Newbridge warning surprises
analysts
Bad news, good news: older products
stumble, but orders for newer switches
soar
James Bagnall
The Ottawa Citizen
After nearly a year of steady improvement, Kanata-based Newbridge
Networks Corp. revealed yesterday that its third fiscal quarter ended
Jan. 31 will come in significantly below analysts' estimates.
Chief operating officer Alan Lutz said Newbridge would post a
third-quarter profit of 17 to 18 cents U.S. a share, excluding one-time
hits and gains.
This is a substantial improvement from the seven cents U.S. a share
profit posted during the admittedly weak third quarter a year earlier. But
it's also about five cents U.S. a share below the consensus estimate for
the third quarter.
Mr. Lutz warned investors that Newbridge would not likely recover the
five-cent shortfall in the fourth quarter.
Third-quarter revenues are expected to be $450 million -- up from $359
million in the same period a year earlier but down from the $470 million
to $480 million consensus estimate of analysts.
Most of the blame for the shortfall lies with Newbridge's older product
line, which is based on a technology known as TDM, short for time
division multiplexing.
Mr. Lutz said TDM sales were especially weak in Asia and Latin
America, leading to an overall shortfall in the quarter of $30 million in
TDM revenues compared with the second quarter.
At the same time, sales related to the former UB Networks unit were off
about $13 million over the period.
"We had to make up $43 million", Mr. Lutz said during an interview.
"The good news in all of this is that our main engine is very strong," he
added.
Newbridge's flagship product -- a high-speed switching device known
as the 36170 -- recorded a 35-per-cent jump in sales from the second
to third quarter. Customer orders for the same product, which is based
on asynchronous transfer mode (ATM) technology, were up an even
more dramatic 45 per cent.
Likely included in this figure is a contract to supply the Global One
consortium with ATM switches. Newbridge had been expected to
announce this deal with great flourish in December but instead has
quietly begun shipping product to conform with the customer's desire for
no publicity.
"If we had closed the extra 10 per cent during the quarter, we would
have made the $20-million revenue and delivered the quarter," said Mr.
Lutz. "The reason we didn't is we ran out of parts."
Part of the difficulty is that most of the orders for new data switches
arrive during the last part of the quarter, when it's tough to ratchet up
production rates at will. Newbridge manufactures most of its own
products in Kanata, but since Mr. Lutz took over as chief operating
officer last June, he has been gradually diversifying the firm's production
capacity.
"We have no intention of building any more manufacturing facilities," he
said. "We'll keep the ones we have full and outsource the lower-level
products as required."
Mr. Lutz is also applying the same outsourcing logic to developing
Newbridge's next-generation ATM switch, a 50 gigabit-per-second
device that can handle massive amounts of voice, video and data
simultaneously.
Newbridge had been co-developing a similar device with alliance
partner Siemens AG of Munich, but progress was slow. Newbridge is
now managing the development on its own, in part by relying on outside
semiconductor companies for key bits of silicon. "We'll have this in
customers' hands by year-end," Mr. Lutz said.
Newbridge will not be trimming staff or taking restructuring charges as a
result of the earnings shortfall in the third quarter. Far from it.
"It would be easy for us to get very conservative at this point and say
we'll plan on 15-per-cent growth and chug down that path," said Mr.
Lutz. "The reality is, we really do have to be in the 35- to 45-per-cent
growth range, and that requires prudent risk-taking."
Newbridge wrapped up the third quarter with more than $900 million
cash in the bank. This reserve was fattened by the sale of Newbridge's
minority stakes late last year in Cambrian Systems Corp. and Vienna
Systems Corp.
Indeed, when these one-time gains are included in Newbridge's final
results for the quarter, it recorded a net profit of 46 cents U.S. a share.
Newbridge shares closed at $48.70 on the Toronto Stock Exchange,
down $1.50 on the day.
Newbridge released its preliminary third-quarter results after the markets
closed. |
