January 19, 1998, TechWeb News
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Fore Systems Shapes Up -- Growing acceptance and product breadth for ATM technology makes Fore a player in networking and telecom infrastructure
By William Schaff
I am always reviewing the winners and losers column of the financial pages for ideas. I didn't have to go far on the 1997 losers column to come across a name that many investors believed would be a performance leader last year:Fore Systems, a leader in asynchronous transfer mode (ATM) technology for high-performance networking solutions. That leadership position didn't keep Fore's stock from plummeting 54% last year. The stock-price decline reflected a common truism:Best-of-breed technology doesn't necessarily translate into commercial and financial success.
In the near term, the Warrendale, Pa., company seems to be gaining from acceptance of ATM on the WAN as well as some penetration on the LAN backbone. The recent availability of multiprotocol over ATM helped support sales for ATM on the LAN. Increased product breadth, including Ethernet LAN switching products, helped increase attractiveness to new customers. For example, every Ethernet LAN port Fore supplied in the fiscal second quarter of 1997 included an ATM uplink. But will this be enough? Alternative technologies such as Gigabit Ethernet will make more inroads into ATM's competitive advantage-especially in the LAN and WAN. Companies such as Cisco, Bay Networks, and 3Com make it difficult to sell costly best-of-breed component technology when IS managers are seeking cost-effective overall networking solutions.
But Fore remains a player in networking and telecommunications infrastructure for several reasons:
- It will introduce a stream of products, such as its scalable 40-Gbps ATM switch. The switch will enter beta testing in March and may ship by summer. Fore will first introduce an enterprise product and release a service-provider product shortly thereafter. Another release is the MSN 700, a concentrator that will be introduced early this year.
- The company is spending top dollar on research and development to maintain its competitiveness. Fore is working on enhancements to its ATM offerings to make them more competitive with emerging technology alternatives backed by Cisco, the leader in routers. Running IP traffic directly over fiber-optic transmission systems eliminates the throughput overhead required for using ATM. However, with improvements to its ATM technology, Fore hopes to minimize overhead.
- New partnerships with substantial manufacturer partners such as Northern Telecom will give Fore added distribution clout into the telecom arena. Also, Fore is directly targeting alternative service providers such as cable companies and Internet service providers.
- Fore is focusing on medium-sized deals, in the $500,000 to $1 million range. This puts it at less risk of losing a major deal, which usually disrupts profit growth. More important, it diversifies its business.
The Asian financial crisis should have only a small impact on Fore's current business, as Asia represents only 7% of total sales. Europe, fortunately, represents about 20% of sales. Fore should benefit from the ongoing recovery and increasing demand there.
Financially and operationally, the company is getting back in shape. I expect continued improvement in its use of working capital, as seen last quarter by declining receivables. Recently, product shipments have become more aligned with bookings, and continued tight expense controls will support net margins.
The stock is still trading at 50 times the projected earnings per share of 31 cents for fiscal 1998 (ending March 31) and 27.7 times consensus estimates of 56 cents for fiscal 1999. The company will report third-quarter '98 earnings on Jan. 21; analysts' consensus seems to be that earnings will be 9 cents per share vs. 14 cents per share last year. Given recent sales trends, I wouldn't be surprised to see a little upside to that consensus this quarter.
William Schaff is chief investment officer at Bay Isle Financial Corp. in San Francisco, which manages the InformationWeek 100 Stock Index. You can reach him at bschaff@bayisle.com.
Copyright (c) 1998 CMP Media Inc. |
