"Analysts Say Cabletron's Troubles Company-Specific "
Dow Jones Newswires -- March 3, 1998
By Joelle Tessler
NEW YORK (Dow Jones)--As the networking sector continues to
recover from a rocky 1997, most analysts agreed that Cabletron Systems
Inc.'s (CS) expected fiscal fourth-quarter earnings shortfall is the result of
company-specific troubles, not a renewed industry slowdown.
Cabletron's focus on high-end, Fortune 500 customers at a time when
smaller companies are making many networking purchases contributed to
its disappointing expectations for its fiscal fourth quarter, analysts said.
Competition from Cisco Systems Inc. (CSCO), Bay Networks Inc. (BAY)
and 3Com Corp. (COMS) - particularly in the switching market - also put
pressure on the company.
In addition, Cabletron still has a sizable presence in shared media products,
even as the networking industry migrates to switching technology, although
the company is building up its switching business.
'The bottom line is that the company is just in a weakened state right now,'
said Donaldson Lufkin & Jenrette Securities Corp. analyst Stephen Koffler.
He added, though, that Cabletron's problems are 'isolated' to the company.
'It's not a reflection of others in the group,' he said.
Still, the company's announcement late Monday that its earnings for the
fourth quarter, ended in February, will fall short of expectations has rattled
other stocks in the group.
Networking-equipment makers are recovering from a slowdown in the first
half of last year due to a pullback in overseas demand, longer sales cycles,
a wave of new product cycles and tight pricing competition. So analysts are
keeping a close eye on the larger companies in the group to affirm that
business has in fact picked up.
Cabletron said late Monday it expects its fourth-quarter operating results to
range from breakeven to a small loss on $305 million to $320 million in
revenue. The company also said it expects to take three charges, totaling
$1.61 a share, for a company reorganization and the purchase of Digital
Equipment Corp.'s (DEC) Network Products Business.
In the year-ago fourth-quarter, Cabletron reported operating income,
before charges, of 47 cents a share on $380.6 million in revenue. And it
earned 13 cents a share on $331.8 million in revenue in the fiscal third
quarter, ended in November 1997.
Monday's announcement marked the third time over the past four quarters
Cabletron has prereleased disappointing results.
But after falling nearly 15% Monday in anticipation of the shortfall, the
company's shares were up Tuesday. Bear Stearns & Co. analyst Eric
Blachno said investors may be speculating that Cabletron could become a
buyout target.
Cabletron's NYSE-listed shares were recently up 1/16, or 0.4%, at 14
1/16 on volume of 2.9 million shares compared with an average daily
volume of 2.8 million.
Yet others in the networking group were under pressure. Bellwether Cisco
was recently down 0.9%. Bay Networks was down 3.1%, after falling
6.4% Monday. 3Com was down 1.4% recently. And Ascend
Communications Inc. (ASND) was recently down 2.7%, after falling 6.3%
Monday.
In its press release Monday, Cabletron attributed its disappointing
fourth-quarter results to 'a shortfall in sales, operating expenses related to
the closing and integration of the Digital Network Business early in the
quarter and the adverse margin impact of lower volume, pricing and some
materials-related charges.'
The company also said it experienced continued softness in its federal
government business and an order shortfall in 'certain domestic segments' at
the end of the quarter.
Blachno of Bear Stearns believes that excluding revenue from DEC's
networking business - which he puts at about $20 million to $30 million -
Cabletron's core revenue fell about 15% sequentially in the fourth quarter.
He noted that revenue fell about 10% sequentially in the third quarter.
Cabletron also said it experienced a reduction in distribution channel
inventory levels due in part to the sales shortfall and to efforts to establish
'consistent and more stringent channel policies.'
Lazard Freres & Co. analyst Michael Duran said Cabletron's troubles stem
in part from its focus on selling high-end systems - which he called the
company's 'bread and butter' - into a market that is buying more low-end
products.
Duran explained that Cabletron's primary customers are high-end, Fortune
500 companies that already have high network penetration. The company
doesn't have nearly as big a presence among smaller companies, which
have much lower penetration and therefore are buying more networking
products, he said.
In order to step up its presence in this market, Duran believes, Cabletron
must introduce more low-end products and build up its indirect sales
channel, since smaller companies tend to buy through that channel.
Blachno of Bear Stearns said Cabletron also is suffering from a loss of
market share in high-end switching to industry leader Cisco and its Catalyst
5500 high-end backbone switch, which competes with Cabletron's
MMAC-Plus switching hub.
Koffler of DLJ noted, in fact, that Cisco is taking advantage of the situation
at Cabletron to recruit employees and bring in new customer accounts.
Bay Networks and 3Com also are gaining market share from Cabletron in switches and hubs, Blachno added.
In addition, the analyst said, Cabletron is also suffering from a continued
decline in the shared media business as switched technology replaces
shared technology in the networking industry. Cabletron is, however,
building up its switching operations.
According to Duran, shared media accounted for $66 million out of $332
million in total revenue in Cabletron's third quarter, and $92 million out of
$372 million in total revenue in the second quarter. Switched products
accounted for $176 million in revenue in the third quarter and $179 million
in the second quarter.
Finally, Duran said, Cabletron has 'given back' nearly 10% in gross margins
over the past two quarters since it has had to lower prices to move
products and since it faces a lot of competition.
Blachno estimates that the company's gross margins could come in at 47%
for the fourth quarter, compared with 50.5% in the third quarter and 57.2%
in the second quarter.
Mang |
