Dow Jones Newswires -- October 12, 1999
DJ Web Growth Seen Fueling Improved Results For Network Cos
By Peter Loftus
NEW YORK (Dow Jones)--Computer networking firms are expected to post improved results for the third quarter as the Internet's growth continues to fuel demand for infrastructure equipment.
Cisco Systems Inc. (CSCO) remains the market leader for equipment used to build data networks of both corporations and Internet-service providers. Its smaller rivals, 3Com Corp. (COMS) and Cabletron Systems Inc. (CS), recently posted mixed results as they struggled to compete. Meanwhile, a handful of smaller upstarts have grown rapidly as they target various niches of the networking space.
In recent quarters, demand has risen for local-area-network, or LAN, switching products, which are used to transmit data across and between networks. The hot product in this space is the layer 3 switch, which allows high-speed transmission of voice, video and data.
"The industry trend is toward LAN switching," said Andy Schopick, analyst with Nutmeg Securities. "The fact that some of the smaller companies in this sector have had strong (initial public offerings) shows the potential in this area."
San Jose-based Cisco leads the way in LAN switching, with roughly a 46% market share, according to Merrill Lynch analyst Michael Ching. Ching expects Cisco to remain the vendor of choice for layer 3 switches. Research organization Dell'Oro group estimates the market for layer 3 will grow to $4.7 billion in 2003 from the current level of $637 million.
Ching expects Cisco to report earnings of 23 cents a share on revenue of $3.86 billion for its first quarter ending around Oct. 25. Cisco, which is set to report results in early November, earned 17 cents a share on revenue of $2.59 billion a year earlier, excluding one-time items and adjusted for a stock split.
Sales Decline At 3Com, Cabletron
3Com beat analysts' earnings expectations for its first quarter ended Aug. 31, as it streamlined operations and cut costs. The company earned 33 cents a share, excluding items, up from 24 cents a share a year earlier. With sales of its Palm Pilot handheld device continuing to rise, 3Com has responded to pressure to unlock the value of this product line with a plan to spin-off the Palm Computing unit in early 2000.
But 3Com's overall sales slipped in the quarter to $1.39 billion from $1.41 billion a year ago. The company said sales of its traditional product lines, analog modems and network adapter cards, will continue to fall to about 25% of overall sales in mid-2000, from 53% of sales in mid-1998.
Cabletron has been under even more pressure than 3Com to boost shareholder value. Analysts have been forecasting a takeover of the company for several months, as a rash of buyouts in the last year left it as one of the few stand-alone networking firms. For its second quarter ended Aug. 31, Cabletron reported earnings of 7 cents a share, excluding items, compared with 6 cents a year ago.
Sales are sluggish at Cabletron, too, falling to $356.6 million for its second quarter from $370.6 million a year ago. The outlook for sales growth isn't positive. Analysts downgraded the stock last month after concluding that Cabletron would receive less revenue from a restructured distribution agreement with Compaq Computer Corp. (CPQ).
While Cabletron and 3Com face uncertain futures, newly public networking firms are growing aggressively. Extreme Networks Inc. (EXTR), which had its initial public offering in April, said Monday it expects to report income of $3.5 million to $4 million, or 7 cents to 8 cents a share, for its first quarter ended Sept. 30. That would beat the First Call/Thomson Financial consensus of 5 cents a share.
Extreme, which is scheduled to report results Oct. 20, also expects revenue of $46 million to $47 million. The company had earnings of 5 cents a share on revenue of $38.1 million for the fourth quarter. Extreme Networks has aggressively sought market share in LAN switching though competitive pricing, said Schopick.
Another high-flying networking upstart is Juniper Networks Inc. (JNPR), whose main product is the M40 Internet Protocol router. Warburg Dillon Read analyst Nikos Theodosopoulos estimated Juniper has already achieved a 13% market share for this product in just nine months on the market, making an aggressive run at Cisco.
Robertson Stephens analyst Paul Johnson expects Juniper to lose 12 cents a share on revenue of $21.5 million, compared with a loss of 27 cents a share on no revenue a year ago.
Copper Mountain Networks Inc. (CMTN), which supplies equipment for high-speed network connections, is another upstart expected to post improved results. The company should report earnings of 13 cents a share on revenue of $30 million for its third quarter ended Sept. 30, up from a pro forma loss of 19 cents a share on revenue of $5.6 million a year ago, Johnson estimated.
Copper Mountain has benefited from the increase in deployment of digital-subscriber-line, or DSL, high-speed networking access, Johnson said. The company has also inked technology partnerships that should fuel future growth, he said.
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