Thread: Overview of networking earnings with mentions of BAY. Victor
ÿ
Pricing Issues, Slower Growth Seen Hurting Networking Firms' Results
Dow Jones Online News, Wednesday, April 08, 1998 at 11:35
By Joelle Tessler, Staff Reporter
NEW YORK -(Dow Jones)- Networking companies are seen reporting mixed
results for the recent quarter as the industry continues to adapt to
substantial pricing pressure and slower top-line growth, analysts said.
Local-area-networking equipment makers could also show some seasonal
weakness in the period since many corporate-enterprise customers don't
approve their information-technology budgets until a month or two into
the new year.
Lazard Freres & Co. analyst Michael Duran expects industry revenue to
be sequentially flat in the March quarter, but he believes growth will
pick up through the rest of the calendar year, driven by strong demand
for ATM technology, layer 3 switches and remote-access products.
Duran also believes growth will accelerate as spending revives once
IT budgets are approved and as prices stabilize. "We think there's a
return to growth in 1998," he said.
The networking business is in its second year of moderate growth
following years of robust expansion - with annual growth rates hovering
around 50% earlier in the decade. Credit Suisse First Boston Corp.
analyst Peter Rubicam expects 20% to 25% top-line growth in the
networking industry in 1998, compared with about 20% last year.
While unit demand appears to be healthy - particularly for carrier
ATM switches and LAN switches - the industry has been facing heavy
pricing pressure, analysts agreed. Sanford Bernstein & Co. analyst Paul
Sagawa said pricing declined 18% across the board in 1997, and predicted
prices will fall another 15% to 16% in 1998.
According to Cowen & Co. analyst Chris Stix, pricing is coming down
in part because component prices, including silicon costs, are falling.
Also, Sagawa said the adoption of application-specific integrated
circuit - ASIC - technology, particularly in the enterprise market, is
pushing prices down.
ASICs are semiconductor circuits optimized for a single application.
Because networks have become so standardized, the technology enables
networking companies to leverage a single design over a wide range of
customers, Sagawa said.
CIBC Oppenheimer Corp. analyst Martin Pyykkonen believes pricing
pressure isn't as severe in the wide-area-networking industry because
carriers and Internet service providers need to build out their networks
to compete for users who want strong performance and uptime.
"They are jockeying with each other for position, so they are in a
spending frenzy," Pyykkonen said, adding that Cisco Systems Inc. (CSCO)
and Ascend Communications Inc. (ASND) have a lot of opportunity in the
wide area business.
In the LAN market, on the other hand, many enterprise customers see
"a less compelling need to upgrade," Pyykkonen said. Also, he noted,
many corporate customers don't make up for lower prices by buying more
equipment.
The economic slowdown in Asia is also hurting growth rates in the
networking industry, of course, and "will cost 4 to 5 points of growth
this year relative to where it would have been" if the market there
hadn't slowed, Sagawa said. Still, Stix pointed out, the region accounts
for less than 10% of sales for many in the group. He added that Europe
is seeing "phenomenal" growth.
Duran stressed that he sees "a return to growth in 1998" driven by
strong demand for ATM technology, remote access products and layer 3
switches.
Many analysts expect layer 3 switches, which take many of the
functions of routers and put them into hardware, to offer customers a
cost-effective networking solution, particularly in LANs. Layer 3
switches can cost 10% to 15% as much as comparable routers and can
perform as much as 75% of the jobs as routers, Sagawa said.
3Com Corp. (COMS), Bay Networks Inc. (BAY) and Cabletron Systems Inc.
(CS) are all touting new layer 3 switches and Cisco will ship a layer 3
product later this year.
Early indications from the networking companies have been mixed.
Hambrecht & Quist Inc. analyst Farrokh Billimoria projects
industry-leader Cisco will report earnings of 45 cents a share for its
fiscal third quarter, which ends this month, compared with 35 cents last
year. He noted that all eyes will be on Cisco, which - as the industry
bellwether - provides a good indication of how the rest of the sector is
doing.
Stix said Cisco is "continuing to outpace the competition based on
its really strong product flow and its focus on the fastest growing
parts of the business," including remote access concentrators and LAN
switching. Stix said Cisco's StrataCom business, which makes frame relay
and ATM switches for the WAN, is also seeing strong growth.
Still, Sagawa warned that some Cisco customers may be holding off on
making purchases since the company is planning to ship a number of new
products - including the Catalyst 8500, which is being positioned as a
high-end layer 3 switch - in the months ahead.
