Newbridge shares fall 9% following loss of contract to Cisco
News of future acquisitions fails to halt slide
Saturday, February 13, 1999
TYLER HAMILTON
Technology Reporter
Newbridge Networks Corp.'s stock tumbled 9 per cent yesterday on news the lucrative wireless
equipment deal it received last August from WIC Connexus has gone to U.S. rival Cisco Systems
Inc.
The Kanata, Ont.-based company said yesterday that it is within weeks of completing two
acquisitions, but that did little to counter its plunging share price.
Newbridge shares dropped $3.70 yesterday to $36.30 on the Toronto Stock Exchange, where it
was the second-most actively traded stock. The stock has fallen 25 per cent over the past week
following Newbridge's surprise earnings warning, the result of sluggish sales in Asia and Latin
America.
"Certainly, a lost contract isn't positive," said Byron Berry, an analyst with Yorkton Securities Inc.
in Toronto. "The minimum that this causes Newbridge is that it was a high-profile contract that
they lost to a very powerful competitor."
The contract was high profile because it was touted by Industry Canada as an example of how
Canada's lead in emerging wireless markets would bring business opportunities to home-grown
equipment companies, such as Newbridge, who could then sell their proven technologies globally
as the rest of the world caught up.
Connexus's switch to Cisco, observers say, is a sign that Canada's lead may have finally dwindled.
It also signals that Newbridge will be up against stiff competition as it seeks out emerging markets
as part of its continuing growth strategy.
Mr. Berry said the news yesterday was enough for him to reduce his 12-month target to $51 from
$55. "I had factored in a part of this [contract] into my revenue [forecast] model, so I reduced my
estimate slightly."
Toronto-based WIC Connexus, a unit of WIC Western International Communications Ltd.,
selected Newbridge andAlcatel SA of France last August as its main equipment suppliers in a
four-year deal worth between $450-million and $500-million.
Newbridge said at the time that it would get two-thirds of the revenue through that deal, and a
similar amount from another contract announced on the same day from MaxLink Communications
Inc. -- a Connexus rival.
The switching equipment was to form the core of a high-speed wireless network -- dubbed LMCS
(Local Multipoint Communications Systems) -- through which Connexus could offer telephone,
data and Internet services. Newbridge hoped to showcase the Connexus network as part of a plan
to boost its wireless equipment sales in the United States.
Cheryl Nesbitt, an analyst with Scotia Capital Markets in Toronto, said that LMCS is still such an
immature market that the contract loss shouldn't have any direct impact on Newbridge's future
earnings.
"I'm not changing my forecast," Ms. Nesbitt said. Still, she said the Connexus contract going to
Cisco does "cause perception and credibility problems" for Newbridge.
Mr. Berry agreed, adding that the loss of LMCS business, mixed with Newbridge's recent earnings
warning, does raise a red flag for investors.
Richard Woo, an analyst with Thomson Kernaghan & Co. in Montreal, said investors have to look
at the fundamentals. "This company has missed five out of the last eight quarters. If you count the
next quarter, that's six out of nine."
Speculation continues as to why Newbridge lost the business. Some analysts point to technical
problems with the company's switching equipment, which Newbridge strongly denies. Others say
Cisco may have been chosen because of its relationship with Shaw Communications Inc., which
owns 52 per cent of WIC.
As for the acquisitions, Newbridge said it will announce two within the next two weeks, with more
to come, as part of the company's continuing plan to bulk up its data networking product line.
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