SG Cowen's Stix expects Cisco Systems Inc. (CSCO) to beat his estimate of 35 cents a share for its fiscal second quarter, which ends in January, by a few pennies. And he believes his revenue projection of $2.7 billion is probably conservative. Cisco earned a split-adjusted 29 cents a share on $2 billion in revenue in the second quarter of last year.
Stix noted that Cisco - the 800-pound gorilla of the networking business - leads in most segments of the industry, including LAN switches and routers. The company also holds "strong leadership positions" in carrier networking gear, including access concentrators, Stix said.
The analyst expects Cisco to continue to capture market share and outpace the industry in growth in 1999 on the strength of new products - particularly those that integrate voice and data traffic - and its broad product line.
Dow Jones Newswires -- January 4, 1999
Networking Cos. Seen Posting Solid Earnings Gains In 4Q
By Joelle Tessler
NEW YORK (Dow Jones)--The leading computer networking companies should report solid earnings gains in the fourth quarter, driven by strong demand for equipment used to build out the Internet and to set up corporate networks.
Although the usual end-of-quarter "prerelease" concerns have surfaced on a few names - among them Fore Systems Inc. (FORE) - so far none of the networking companies has issued a disappointing earnings outlook for the period. And analysts say business trends overall were strong for the group in the final part of 1998.
SG Cowen Securities Corp. analyst Chris Stix believes revenue grew at least 9% to 10% sequentially in the fourth quarter for the big networking companies, which continue to capture market share from smaller players and drive industry consolidation.
In the carrier - or telecommunications - market, deregulation and the emergence of new players like the competitive local exchange carriers, or CLECs, are driving robust growth, according to Nutmeg Securities' Andy Schopick.
Phone companies ranging from AT&T Corp. (T) to the baby Bells to the CLECs, as well as Internet-service providers, are all spending heavily to build out data networks and to develop the capacity to put voice traffic over them, said Hambrecht & Quist Inc. analyst Farrokh Billimoria.
"With the Internet becoming more and more critical to people's survival, carriers have to spend on it," he said.
This has spurred strong demand for asynchronous transfer mode, or ATM, and frame-relay switches in particular, as well as for remote-access equipment.
In the enterprise - or corporate - market, demand is also solid as companies "spend off the remainders of their 1998 budgets," said Sanford C. Bernstein & Co. analyst Paul Sagawa.
This is driving sales of fast Ethernet and gigabit Ethernet products and layer 3 switches, which can perform many of the same functions as routers but are much cheaper.
While the aggressive growth in the carrier networking market is widely expected to continue, analysts are split on the outlook for the enterprise side of the business.
Sagawa, for one, believes corporate spending on networking equipment could slow in 1999 as U.S. companies feel the effects of the economic turmoil overseas and scale back their capital budgets. The analyst thinks revenue growth in the enterprise networking market could fall to 13% or less in 1999, compared with 15% in 1998.
"To the extent that we have a slowdown in corporate America, and we do, enterprise spending will be impacted," Schopick agreed. "This creates uncertainties for 1999."
Sagawa added that pricing pressure in the enterprise market, which began in hubs two years ago and spread to low-end switches in 1997, has now hit modular and stackable switches. Lower prices could also contribute to deceleration in enterprise spending, the analyst believes, since "companies can get everything they need by spending less."
But not everyone sees things this way. While SG Cowen analyst Stix agreed that enterprise spending on information technology could slow next year, he believes many companies are still investing in their computer networks.
"Networking growth should be disproportionately strong since it is so strategic since it involves getting on the Internet," he said.
The results from the two major networking companies with quarters ended in November - 3Com Corp. (COMS) and Cabletron Systems Inc. (CS) - were mixed.
3Com beat earnings estimates for its fiscal second quarter by a wide margin, indicating that the company is recovering from the bloated inventory levels and sluggish modem sales that plagued it earlier in 1998. 3Com posted earnings of 36 cents a share, above the consensus estimate of 31 cents and the restated penny that 3Com posted a year ago.
The company saw strong consumer demand for 56K modems and its hand-held Palm Pilot computing device - a non-core product that is contributing close to 10% of 3Com's revenue - with back-to-school purchases in the early part of the period and holiday purchases in the latter part. New products like the CoreBuilder 9000 LAN switch also drove revenue growth.
