Thursday 5 February 1998
Newbridge faces trying times, tough choices
Analysts wonder aloud whether Kanata giant will put grandiose plans on hold, cut costs
Bert Hill
The Ottawa Citizen
<Picture>Dennis Leung, The Ottawa Citizen / Newbridge Share Price Movement: Peak close: $92.35, Wednesday close: $27.50, down $1.25
Newbridge Networks Corp. could be forced to trim costs, slow its hiring and throttle back ambitious expansion plans.
Analysts -- commenting yesterday after the Kanata company's share price closed at $27.50, down $1.25 a share -- said it also must improve its products and marketing in the face of the swift changes in the telecommunications networking market.
On Tuesday, Newbridge stock tumbled $8.75, a day after the company slashed its quarterly profit projections by two thirds.
Last October, its shares traded at $95. Last summer, the networking company said it planned to hire 1,200 employees annually, including about 900 in Kanata. About 3,200 of the company's 6,200 employees work at the Newbridge campus in Kanata.
And only a few weeks ago, Newbridge chairman Terry Matthews announced that his Kanata Research Park Corp. has a $200-million development plan to build a hotel, conference centre, golf course and major office expansion on 500 acres of land over the next five to seven years.
But some of those grandiose plans might have to be put on hold.
Duncan Stewart, an analyst with Tera Capital Corp. in Toronto, said the problems with Newbridge's product line could force the company to cut its expansion plans from 1,200 employees to about 200 employees this year.
He said moving people from an older, slow-selling products to a new technology lines will be difficult for some specialized workers. That , he said, could even lead to layoffs. Reassigning staff in production, technical support, sales, marketing and administration is less likely to be a problem.
Mr. Stewart said that in a conference call with analysts this week, Newbridge management declined to discuss the impact on jobs of the latest earnings slide.
Yesterday, the company would not comment on employment plans.
Monday night's warning about quarterly earnings falling short of analysts' projects was the third straight for Newbridge. It blamed a dramatic fall in sales of older networking products, known as TDM, and serious troubles with UB Networks, a California subsidiary it acquired in a year ago.
But some analysts said Newbridge's problems transcend that explanation.
"Between November 1996 and September 1997, Newbridge's market share for switches rose from 18 per cent to 25 per cent because they had products that the competition couldn't match," said Paul Sagawa of Sanford C. Bernstein Inc. in New York City. "But now their market share has fallen back because the opposition is coming back with new products and winning the sales.
"The question is," he added, "how fast Newbridge can put out new versions to match them."
Newbridge's main networking products include equipment that uses the super-speed asynchronous transfer mode -- ATM -- technology. ATM products have won strong acceptance with major telephone companies but not with computer networks.
Mr. Sagawa said Newbridge has to stop believing the ATM switch will set the industry standard and must start hedging its technological bet with different products and cheaper alternatives tailored to customers' needs.
He also zeroed in on operating costs: "Newbridge's costs have always been well above the competition and that is now a factor in the poor performance of the stock. There has not been enough scrutiny to improve operating margins."
For example, he said, market-leader Cisco Systems Inc. has an operating margin -- a ratio that measures profits as a percentage of sales -- of 33.4 per cent, compared with only 19 per cent at Newbridge prior to the revised profit forecast and 7.4 per cent after it.
Mr. Sagawa said Ascend Communications Inc., another company that has been making market inroads at Newbridge's expense, has an operating margin of 20 per cent.
"The problem is not just the number of employees, because the hardware that goes into their products is very expensive," Mr. Sagawa said. "But this is a company that is a robust spender on research and development, on marketing and on general administration."
Mr. Stewart said Newbridge might be forced to move away from TDM products -- which generated more than half of its sales in the previous fiscal year --Emuch more quickly if the drop in sales is much deeper than the company anticipates.
And he said Newbridge won't bring out a revised version of an older ATM switch that has been selling poorly for six months.
"They don't want to admit, it but the problems could be a lot deeper than they appear," he said.
Patrick Houghton, an analyst with Wheat First Butcher Singer in Richmond, Virginia, said Newbridge "has to show that the ATM prospects can be turned into solid sales.
" They are clearly a leader," he said, "but this is a young market in which there are openings for other competitors."
David Powers of Edwards Jones Inc. in St. Louis, Missouri, said he does not expect Newbridge will slash staffing expansion, product development or marketing plans.
"The challenge is refocusing their effort on their core strength after being diverted by the UB Networks problems," he said.
He said the company will probably trim some administrative costs, "but I don't seem them cutting back research and development staffing because that is the life blood of the company."
Farrokh Billimoria, an analyst with Hambrecht & Quist in San Francisco, said marketing will be the major priority in the next months.
"They've got to show the market how they will ramp-up revenue growth again. They need some big sales wins."
Mr. Billimoria believes the company will reduce operating costs by $11 million in the next quarter through job cuts at UB Networks and other measures. He expects sales will grow strongly, driving down operating expenses from 46 per cent of revenues in the current fiscal year to 41 per cent in the next year. |
