"Strong Pfts Amid Consolidation Seen For U.S. Network Cos"
By Peter Loftus
NEW YORK (Dow Jones)--Newly-public firms with strong market capitalizations vied for attention, and several leading companies were gobbled up in mergers, as profits in the computer-networking industry rose in the second quarter.
Analysts expect continued consolidation among the networking firms, as telecommunications equipment makers look to add data capacity to their traditional offerings of voice networking equipment.
Meanwhile, the remaining stand-alone networking companies will continue to focus on expanding products and services for the telecommunications market, analysts said. This growth would augment selling to the business market, known as the enterprise segment.
"We expect there will continue to be acquisitions," said Lazard Freres & Co. analyst Michael Duran. "The technology is changing so fast, and most of these acquisitions are to secure technology. It's unlikely that a company would develop all necessary technologies internally."
Several leading networking firms were taken out of the picture in the quarter ended June 30. In June, Lucent Technologies Inc. (LU) acquired Ascend Communications for $24 billion while Fore Systems was grabbed by General Electric Co. PLC for $4.5 billion. Xylan Corp. was purchased by Alcatel SA (ALA) in April for about $2 billion.
As these companies disappear from the stand-alone networking scene,
newly-public companies such as high-flying Juniper Networks Inc. (JNPR) and Redback Networks Inc. (RBAK) have entered the fray. They are among four networking firms with initial public offerings in the past few months, and which now have market capitalizations of at least $1 billion each.
Profits at some of the few remaining large networking firms are up. 3Com Corp. (COMS) reported last month it had earnings excluding items of 24 cents a share in its fourth quarter ended May 31, up from 18 cents a year ago. Cabletron Systems Inc. (CS) reported earnings excluding items of 4 cents a share for its first quarter ended May 31, up from break-even results a year ago. Both
companies beat analysts' expectations.
But questions about 3Com and Cabletron remain. 3Com warned that its
first-quarter revenue would slip and may continue to be sluggish over the next year as it shifts its focus away from sales of computer modems and network adapter cards towards high-speed Internet access products. Duran expressed concern that Cabletron has had sluggish revenue growth over the past year.
Continued growth of the Internet and improving economies in North America and Asia should help leading networking firm Cisco Systems Inc. (CSCO) post strong results for its fourth quarte ending around July 31, said SG Cowen & Co. analyst Christopher Stix.
Telecommunications carriers continue to spend robustly on networking
equipment. Enterprises are discovering they underspent on such equipment last year, leading to increased spending this year, Stix said. Both sets of customers want solutions providers along with the equipment, which plays into Cisco's hands because its service operations are strong, he said.
"The revenues are being helped by the continued strength in the Internet and the convergence of voice and data," Stix said.
Stix expects Cisco to report fourth-quarter earnings of 20 cents a share, matching the First Call consensus estimate, on revenue of $3.45 billion to $3.5 billion. Cisco earned 16 cents a share in the year-ago fourth quarter, excluding items and adjusted for stock splits, First Call said. Stix's fourth-quarter revenue estimate represents a 45% increase from a year earlier.
While most networking firms concentrate on the carrier and enterprise markets, Proxim Inc. (PROX) is also focusing on products and services for residential and small-business users. Increasing sales of Proxim's Symphony cordless networking product, which allows users of multiple personal computers to share a single Internet account, helped Proxim boost earnings and revenue in its second quarter ended June 30, estimated Lazard Freres' Duran.
Duran expects Proxim to report second-quarter earnings of 16 cents a share, a penny above the First Call consensus and up from 11 cents a year ago. Duran estimated Proxim had $16 million in revenue for the quarter, up from $11.5 million a year earlier.
Several networking firms whose initial public offerings took place in the last year have the potential to grab healthy shares of the expanding Internet market, which has helped their stock prices soar from IPO levels, analysts said.
Extreme Networks Inc. (EXTR), which had its IPO in April, should report earnings of 4 cents a share for its fourth quarter ended June 30, a penny above the First Call consensus, on revenue of $35 million, said BancBoston Robertson Stephens analyst Paul Johnson. He cited strong demand for its hardware-based
switch-router products.
Johnson expects Copper Mountain Networks Inc. (CMTN), whose IPO was in May, to post break-even results for the second quarter, on revenue of $17.5 million. He expects the market for Copper Mountain's high-speed Internet access, or broadband, products to accelerate over the next few years.
Redback Networks Inc. (RBAK) should report a second-quarter loss of 27 cents a share, compared with the First Call consensus of a loss of 19 cents, Johnson said.
Like Copper Mountain, he expects it to tap into the growing market for Internet broadband products.
The newest networking IPO is Juniper Networks, which makes products that handle high interface speeds for Internet systems. Its shares were priced at $34 each on June 25, and closed Wednesday at 135 1/16, down 4 7/16. No analysts' earnings estimates have been published for Juniper's second quarter ended June 30.
-By Peter Loftus; 201-938-5267; peter.loftus@dowjones.com
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