Newbridge Gets Hammered After Earnings Warning
By Carolyn Koo
TheStreet.com/nytimes.com Staff Reporter
11/2/99 2:15 PM ET
Shares of Newbridge Networks (NN:NYSE) plunged Tuesday after the networking solutions company warned that its second-quarter earnings will come in well below Wall Street's forecasts, its seventh such warning in the last 11 quarters.
Also, Newbridge's president and chief operating officer resigned after presiding over the company's recent woeful performance.
For the second quarter ended Oct. 31, Newbridge, which is based in Kanata, Ontario, projected preliminary earnings of 8 to 10 U.S. cents a share, excluding the effect of items related to acquisitions and nonrecurring items. The consensus estimate of sell-side analysts polled by First Call/Thomson Financial was 20 U.S. cents a share.
Worldwide revenues are expected to come in at C$480 million, with flat year-on-year revenues in North America. Third-quarter revenues a year earlier were C$457 million. Third-quarter results will be announced Nov. 18.
"The quarter was a disappointment," said Terence Matthews, chairman and chief executive of Newbridge Networks, in a statement. He also accepted the resignation of Alan Lutz, president and chief operating officer. Pearse Flynn, executive vice president and general manager for Europe, Middle East and Africa, will replace Lutz.
The company's shares fell more than 22% on Tuesday, trading down 4 11/16 at 16 1/16 by early afternoon. "For Newbridge investors, this is a bad dream that has turned into a nightmare," said David Powers, an analyst at Edward Jones. "Every quarter there is some issue that negatively impacts the company and restricts its ability to produce consistent revenue and earnings growth." Powers rates the company a hold and has not participated in any underwriting for the company.
In the past, Newbridge has experienced all sorts of difficulties, from sluggish growth in its telephone equipment business to an inability to supply enough products to meet demand. But despite management's tight-lipped comments on its earnings forecast, Powers surmised the issue this time was weak demand in the U.S.
Newbridge is also sagging while the overall market is robust and its competitors are getting stronger. "You have to wonder why competitors like Nortel (NT:NYSE) and Lucent (LU:NYSE) are doing well while Newbridge isn't," said Fred Cohen, an analyst at Daiwa Research. "Maybe they're not competing aggressively enough for deals with carriers. Maybe their pricing is not aggressive enough." Cohen has a buy rating on Newbridge and has not participated in any underwriting for the company.
Powers believes the problems are more internal, saying, "Newbridge has to stop tripping all over itself."
Cohen also said the North American operation needs to take a page from the European operation's book by focusing less on selling products, such as switches. Rather, "in Europe, they've done well selling solutions" he said. After all, revenue from Europe in the fiscal second quarter was almost 40% higher than the second quarter of fiscal 1999.
Because of his role in Europe, Flynn is considered directly responsible for the success there.
Powers said he was surprised that Lutz had resigned. "Despite the recent problems, Lutz was fairly well liked by investors. This casts doubt on the leadership of the company."
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