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Technology Stocks : BAY Ntwks (under House) -- Ignore unavailable to you. Want to Upgrade?

To: Ibexx who wrote (4244)	2/17/1998 11:59:00 PM
From: George A. Roberts	Respond to of 6980

op Stories: Bay Networks Carves Prices in Battle With Cisco By Kevin Petrie Staff Reporter 2/17/98 7:55 PM ET At the tail end of a turnaround, Bay Networks (BAY:NYSE) is employing a time-honored tactic to attack the competition -- price cuts. Last week, the networker began shipping new "fast-ethernet switches" at surprisingly low prices, according to analyst Scott Heritage at UBS Securities. That means the 350T-HD product, which shunts data across corporate PC networks, now sells at about a 33% discount to its list price. Heritage says it undercuts similar products from networking industry leader Cisco (COMS:Nasdaq) by roughly 15%, says Heritage, whose firm hasn't participated in any Bay underwriting projects. Bay declined to confirm the price cut, but said that certain products in its 350 line have been price leaders for a year. Bay sells its products through a web of distributors and resellers. Officials at the Cisco and 3Com could not be reached for comment. Bay is wagering that discounts will spur sales to a point where they will boost rather than sap overall revenue. In 1997 Bay applied that strategy to older 350 products, and it worked by two measures. Bay claimed 12.9% of worldwide ethernet switch revenue in the fourth quarter of 1997, up from 11.1% in the prior period, according to fresh data from Dell'Oro Group, a market-research firm based in Portola Valley, Calif. Cisco, meanwhile, slipped to 38% from 39% in that time period, measuring by revenue. Bay's gross profit margins, meanwhile, ticked up to 51.5% from 51% in the prior period and 44.6% one year earlier. Analysts expect them to nose even higher in coming quarters as Bay makes its manufacturing process more efficient. Analyst Mike Duran at Lazard Freres says the price cuts emit bullish signals about Bay's health. He expects Bay's quarterly switch revenue to grow 10% to 20% sequentially. His firm has performed no underwriting for Bay. Still, questions about a product transition are nibbling at the company this quarter. A First Call survey of 28 analysts forecasts earnings of 28 cents per diluted share for the March quarter. In the year-ago quarter, Bay earned 10 cents a share excluding restructuring charges. (The year-earlier figure isn't adjusted for new accounting standards for earnings per share.) Chief executive Dave House, who has engineered a turnaround at the company since taking control in late 1996, has cautioned Wall Street about a cloudy short-term outlook. "People are kind of waiting on the sidelines to get a little more visibility," says one trader who deals in Bay stock. On Tuesday, Bay's shares settled 7/16 lower at 30 3/4. Cisco lifted 1/16 to 64 15/16, while 3Com slipped 1 1/4 to 33 7/16. This quarter the company is shipping new products in two categories, the 350 and Accelar 1000 lines. The 350 devices are "switches" that ship digits across local-area networks, while Accelar technology performs more complex navigation tasks at speeds and prices that challenge Cisco's dominance with its routers. These products are intended to pick up the slack as older 350 models and hubs diminish in the revenue picture. It's a plan common to the industry -- cannibalize old models with the new ones, lowering prices to sweeten the deal for customers. New products overall generated 59% of revenue in the fourth quarter of 1997. Still, the severity of the latest reductions surprised some analysts. After introducing a 350T-HD unit at a list price of $149 per port (or network connection), analyst Heritage says, Bay started shipping it last week at less than $100 per port. "We did not anticipate that street prices for fast ethernet switching would be under $100 per port until the second half of 1998," Heritage writes in a research note. "We believe this ... pricing will help Bay maintain its market share lead in the low end of the fast ethernet switch market." Heritage rates Bay stock a hold because other products such as hubs and routers don't look so strong. His firm has performed no underwriting for Bay. Heritage expects margins to rise from 51.5% in the December quarter to 52% or 53% in the fiscal fourth quarter ending June. A Bay spokesman declined to comment on the margin outlook.