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

To: thebeach who wrote (5408)	4/17/1998 1:48:00 PM
From: Maverick	Read Replies (1) \| Respond to of 6980

Gray Day for Bay FOOL PLATE SPECIAL An Investment Opinion by Alex Schay Fierce price competition coupled with technology transition issues has made for rough going in the networking segment over the last couple of months. It was almost exactly a month ago today that networking products firm Bay Networks' (NYSE:BAY - news) stock advanced despite the company announcing that it expected third quarter earnings to fall below expectations due to weaker-than-anticipated customer demand (albeit in a seasonally weak quarter). The company forecast that third quarter revenue would be down about 10% from second quarter sales of $645 million, and that gross margins would decline to about 49.5%. Using this guidance, EPS for the quarter was expected to come in around $0.12 (excluding a charge for writing off in-process R&D). The bleak announcement was somewhat tempered by a book-to-bill well above one for its Accelar routing switch products as well as favorable performance test results. Some investors were betting that the worst was over and that a new line of high-speed switches would help boost Bay Networks' fourth quarter profits. However, this morning Bay sank $1 5/8 to $22 3/8 after reporting third quarter earnings of $0.04 per share (before charges) compared with $0.10 (excluding restructuring charges) in the year-earlier period. Including a $154 million charge for in-process R&D costs related to two acquisitions, Bay reported a Q3 loss of $0.66 per share. Revenues came in at $547, which was 15% below its Q2 figures and 50% less than the company had previously forecast. In addition, gross margins dropped to 46.8% versus the previous guidance of 49.5%. Perhaps it's easy to condemn optimistic guidance, but as a result of the Q3 announcement numerous brokerages with egg on their faces cut their ratings on the firm. Bay was cut to "market perform" at Donaldson, Lufkin & Jenrette, "hold" at Deutsche Morgan Grenfell, and "market perform" at Goldman Sachs. The market is replete with examples where companies providing conservative guidance are rewarded (erring on the low side of expectations) as opposed to providing optimistic assessments that are ultimately squashed. Although 55% of the company's revenues in the quarter came from "new" products (12-months old), roughly 29% of its sales are still derived from its LAN switch line that is subject to constant price drops. This combined with customer indecision with respect to gigabit ethernet versus ATM backbones, routers versus routing switches, and 56K modem technology (recent standard issued) will continue to make for some choppy quarters.