3Com reported operating earnings of two cents a share for its fiscal
third quarter, ended in February, compared with 50 cents a year earlier.
Sales out of the distribution channel in the quarter declined
sequentially, Duran said.
But many analysts said 3Com's outlook is brightening because it has
reduced excess channel inventories and put in place a new business model
that calls for lower gross margins but also lower expenses. Duran also
has high hopes for several new products from 3Com, including its 56K
modems and two new layer 3 switches.
Pyykkonen projects Bay Networks earned 11 cents a share in its fiscal
third quarter, ended March, compared with 10 cents a year earlier. Bay
has already warned that it expects revenue, operating earnings and gross
margins to be below second-quarter levels.
The company's troubles were partly the result of timing issues since
Bay's new Accelar line of routing switches, which began shipping in
December, is ramping quickly but not quickly enough to offset weakness
in older products like shared media hubs, according to Duran.
Cabletron missed even scaled-back expectations for its fiscal fourth
quarter, ended February, and reported a loss of four cents a share,
compared with earnings of 45 cents last year.
Sagawa said Cabletron is having trouble partly because some of its
traditional customers are defecting to Cisco for end-to-end solutions.
Analysts said the company is also hitting bumps because it needs to
build up an indirect sales channel and because it faces competition from
Cisco, Bay Networks and 3Com, particularly in the switching market.
But Cabletron's recent acquisition of Digital Equipment Corp.'s (DEC)
Network Products business should help it build up its indirect sales
channel. And its purchase of Yago Systems has given the company a
high-end switch router that Oppenheimer's Pyykkonen believes will be "a
key variable" in Cabletron's ability to turn its business around.
In other projections:
- Billimoria estimates Fore Systems Inc. (FORE) earned 10 cents a
share in its fourth quarter, ended March, compared with nine cents a
year ago.
- Stix estimates Ascend earned 25 cents a share in the first quarter,
compared with a restated 31 cents last year.
- The mean estimate on Xylan Corp. (XYLN) for the first quarter is 16
cents a share, compared with 13 cents a year ago.
Copyright (c) 1998 Dow Jones & Company, Inc.
_________
Return to Company Headlines
ÿ
Pricing Issues, Slower Growth Seen Hurting Networking Firms' Results
Dow Jones Online News, Wednesday, April 08, 1998 at 11:35
By Joelle Tessler, Staff Reporter
NEW YORK -(Dow Jones)- Networking companies are seen reporting mixed
results for the recent quarter as the industry continues to adapt to
substantial pricing pressure and slower top-line growth, analysts said.
Local-area-networking equipment makers could also show some seasonal
weakness in the period since many corporate-enterprise customers don't
approve their information-technology budgets until a month or two into
the new year.
Lazard Freres & Co. analyst Michael Duran expects industry revenue to
be sequentially flat in the March quarter, but he believes growth will
pick up through the rest of the calendar year, driven by strong demand
for ATM technology, layer 3 switches and remote-access products.
Duran also believes growth will accelerate as spending revives once
IT budgets are approved and as prices stabilize. "We think there's a
return to growth in 1998," he said.
The networking business is in its second year of moderate growth
following years of robust expansion - with annual growth rates hovering
around 50% earlier in the decade. Credit Suisse First Boston Corp.
analyst Peter Rubicam expects 20% to 25% top-line growth in the
networking industry in 1998, compared with about 20% last year.
While unit demand appears to be healthy - particularly for carrier
ATM switches and LAN switches - the industry has been facing heavy
pricing pressure, analysts agreed. Sanford Bernstein & Co. analyst Paul
Sagawa said pricing declined 18% across the board in 1997, and predicted
prices will fall another 15% to 16% in 1998.
According to Cowen & Co. analyst Chris Stix, pricing is coming down
in part because component prices, including silicon costs, are falling.
Also, Sagawa said the adoption of application-specific integrated
circuit - ASIC - technology, particularly in the enterprise market, is
pushing prices down.
ASICs are semiconductor circuits optimized for a single application.
Because networks have become so standardized, the technology enables
networking companies to leverage a single design over a wide range of
customers, Sagawa said.
CIBC Oppenheimer Corp. analyst Martin Pyykkonen believes pricing
pressure isn't as severe in the wide-area-networking industry because
carriers and Internet service providers need to build out their networks
to compete for users who want strong performance and uptime.
