DJ Newbridge Stk Dn 19% Following 2Q Profit Warning
TORONTO (Dow Jones)--Newbridge Networks Corp.'s (NN) stock is down 19% early Tuesday, after the company warned that its earnings for the fiscal second quarter will fall well short of analysts expectations.
Before the market opened, Newbridge, a Kanata, Ont. network equipment vendor, said it would earn between 8 and 10 U.S. cents, excluding unusual items, for the second quarter ended Oct. 31, or about half of the 20 cents a share analysts expected it to earn, according to FirstCall/Thomson Financial.
The earnings warning couldn't have come at a worse time, as the company has been struggling to overcome a credibility problem in the market. Indeed, this latest earnings warnings is the sixth such announcement in the last nine quarters.
And analysts' frustation with the company's track record was evident in a conference company executives held Tuesday to explain the reasons for the second-quarter earnings short-fall.
At the end of the one-hour conference call, one analyst asked in apparent frustration: "The two answers that I haven't heard yet are what went wrong and what's going to be done about it?"
In response, Terrence Matthews, Newbridge's chairman and chief executive, replied: "I'm sorry, but I don't have a simple answer for you."
Matthews said the company didn't complete, as originally expected, the delivery of "several good-sized networks" during the quarter, but added "there is no general answer."
Matthews continued by saying that sales in Europe were on track in the quarter, but sales in the U.S. were disappointing.
But why did U.S. sales fall short? asked the analyst. "Was it an inability for sales people to bring in the orders before the last week of the quarter? Was it an inability to ship? I just don't see any depth to that response," the analyst said.
In response, Pearse Flynn, Newbridge's newly appointed chief operating officer and president," said it's a sales problem. "It's not a product problem, or operations problem," he said.
Newbridge's challenge is to transplant the sales success it's had in Europe to the U.S. market, which the company aims to do rapidly, Flynn said, without elaborating.
Flynn, who headed up Newbridge's operations in Europe, the Middle East and Africa, succeeds Alan Lutz, who resigned in the wake of the latest profit warning.
Newbridge is down 5.70 to 24.20 in Toronto and is down 4 1/16 to 16 7/16 in New York. In Toronto, the stock has traded as low as 22.75 Tuesday.
Analysts said the most damaging aspect of Newbridge Network Corp.'s (NN) profit warning was that sales of its main business - selling asynchronous transfer mode (ATM) network equipment - fell sequentially in the fiscal second quarter from the company's first quarter.
Most recently, Newbridge has blamed its quarterly earnings shortfalls on operational issues that prevented it from fulfilling all orders within a quarter. Before that, it pinned lower-than-expected results on a slowdown in the sale of its older time division multiplexer equipment.
The slowdown in ATM sales represents a psychological blow to investors who have hung on to the stock, despite previous profit warnings, in the belief that ATM sales will continue to post strong growth, said Robert MacLellan, technology analyst at CT Securities.
Michael Urlocker, technology analyst at Scotia Capital Markets, echoed this view. "We believe Newbrige has failed to capitalize on its leadership in ATM."
Earlier Tuesday, Urlocker cut his rating on the stock to "hold" from a "speculative buy," and said he is doubtful the company can succeed as a independent supplier.
Both analysts suggest that Newbridge, which has long been dogged by takeover rumors, needs to be acquired by a larger company if it wants to compete against its bigger rivals - Nortel Networks Corp. (NT), Cisco Systems Inc. (CSCO) and Lucent Technologies Inc. (LU). They said the bigger companies are all better able to meet the one-stop shopping needs of customers.
Indeed, Newbridge's profit warnings comes only days after Nortel Networks, Brampton, Ont., reported better-than-expected earnings for its third quarter ended Sept. 30.
In Tuesday's conference call with analysts, Terrence Matthews, Newbridge's chairman and chief executive, declined to comment on the possibilty of the firm putting itself up for sale.
Analysts said Matthews has been, and continues to represent, a major stumbling block to Newbridge being acquired, because he owns more than 20% of the stock.
Matthews' ownership stake discourages a company from launching a hostile bid for Newbridge because it prevents the potential bidder from recognizing the acquisition using the popular pooling-of-interests method of accounting, MacLellan said.
And Urlocker suggests Matthews would unlikely to sell until he can demonstrate a turnaround at the company.
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