Wall St. wary of Cabletron's future
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Wall St. wary of Cabletron's future
By JIM DUFFY
Network World, 02/08/99
ROCHESTER, N.H. - As the network industry rockets into the new millennium and the age of convergence, it may be leaving behind one of its former stars.
A "mid-quarter" conference call with company executives last week failed to persuade some Wall Street analysts that Cabletron isn't fading from view. They came away unconvinced that Cabletron can turn its fortunes around anytime soon despite the following developments:
A new advertising campaign to stem defections to Cisco.
The shipment of product to Compaq for resale.
The discontinuation of some product lines.
Analysts now believe that Cabletron is not a prime acquisition candidate, and will remain an independent company for some time. Cabletron says it would make a fine acquiree.
"Of the 300 vendors we compete with, we've got the third-highest sales volume," says Cabletron CEO Craig Benson, adding that the company will unveil "bold new plans" for a turnaround at the end of this quarter. "Somebody is buying our products. I know for a fact that there's interest around Cabletron."
Cabletron was a high-flyer earlier this decade, one of the vaunted "Big Four" in the LAN industry. But as the company struggles through its current financial malaise, it is stuck in suspended animation while the remainder of the Big Four - Cisco, 3Com and Bay Networks, now a division of Nortel Networks - hurtle through the stratosphere toward Planet Internet.
But Cabletron claims it is keeping - if not setting - the convergence pace.
"We started this two years ago," Benson says. "We have the only converged network in the datacom [vendor] world."
Benson says Cabletron not only has a converged network internally but also has shipped products to customers as the basis of their converged voice/data networks. Cabletron has also shipped 10 million nodes that are being used in policy-based networks, another hot area.
The company's problems hit like a meteor late last year, when it lost $21.2 million - 12 cents per share - on sales of $330 million for its third quarter of fiscal 1999. Cabletron attributed the loss to a difficult transition from sales of shared-media hubs to LAN switches, the loss of Nortel as a customer and slow sales through the Compaq/ Digital channel.
Wall Street analysts expected a profit of 11 cents per share, and the shortfall prompted some to call for a change of leadership at the company (NW, Dec. 7, 1998, page 1). At the very least, Cabletron said it would keep analysts updated on its recovery.
Progress report
The company last week kept its word with the conference call, which came a month away from the end of Cabletron's fourth quarter and fiscal 1999.
But despite the progress report, analysts say Cabletron's future will be as an independent company that may survive, but will not thrive.
For the near term, Cabletron will continue to grapple with a legacy in shared-media hubs, a shrinking enterprise market and questionable acquisitions.
These issues will crimp Cabletron long-term by keeping the company from moving quickly to capture new markets in a rapidly moving industry. Ultimately, the industry will move away from Cabletron, analysts say.
The company will remain independent not because it wants to but because it offers little value to potential suitors, analysts say.
Even though its stock is down and it could be acquired for a fraction of the cost of recent acquisitions, Cabletron has virtually no products for the hot service provider market; it's losing to Cisco in the enterprise; and it has a lot of operational and management baggage.
Benson disagrees with the perception that Cabletron has nothing to offer service providers. Cabletron switches are installed in America Online and UUNET networks; and cable service provider Adelphia just became a Cabletron customer within the past two weeks, he says.
Financially, Cabletron says it will start to turn things around this summer. Users and company watchers should look for revenue gains and increased revenue per employee in the first and second quarters of fiscal 2000, which end in May and August, respectively, according to John d'Auguste, president of operations.
D'Auguste made his remarks during last week's conference call. Benson did not participate in the conference call "to show we've got some talent in Cabletron that's not got my name."
D'Auguste outlined Cabletron's new ad campaign and Compaq relationship, but he only touched on product- narrowing plans.
The ad campaign will be targeted at CEOs and chief information officers (CIO), and will question whether the purchase of Cisco equipment instead of Cabletron gear makes good business sense. The campaign will begin in March.
"When we compete against Cisco, we win on a product-to-product comparison," d'Auguste claims. "When we lose, it's a 'Cisco is a safe solution' choice, and it's a CIO and a CEO decision vs. a technology decision. The perceived safe solution may not necessarily be the best business solution."
The Compaq factor
The Compaq agreement will be completed in 30 to 40 days, d'Auguste says, and will honor the same three-year, $1 billion arrangement that Cabletron and Digital hammered out in late 1997. Compaq purchased Digital in 1998.
"Our [current] quarter will be the first full quarter of shipping the SmartSwitch Router and the SmartSwitch 6000 in rebranded format for Compaq," says David Kirkpatrick, Cabletron executive vice president of finance. "We anticipate a pretty strong quarter on both those product sets within Compaq."
Benson was a little more passionate about the Compaq relationship.
"Anybody that thinks we're not going to be around ought to talk to Compaq because they're signing a multiyear agreement for an awful lot of stuff with their name on it that they'd be foolish to do if they believed any of this [fading away] stuff," he says.
Analysts are still unclear, though, when Cabletron will see its share of money expected from sales of its equipment through Compaq. Cabletron expects its share to total about $83 million per quarter.
"They were very vague, they didn't really know yet," says Scott Heritage of Warburg Dillon Read in New York.
Cabletron was also vague about which products it will kill off.
"We are looking at all aspects of the company, and when we get closer to a decision we'll communicate that," d'Auguste told analysts.
A Cabletron spokesman says the company will be discontinuing older gear, such as MMAC hubs and switches, and transceivers.
Where's the beef?
Analysts say the progress report currently lacks meat.
"I still think the whole question is, 'Where's The Beef?' " says William Becklean of Tucker Anthony in Boston. "I think the proof of the pudding's in the May quarter. If these guys can't show that they can drive top-line revenue growth, then you start to wonder if they ever can."
"There's a certain lack of stability at this time to give anyone confidence that this ship is being effectively turned around," says Andy Schopick of Nutmeg Securities. "This is more than just a transition from shared-media hubs to LAN switching."
Schopick says Cabletron has made a series of costly acquisitions that have not contributed much to the bottom line. He says the purchase of Digital's Network Products Group is one example.
"In view of the subsequent events, it looks very dubious, very iffy as to how smart a transaction that was," Schopick says.
Benson disagrees.
"We did the Digital acquisition with the hopes of becoming much more channel-friendly; it's really helped our channel mix dramatically," he says.
As for Cabletron the acquiree, "Who would want to pony-up to the bar with them?" asks Craig Johnson, principal of Pita Group in Portland, Ore. "At one level it would be an opportune time because it's hurting so bad; the only other theory is if [the buyer is] a U.S. firm, it would be almost impossible for them to sell [the acquisition] to Wall Street."
Benson believes analysts are especially harsh on the company because they wanted more substance in last week's conference call.
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