"They are jockeying with each other for position, so they are in a
spending frenzy," Pyykkonen said, adding that Cisco Systems Inc. (CSCO)
and Ascend Communications Inc. (ASND) have a lot of opportunity in the
wide area business.
In the LAN market, on the other hand, many enterprise customers see
"a less compelling need to upgrade," Pyykkonen said. Also, he noted,
many corporate customers don't make up for lower prices by buying more
equipment.
The economic slowdown in Asia is also hurting growth rates in the
networking industry, of course, and "will cost 4 to 5 points of growth
this year relative to where it would have been" if the market there
hadn't slowed, Sagawa said. Still, Stix pointed out, the region accounts
for less than 10% of sales for many in the group. He added that Europe
is seeing "phenomenal" growth.
Duran stressed that he sees "a return to growth in 1998" driven by
strong demand for ATM technology, remote access products and layer 3
switches.
Many analysts expect layer 3 switches, which take many of the
functions of routers and put them into hardware, to offer customers a
cost-effective networking solution, particularly in LANs. Layer 3
switches can cost 10% to 15% as much as comparable routers and can
perform as much as 75% of the jobs as routers, Sagawa said.
3Com Corp. (COMS), Bay Networks Inc. (BAY) and Cabletron Systems Inc.
(CS) are all touting new layer 3 switches and Cisco will ship a layer 3
product later this year.
Early indications from the networking companies have been mixed.
Hambrecht & Quist Inc. analyst Farrokh Billimoria projects
industry-leader Cisco will report earnings of 45 cents a share for its
fiscal third quarter, which ends this month, compared with 35 cents last
year. He noted that all eyes will be on Cisco, which - as the industry
bellwether - provides a good indication of how the rest of the sector is
doing.
Stix said Cisco is "continuing to outpace the competition based on
its really strong product flow and its focus on the fastest growing
parts of the business," including remote access concentrators and LAN
switching. Stix said Cisco's StrataCom business, which makes frame relay
and ATM switches for the WAN, is also seeing strong growth.
Still, Sagawa warned that some Cisco customers may be holding off on
making purchases since the company is planning to ship a number of new
products - including the Catalyst 8500, which is being positioned as a
high-end layer 3 switch - in the months ahead.
3Com reported operating earnings of two cents a share for its fiscal
third quarter, ended in February, compared with 50 cents a year earlier.
Sales out of the distribution channel in the quarter declined
sequentially, Duran said.
But many analysts said 3Com's outlook is brightening because it has
reduced excess channel inventories and put in place a new business model
that calls for lower gross margins but also lower expenses. Duran also
has high hopes for several new products from 3Com, including its 56K
modems and two new layer 3 switches.
Pyykkonen projects Bay Networks earned 11 cents a share in its fiscal
third quarter, ended March, compared with 10 cents a year earlier. Bay
has already warned that it expects revenue, operating earnings and gross
margins to be below second-quarter levels.
The company's troubles were partly the result of timing issues since
Bay's new Accelar line of routing switches, which began shipping in
December, is ramping quickly but not quickly enough to offset weakness
in older products like shared media hubs, according to Duran.
Cabletron missed even scaled-back expectations for its fiscal fourth
quarter, ended February, and reported a loss of four cents a share,
compared with earnings of 45 cents last year.
Sagawa said Cabletron is having trouble partly because some of its
traditional customers are defecting to Cisco for end-to-end solutions.
Analysts said the company is also hitting bumps because it needs to
build up an indirect sales channel and because it faces competition from
Cisco, Bay Networks and 3Com, particularly in the switching market.
But Cabletron's recent acquisition of Digital Equipment Corp.'s (DEC)
Network Products business should help it build up its indirect sales
channel. And its purchase of Yago Systems has given the company a
high-end switch router that Oppenheimer's Pyykkonen believes will be "a
key variable" in Cabletron's ability to turn its business around.
In other projections:
- Billimoria estimates Fore Systems Inc. (FORE) earned 10 cents a
share in its fourth quarter, ended March, compared with nine cents a
year ago.
- Stix estimates Ascend earned 25 cents a share in the first quarter,
compared with a restated 31 cents last year.
- The mean estimate on Xylan Corp. (XYLN) for the first quarter is 16
cents a share, compared with 13 cents a year ago.
Copyright (c) 1998 Dow Jones & Company, Inc.
V |
