O.K., Bruce, I listened to the conference call and I found it mixed. The good news is the acceleration in revenues, especially the strength of the ASX 4000 (probably about $15 to $20 million in revenues in the quarter)and revenues from the Berkeley Networks' ESX 2400 and 4800 switches.
The bad news is the gross margins. That federal government business may only account for about 5% of sales for the quarter, but the discounting needed to secure that piece of business probably knocked the gross margin on it down to around 10%. The impact will show up in the current quarter as well; the company guided analysts to expect the overall gross margin to be in the range of 53.5% to 54.5%, which assumes a slight increase in revenue generated from this contract.
This is the reason for the reduction in estimates for the current fiscal year of a penny or two. Keep in mind that although there is a lot of potential revenue from the business, the company does not yet know how it is going to play out and won't know for another month or two.
I think that the stock is overreacting to the margin surprise. FORE had to discount to get the business and there was, I understand, a concern about some key salesforce defections if the business got away. Margins should improve as higher margin product is shipped.
I remain confident that FORE can enjoy a very strong recovery in both revenues and operating margins, back up to 13% in the current quarter. If they can manage 12% for the fiscal year ending in March of 2000, earnings have the potential to double. So I am a buyer with a target price of $25 - $27 based on a multiple of around 30 times calendar 2000 earnings per share of 90 cents. |
