Amid Weak Results, Analysts See
Better Times Ahead for Networkers
By JOELLE TESSLER
Dow Jones Newswires
Although many of the computer-networking companies should post June
quarter earnings that are below year-ago results, analysts said the sharp
pricing pressure and slowing demand that have plagued the industry for the
past year and a half appear to have leveled off.
While most of the data-networking companies won't deliver upside surprises,
Hambrecht & Quist analyst Farrokh Billimoria doesn't expect a repeat of
the earnings disappointments that have become common in recent quarters.
"The industry has definitely slowed down, but it's a lot better than last
quarter within the context of slower demand," said Sanford C. Bernstein &
Co. analyst Paul Sagawa.
The companies that make equipment for the wide area networking market --
the telecommunications carriers and Internet service providers -- are
particularly well-positioned since many emerging independent carriers are
spending heavily on frame-relay and ATM switches, routers, and
remote-access products, said Cowen & Co. analyst Chris Stix.
Mr. Stix said the local area networking companies should benefit over the
next few quarters from stabilizing pricing, the introduction of layer 3
switches -- which can perform many of the functions of routers but are less
than half the price -- and a Fast Ethernet upgrade cycle as corporations
migrate their networks from Ethernet technology.
Mr. Sagawa added that LAN equipment suppliers should see seasonal
strength in the June quarter since many corporations that were still sorting
out their budgets in the first quarter finalized their spending plans and began
investing in their networks in the second quarter.
Still, Mr. Stix warned, the local area networking companies could see a
slowdown toward the end of the year as the Fast Ethernet cycle slows.
And Nutmeg Securities analyst Andy Schopick stressed that the annual
growth rate for the data networking industry as a whole, which had ranged
from 30% to 50% for a number of years earlier in the decade, will be well
below this in 1998 for the second year in a row.
Mr. Sagawa expects the industry to grow at about 15% this year, compared
with 16% to 17% last year, and 45% in 1996.
Mr. Schopick explained that while some technologies like ATM and frame
relay are growing quickly, many older product families that drove industry
growth for a number of years -- like intelligent hubs -- "are turning into
negative growth areas." Prices have been declining rapidly for mature lines
like adapters and hubs, he said.
In addition, Mr. Schopick noted, the severe economic turndown in Asia is
slowing growth in the networking industry.
3Com and Cabletron Systems
Results from the two companies with quarters ended in May, 3Com Corp.
and Cabletron Systems Inc., were mixed.
3Com reported operating earnings of 18 cents a share for its fiscal fourth
quarter, beating the consensus estimate by a penny and its year-ago results
of 12 cents. The company also reassured analysts that it has brought its
channel inventories in line with lower targeted levels. 3Com had been
plagued by bloated channel inventories for several quarters and slowed
shipments to distributors to address the problem.
3Com's systems products business -- which includes switches, hubs,
routers, remote-access concentrators and network-management software --
showed a particularly robust 22% sequential growth in sales. But sales of
client-access products -- adapter cards and v.90 modems, which are based
on the new 56K standard -- rose only 1% sequentially.
Cabletron, on the other hand, missed the consensus estimate by two cents a
share and gave analysts cautious guidance on its near-term sales. For its
fiscal first quarter, the company reported earnings of four cents a share
excluding charges related to its acquisition of Yago Systems Inc., compared
with 37 cents a year earlier.
Cabletron has been coping with pricing pressure, a heavy concentration of
older products like intelligent hubs, limited penetration in the carrier and
low-end enterprise markets and a sizable presence in shared media -- which
is rapidly being replaced by switched technology in the networking industry.
Cisco Systems
Cowen & Co. analyst Mr. Stix projects Cisco Systems Inc., the giant of the
data-networking industry, will report profit of 48 cents a share for its fiscal
fourth quarter, which ends in July. This compares with 37 cents adjusted for
a 3-for-2 stock split a year ago.
Sanford C. Bernstein's Mr. Sagawa explained that Cisco has been able to
consistently outpace the industry in growth because it has a hand in so many
different parts of the networking business, a position that protects it from
downturns in particular product segments.
Mr. Schopick of Nutmeg Securities added that the company's aggressive
acquisition strategy and its success in gaining market share -- usually at the
expense of its competitors -- have enabled it to "succeed in an otherwise
challenging year for the industry."
According to Mr. Stix, Cisco is benefiting from strong growth in a number of
its product lines, including the Catalyst 5500 modular LAN switches; the
Catalyst 2900 work-group switches; the Catalyst 8510, a layer 3 switch that
began shipping in June; the 3800 access platform, which uses frame-relay or
ATM switches to send voice traffic; and the AS5800 universal access
server.
Bay Networks and Fore Systems
Mr. Sagawa projects Bay Networks Inc. earned 14 cents a share in its
fiscal fourth quarter, ended June, compared with 15 cents a year earlier.
Bay has been struggling to compete against Cisco and recently agreed to be
acquired by Northern Telecom Ltd. in what many see as the start of a wave
of consolidation among the data-networking and
telecommunications-equipment companies.
Year-end sales incentives, strong demand in its LAN switching business --
particularly Bay's 10/100 auto-sensing switch and its low-cost System 5000
modular Ethernet switching hub -- and contributions from the company's
new Accelar routing switches should help Bay in the fourth quarter, Mr.
Sagawa said.
Hambrecht & Quist's Mr. Billimoria warned, however, that Accelar will
face a competitive market since Cisco, 3Com and Cabletron are all
introducing their own layer 3 products. While the Accelar line began
shipping in late 1997, sales didn't ramp up quickly enough to offset declining
sales in older product categories like shared media hubs in the third quarter.
Mr. Billimoria estimates Fore Systems Inc., which specializes in ATM
technology, earned 13 cents a share in its fiscal first quarter, ended June,
compared with five cents a year earlier.
Mr. Schopick expects the company's revenue to grow by an annualized 30%
this year to between $580 million and $600 million since the "opportunities in
the ATM market seem to be genuinely gaining momentum."
Ascend Communications and Xylan
Mr. Stix estimates Ascend Communications Inc. will report earnings of 27
cents a share for its second quarter, ended June, compared with 31 cents
last year.
The analyst said the company's core ATM and frame-relay switching
business is strong, while revenue from its remote-access business should be
"flat to slightly up sequentially" in the quarter.
Mr. Sagawa noted that Ascend's remote-access business has booked
long-term contracts with a number of Internet service providers including
WorldCom Inc.'s UUNet Technologies, GTE Corp.'s GTE Internetworking
and PSINet Inc., among others. These contracts, he said, act much like
annuities, producing a steady income stream.
Many analysts see Ascend as the next likely target for a voice-equipment
company and believe Lucent Technologies Inc., which will be free to do
pooling-of-interest deals in October, could make a play for the company
then.
Mr. Schopick estimates Xylan Corp. earned 20 cents a share in the second
quarter, ended June, compared with seven cents a year earlier. Xylan said
after its first-quarter earnings report that it expects double-digit sequential
revenue growth in every quarter of this year.
Mr. Schopick said he remains "a little nervous about their aggressive growth
goals" since the company does have exposure to Asia and relies heavily on
original equipment manufacturer -- or OEM -- sales to International
Business Machines Corp. and to Alcatel Alsthom. OEM sales to these two
companies accounted for 40% of Xylan's total sales in the first quarter. |
