Investors Seek Springtime Visibility on Bay
[Info on Voice Gateway 4000 product announcement on Monday]
By Kevin Petrie
Staff Reporter
4/16/98 9:45 AM ET
Wall Street knows Bay Networks (BAY:NYSE) blew the
March quarter. What it wants to know is whether the
networker can rebound quickly -- a tough task in the tech
sector.
Investors hope to get some idea about Bay's springtime
prospects today when the company reports fiscal
third-quarter earnings and holds a conference call after the
market closes. The call will shut out the press.
After sounding mild cautionary notes earlier this year, Bay
issued a profit warning on March 17 for the period, which
ended March 28. It said revenue would slip roughly 10%
from the $645 million achieved in the December quarter.
After climbing last year, gross margins would fall below
51.5%; Bay, however, still expected to turn an operating
profit. Analysts slashed their estimates, reducing the First
Call consensus to 12 cents per share from 28 cents.
Bay, which, with a $5.2 billion market cap, trails industry
leader Cisco's (CSCO:Nasdaq) $68.9 billion figure, has
plenty to prove this time. Earlier this month, Bay's shares
were buffeted by rumors that the company won't rebound
in the June quarter as it had forecasted in mid-March.
Previously, CEO Dave House assured investors that the
revenue likely will exceed $645 million in the June period.
He added that corporate customers were snapping up new
Accelar units, advanced switches which aim to steal
some of Cisco's routing business. Accelar needs to sell
robustly in order to replace revenue from older 350T
switches for corporations.
But one former shareholder is skeptical about "short-term"
issues. "The proverbial one-quarter problem is pretty hard
to find," says Arden Armstrong, managing director at
money manager Miller Anderson & Sherrerd. Tech
companies often take longer than three months to
execute a product transition. Armstrong declined to give
examples, but 3Com (COMS:Nasdaq) for one has taken
several quarters to purge excess inventories in the sales
channel and swing to new products.
Armstrong's MAS Mid-Cap Growth fund sold its stake in
Bay six weeks ago, roughly breaking even, after a phone
call to its CFO hinted that the networker might be stuffing
sales into the final weeks of the quarter. Armstrong
doesn't intend to listen to the conference call Thursday
evening, but "I'll watch for it to improve." If the company
exudes confidence about making its top line in June, she
might warm to the stock.
The sell-side sticks to its bullish case.
Analyst Joe Bellace at Merrill Lynch expects revenue in
the June quarter to bounce 8% to 10%, which would put it
back near the December level. He recently lowered his
top-line estimate just a bit, but didn't say why. As for
Accelar, "I've heard the product is being well accepted,"
he says. Bellace has rated the stock accumulate for
some time. His firm hasn't done any recent underwriting
projects for Bay.
Al Tobia at NationsBanc Montgomery Securities
doesn't think Bay will encounter long-term transition
challenges like 3Com. Tobia says corporations simply are
taking time to test Bay's Accelar products. He predicts
earnings of 21 cents per share and revenue of $645 million
for the June quarter. Tobia correctly predicted Bay's
rebound under the leadership of House, a former Intel
(INTC:Nasdaq) whiz, after the company blew earnings in
the fourth quarter of 1996. Tobia rated the stock a buy in
the low 20s in January 1997, then held it there for the
stock's roundtrip to 41 in October and back to 23 in late
December. On Wednesday, Bay ended up 1 3/16 at 25 on
heavy volume.
A larger question for the conference call is the health of
the networking industry. Cisco says that, short-term
wiggles aside, the industry still is growing revenue at an
average 30% to 50% clip for the long term. Other
networkers aren't saying that. 3Com says it slipped to the
20% to 40% range last year. Some research groups say it
fell shy of 20%.
Is Cisco trying to show up its rivals by boasting while they
lose market share? Cisco spokesman Bob Michelet says
the company is making an objective call. Cisco might be
more optimistic, he says, about revenue from the
convergence of voice and data systems. 3Com also says
convergence could revitalize industry growth, but it has
more catching up to do.
Bay likely will speak to both issues -- networking growth
and voice-data convergence -- tonight.
As TheStreet.com reported earlier today, Bay will unveil
the Voice Gateway 4000 product on Monday, in a bid to
bolster its position in the brewing business of running fax
and phone services over the Internet, according to
company documents.
The Voice Gateway 4000 will act as a bridge between
phone systems and the Internet, allowing corporations to
cut their phone bills in the short run and develop enhanced
services in the long run. Bay intends to sell it to carriers,
Internet service providers and corporations. The product,
developed in partnership with the startup NetSpeak
(NSPK:Nasdaq), can be ordered immediately. It will
compete with offerings from VocalTec (VOCLF:Nasdaq).
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