In addition, 3Com is seeing margin expansion as it manages costs better and ramps up manufacturing after slowing production earlier in the year to bring down inventories.
Cabletron, on the other hand, even missed expectations that were scaled back after it had warned that estimates for its fiscal third quarter were too high. The company posted an operating loss of 12
cents a share, below the consensus view of a 10-cent loss and year-ago earnings of 12 cents.
Cabletron blamed the disappointing results on lower-than- expected sales to Lucent Technologies Inc. (LU) and Northern Telecom Ltd. (NT). Sales to both telecom-equipment makers have slowed as they have built up their own data operations, including through Nortel's recent purchase of Bay Networks.
Cabletron also said sales to Digital Equipment Corp. were below expectations. Digital Equipment agreed to purchase and resell about $1 billion of Cabletron's products over three years when Cabletron bought DEC's networking products division in early 1998. But Compaq Computer Corp. (CPQ), which has purchased DEC, is now renegotiating the agreement.
Finally, although Cabletron's new Layer 3 switch - the SmartSwitch router - is seeing strong demand, growth in Cabletron's switching operations hasn't been fast enough to offset declines in its older shared-media hub business.
SG Cowen's Stix expects Cisco Systems Inc. (CSCO) to beat his estimate of 35 cents a share for its fiscal second quarter, which ends in January, by a few pennies. And he believes his revenue projection of $2.7 billion is probably conservative. Cisco earned a split-adjusted 29 cents a share on $2 billion in revenue in the second quarter of last year.
Stix noted that Cisco - the 800-pound gorilla of the networking business - leads in most segments of the industry, including LAN switches and routers. The company also holds "strong leadership positions" in carrier networking gear, including access concentrators, Stix said.
The analyst expects Cisco to continue to capture market share and outpace the industry in growth in 1999 on the strength of new products - particularly those that integrate voice and data traffic - and its broad product line.
Worries that Fore Systems could miss projections for its fiscal third quarter, ended December, surfaced last week. But many analysts now expect the company to meet estimates, saying that if Fore were planning to "prerelease" a disappointing outlook for the quarter, it would have done so by now. The company is projected to report earnings of 10 cents a share for the quarter, versus 10 cents last year.
Fore issued a disappointing earnings outlook last quarter partly because many orders came in late in the period, leaving the company unable to fill them before the end of the quarter. Though analysts believe Fore has worked through logistical problems that also contributed to its troubles in the second quarter, they agreed that the company was shipping gear right up to the end of the quarter again in the third.
In addition, Hambrecht & Quist's Billimoria noted that Fore faces a product transition as it integrates Ethernet products from its purchase of Berkeley Networks last summer into its existing product line. Still, Nutmeg Securities' Schopick said Fore's core ATM business is doing well. SG Cowen's Stix believes Fore's new ASX-4000 ATM switch contributed about 10% of revenue in the third quarter.
Concerns that Xylan Corp. (XYLN) could "prerelease" a disappointing earnings outlook for its fourth quarter also surfaced at one point last month, but Schopick believes the company will meet his earnings estimate of 24 cents to 25 cents a share, up from 14 cents a year earlier.
Xylan set very high expectations for itself at the start of 1998 by promising double-digit sequential revenue growth in every quarter of the year. Wall Street became skeptical that the company would
meet these projections in the second half of the year since Xylan is so dependent on original equipment manufacturer sales to two key customers - Alcatel SA (ALA) and International Business Machines Corp. (IBM). Sales to both companies have shown signs of a potential slowing.
But Xylan has been building up its non-OEM sales in recent months, and has been trying to add new OEM customers. And Schopick believes the company will come "close enough" to meeting its
aggressive revenue growth goals.
Finally, Stix expects Ascend Communications Inc. (ASND) to report earnings of 32 cents to 33 cents a share for the fourth quarter, up from 24 cents a year ago. The company, which is focused entirely on the carrier market, is benefiting from aggressive spending by phone companies and ISPs.
Sanford C. Bernstein's Sagawa believes Ascend's ATM and frame relay switching business grew 25% sequentially in the fourth quarter, while its remote access equipment sales rose modestly after climbing 29% in the third quarter.
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