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Strategies & Market Trends : The Thread Formerly Known as No Rest For The Wicked -- Ignore unavailable to you. Want to Upgrade?

To: Dave who wrote (61860)	9/22/1999 12:57:00 PM
From: Jeff Guy	Read Replies (1) \| Respond to of 90042

More CS stuff... NEW YORK (CBS.MW) -- A change in Cabletron's relationship with Compaq caused investors to dump shares of the computer networking equipment company on Tuesday -- a knee-jerk reaction that may have been too hasty in light of the company's better-than-expected earnings and improving fundamentals. The stock plunged nearly 9 percent Tuesday, negating positive sentiment for the company's better-than-expected second-quarter earnings. It also reversed signs that Cabletron (CS: news, msgs) was rebounding from a sluggish stretch. Shares fell 1 11/16 to 17, distancing the company further from its 52-week high of 19 15/16. However, Cabletron shares are up about 100 percent for the year. Cabletron, which makes routers, switches, and other hardware devices, reported pro forma net income for the second quarter of $12.5 million, or 7 cents a share, up from $10.5 million, or 6 cents, a year earlier. The seven-cent profit edged past the First Call consensus estimate by a penny. Sales for the quarter dropped to $357 million from $370 million last year. Strong sales of its SmartSwitch routers, which grew 200 percent year over year, boosted the company's second-quarter performance. Cabletron also said it specifically targeted cable companies, local exchange carriers and Internet service providers during the quarter to expand its business. "This is a fundamentally different company," Piyush Patel, chief executive officer, told investors in a statement. Patel has been with the company since June, and analysts said the new management team lent a hand to the turnaround. Confusion But confusion surfaced after Cabletron announced that Compaq (CPQ: news, msgs) was revoking an earlier pact to buy $300 million a year worth of Cabletron network equipment for resale, committing itself to an equity investment in Cabletron's Spectrum business instead. As the ailing Compaq now restructures its business, the figure will be negotiated downwards to below $50 million a year from about $75 million per quarter, according to William Becklean, an analyst at SunTrust Equitable Securities. Under the new agreements, Compaq will continue to purchase Cabletron's products for internal use and for resale by Compaq's professional services. See press release. Details of Compaq's investment in the Spectrum network were not disclosed, but Cabletron said that Compaq has agreed to make a multi-year purchase of Spectrum products and services. Lower revenues In a note to clients, Becklean said that while the net result will be lower revenue at a somewhat higher margin, management believes Cabletron's other businesses are strong enough that the change will have only a "minor impact" on third-quarter earnings. In a conference call with analysts Monday, Cabletron executives said the company expects that revenue will be "flat to slightly down" over the next two quarters. "There is going to be a transition period. Compaq is not just walking away from this stuff tomorrow," said Cabletron spokesperson Mike Quinn. "One part of the relationship is changing, but it gives us an opportunity that we just haven't had up to this point. I think we'll be able to hold our ground." Turnaround mode "This company has been in a turnaround mode for two years now," said Becklean, who has a "strong buy" rating on the stock. "This is the last tough quarter for them. The next quarter will exit their mark from the turnaround mode." The analyst has a 12-month price target of $24 on the shares and expects third-quarter earnings to come in at 10 cents a share vs. a loss of 12 cents last year. BancBoston Robertson Stephens senior communications and networking analyst Paul Johnson Tuesday reiterated a "buy" rating on Cabletron shares, saying that the SmartSwitch Routers represent the most important new products for Cabletron. Johnson also raised fiscal 2000 and 2001 earnings-per-share estimates to 29 cents a share from 24 cents, and to 51 cents from 41 cents, respectively. He said the estimates reflect the solid quarter and the general tone of business. "Cabletron is reasserting our position as the industry's technology leader," said Patel. "We have a clear strategy and direction, we are focused on execution and we now have clear visibility into our business fundamentals."