Networking Firms' Earnings Are Hurt by Spending Cuts
By PETER LOFTUS
Dow Jones Newswires
NEW YORK -- Reduced technology spending by telecommunications carriers and other companies continued to cause declines in sales and profits at most networking-equipment makers in their latest quarters.
Sales of network gear to telecommunications carriers continued to be sluggish in the quarter ended Dec. 31. But sales of equipment used in corporate networks may have stabilized, analysts said.
"In general, we like the enterprise-focused companies," said Merrill Lynch analyst Sam Wilson. "We think most companies focused on the enterprise will meet their numbers."
These enterprise-focused companies include Cisco Systems Inc., Enterasys Networks Inc. and Extreme Networks Inc., all of which derive a majority of their sales from corporate network customers.
The outlook isn't as bright for companies that sell primarily to telecom-service providers. The most dramatic example has been Juniper Networks Inc., which warned in December its fourth-quarter results would be substantially lower than expected. Juniper attributed the expected shortfall to cautious purchasing by its telecom customers.
Cisco Should See Business Stabilize
The networking market leader, Cisco Systems, is gaining ground following a year of sharp quarterly sales declines. Cisco, San Jose, said in November it expected sales in its fiscal second quarter, which ends in late January, to be either flat with the first quarter's $4.45 billion or up slightly.
Cisco Sees Market-Share Gains in Fiscal Second Quarter (Jan. 8)
Still, Cisco should show a sharp decline from last year. Mr. Wilson predicted Cisco will earn five cents a share, excluding goodwill amortization and other items, down from 18 cents a share a year ago.
Sales should fall 33% to $4.53 billion from $6.75 billion a year ago, Mr. Wilson estimated. Although such a decline would be substantial, Mr. Wilson and other analysts believe Cisco's business has stabilized. He said the company could slightly exceed his estimates.
Cisco Chief Executive John Chambers said this week the company was making "dramatic" gains in market share against its rivals. He also said product orders were on pace for the second quarter.
The key to the stabilization of Cisco's sales has been its enterprise business. That reverses a trend that developed in the late 1990s and into 2000, when Cisco's growth was fueled by telecom-carrier spending. Cisco is scheduled to report results Feb. 6.
Demand Is Fickle for Juniper Products
The telecom-spending slump is what's hurting Juniper, Sunnyvale, Calif. The company warned in December its revenue in the fourth quarter would be at least 23% lower than previously thought, at between $150 million and $155 million. Earnings excluding items should be five cents a share, the company warned, only half of the company's previous forecast.
Juniper Will Miss Financial Targets Due to Carriers' Spending Cutbacks (Dec. 21, 2001)
A year earlier, Juniper earned 24 cents a share excluding items on $295.4 million in sales. The culprit in the latest quarterly shortfall was continued spending cuts by Juniper's telecom customers, particularly Qwest Communications International Inc., said Salomon Smith Barney analyst Alexander Henderson.
Mr. Henderson suggested Juniper has experienced substantial fluctuations in the sizes of product orders from quarter to quarter. While these fluctuations hurt the fourth quarter, Mr. Henderson noted that some big contracts in the third quarter allowed the company to easily beat analysts' estimates for that period. Juniper is scheduled to release results Jan. 15.
Riverstone Capitalizes on Niche
Not all networking firms in the telecom-carrier market have suffered. Riverstone Networks Inc. in December reported pro forma results of three cents a share, one cent ahead of analysts' expectations for its fiscal third quarter ended Dec. 1.
Riverstone Networks Will Supply Routers For Metropolitan Ethernet Project in Seoul (Jan. 7)
Riverstone, Santa Clara, Calif., posted a relatively strong quarter because it sells gear that's used on the outer reaches of telecom networks in metropolitan areas, analysts said. In contrast, Juniper sells routers that are used at the core of networks, and telecom carriers haven't opted to upgrade these routers in recent months.
Riverstone was spun out last year from Cabletron Systems Inc., the networking-industry pioneer that dissolved after spinning off its other units.
Another former Cabletron unit is Enterasys Networks, Rochester, N.H., which sells switches to corporate customers. Analysts surveyed by Thomson Financial/First Call expect Enterasys to earn five cents a share, excluding items, on revenue of $203.4 million. The revenue figure has been adjusted to reflect a new revenue recognition method at Enterasys.
Comparisons with the year-earlier period aren't meaningful because Enterasys was still part of Cabletron at that time. In the third quarter, under the old revenue-recognition method, Enterasys earned five cents a share on $217 million in revenue. The company hasn't scheduled a date for its earnings release yet.
Improving Fortunes at Extreme?
Another seller of switches to the enterprise market, Extreme Networks, has already signaled it will meet expectations for the quarter. The Santa Clara, Calif., company said this week it earned one cent to two cents a share, excluding items, on revenue of between $108 million and $110 million in its fiscal second quarter ended Dec. 31.
Extreme's latest quarterly results fell from a year earlier, when the company earned 11 cents a share excluding items on revenue of $144.7 million.
SG Cowen analyst Christin Amracost said Extreme's fortunes appear to be improving. She suggested the company's backlog of new orders was stronger than she previously thought, a development that bodes well for future quarters. Extreme is scheduled to release results Jan. 16.
Write to Peter Loftus at peter.loftus@dowjones.com |
