
fact, they've been so jittery that Newbridge stock has dropped by about
$7 (US) in the past month.
"If there's material information [that differs from the consensus], our
objective is to get it into the market as soon as we possibly can ...
whether it be materially positive or negative," said John Lawlor,
Newbridge's vice-president of investor relations. "But it takes a day or
two to get sufficient visibility on our numbers."
He called "pure falsehood" a rumour flying on Friday that Newbridge's
quarter would be made or lost on a single contract the company was
waiting for permission to ship over the weekend. But the very existence
of such rumours shows how close to the wire analysts expect this
quarter was.
Newbridge has been silent on the earnings, as is required by securities
regulators, since Oct. 15, two weeks before the quarter ended. But the
bulk of sales in the quarter were expected in the latter half of the third
month - the very period when Newbridge officials are not allowed to be
providing details to analysts and the media about the results. That has
made it hard for analysts to get a firm handle on the quarter.
"As we entered our quiet period [Oct. 15], the message that I had to
deliver to analysts was that it was still too far away from the finish line
to make the call," Mr. Lawlor said.
That's a real problem for the company and its relations with investors,
already strained by Newbridge's recent pattern of missing earnings
projections. When you've missed five of the last nine quarters, people
want to hear about how good the current quarter is. If they don't hear
it, they start worrying.
Consequently, "the stock is acting like Newbridge is going to
pre-announce," said Paul Silverstein, technology analyst at BancAmerica
Robertson Stephens in New York. He, like most Newbridge analysts,
isn't willing to hazard a guess about whether the company will make its
earnings estimates.
"I still believe Newbridge is very well-positioned strategically. But the
execution risk, which is well known in this company's case, is part of
the equation. If Newbridge misses the quarter again, they reinforce the
image of inability to execute and unfortunately you probably end up
with dead money for a while," Mr. Silverstein said.
On the conference call following release of Newbridge's first quarter
results in September, Alan Lutz, Newbridge president, said problems in
the company's production cycle have been largely fixed.
But Newbridge's August-October quarter is traditionally a slow one for
the company because 40% of its sales originate in Europe - a continent
that virtually shuts down during August. Therefore, most of the
company's business took place at the back-end of the quarter. That's a
problem that has plagued Newbridge and the people who try and predict
its results. The company has taken steps to "improve the linearity of our
quarters," Mr. Lawlor said, but that didn't help the second quarter.
But even an earnings warning before the results are published on Nov.
18 probably won't pull down the stock by much, Mr. Silverstein
predicted. "At this level, there's not a lot of air to be let out of the tires,"
he said.
In fact, Newbridge's very low current stock price (it closed Friday at
$19.75 in New York) has prompted some analysts to raise their
recommendations. Robert MacLellan, technology analyst at CT
Securities, now rates Newbridge a "trading buy."
"Our view is below $20 [US] it has some trading value on it, but we're
not trying to call the bottom of the stock because we believe it could be
worse before it gets better," Mr. MacLellan said. He's predicting a stock
price of $25 (US) in the next year.
"I think it's safe to say if Newbridge preannounces, there will be a lot
people throwing up their hands and they will want to see some very
meaningful changes take place very dramatically, very publicly and very
quickly."
The current stock price also presents problems for Newbridge's
ongoing acquisition of Stanford Telecommunications Inc. for
$490-million (US) in stock. Stanford's product line is a key component
of Newbridge's arsenal of Internet Protocol (IP) products. But the
terms of the deal require Newbridge stock to average at least $24 (US)
from Oct. 26 through Nov. 8. If it doesn't - and all signs are pointing
that way - Newbridge has to pony up more shares or cash.
Mr. MacLellan added that the further Newbridge's share price drops,
the more rumours pop up, "99% of them untrue," that the company is
on the verge of being acquired by a larger telecommunications
equipment maker.
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