Forbes article on BAY. The Art of the Comeback. [ASND positive reference]
Excerpt: "The best long-term opportunity, however, may be
in the carrier space. "That's going to be a huge
strong market over the next five years,"
Armstrong says.
But right now the carrier space is Bay's weakest
area. Its product line is incomplete compared with
those of Cisco and Ascend Communications Inc.,
and analysts doubt that Bay can catch up."
forbes.com
By Daniel Lyons
Can Bay Networks Inc.'s top-notch products
save the day? In the booming networking
industry, the Santa Clara, Calif. company is
forced to play second fiddle to Cisco Systems.
The question is not just academic. Bay (BAY)
knows how to develop great networking gear, but
Cisco knows how to sell. "We have prospects
where the guy in the lab will do a side-by-side
comparison and decide that Bay is the best. But
when he takes that recommendation to the CIO
or the CEO, the Cisco sales rep is up there selling
to those guys--and we're not," says Lloyd
Carney, executive vice president at Bay.
That is one reason why Cisco has sales of more
than $6 billion a year, compared with Bay's $2
billion. For many customers Cisco is the safe
choice.
Carney says Bay is targeting top management in a
subtle shift away from the geekier technology vice
presidents. The company is also putting together
slick advertising on TV and in business
magazines, hoping to build brand awareness
among people other than the nerds in the lab.
But Bay is hoping that its better products and not
its sales techniques triumph in the end. Recently
the company was first to market with a new kind
of switch that combines features of both routing
and switching. (Switches rely on hardware and
are faster and cheaper, while routers use software
and can handle more types of data.) These
so-called Layer 3 switches are the Next Big
Thing in networking, since they can do what a
router does, at 1/10th the cost.
"Shame on us for setting
expectations too high."
Cisco is still relying heavily on old-fashioned
routers, and is being slow about making the
transition. Although it has announced a Layer 3
switch product, "they're not going to ship until this
summer, and that's based on what they've
preannnounced. Who knows when they'll actually
ship?" Carney says.
Bay's Layer 3 switch, called Accelar, has another
advantage because it can handle Gigabit Ethernet,
the newest version of the networking standard.
Gigabit Ethernet moves data at
1,000-megabits-per-second--100 times faster
than ordinary (10-mbps) Ethernet, and 10 times
faster than so-called Fast Ethernet, which moves
data at 100-mbps.
Accelar sales have been strong, Carney says. But
not as strong as some had hoped. Although 55%
of the company's revenues in the latest quarter
came from "new" products, roughly 29% of its
sales are still derived from its local area network
switch line, which is subject to constant price
drops.
Bay results disappointed Wall Street.
Third-quarter earnings came to 4 cents per share
(before charges) compared with 10 cents per
share in the year-earlier period. Add in a $154
million charge for R&D costs related to two
acquisitions, and Bay ended up with a
third-quarter loss of 66 cents per share.
Revenues also came in at $547 million, which was
50% less than the company had previously
forecast.
"Shame on us for setting expectations too high,"
Carney says.
Shame indeed. That's the kind of goof that Cisco
never would have made. Which helps explain why
Cisco's market capitalization is 15 times greater
than Bay's even though its sales are only three
times greater.
Still, some analysts like Bay stock, which at a
recent $23 is trading at about 33 times expected
earnings for the current fiscal year, which ends
June 30. "It's very reasonable to expect that
shares can appreciate from here," says David
Raezer, analyst with Montgomery Securities.
Raezer's rationale is that the Accelar is going to
spark sales for the next several quarters. Last
year Bay drove its business by being first to
market with a 10/100 Ethernet switch (one that
can communicate with 10-mbps Ethernet devices
and 100-mbps Fast Ethernet devices) called the
BayStack 350.
"The 350 has really dominated that market over
the past 12 months. And now they have a nice
installed base into which they can sell the
Accelar," Raezer says.
So why the shortfall in the most recent quarter?
Customer indecision with respect to gigabit
ethernet routers. "The product cycle is still going
to be there," Raezer says.
Building morale and market share
| continued from "Gray day for Bay" |
Acquiring for the future
Bay got a jump on its rivals with the 350 and
the Accelar by acquiring the technology
rather than trying to develop it in-house. The
350 came from a company called NetICS, and
the Accelar came from a company called Rapid
City.
A keen eye for acquisitions has been the
trademark of David House, Bay's chairman,
president and CEO, who joined the company in
1996, after 22 years at Intel.
Bay was in the doldrums when House took over.
The company, formed in 1994 through the merger
of SynOptics Communications Inc. and Wellfleet
Communications Inc., was losing market share to
Cisco. Employees were jumping ship. So were
customers.
Since then House has shored up
morale and regained share in
some markets. He's also
contained costs, and boosted
sales, which are expected to
grow 14 percent this year, to
$2.4 billion, after hovering at about $2 billion for
the previous two years.
And he's acquiring like crazy. In its most recent
quarter Bay acquired two companies--one
develops so-called extranet technology, the other
makes network management software--and
invested in a company that develops
voice-over-IP technology, which lets people talk
over the Internet.
Whether Bay can buy its way into the future
remains to be seen. The company is a leader in
various areas--ATM, hubs, cable modems,
low-end Ethernet switches--but doesn't have the
kind of end-to-end product breadth that Cisco
has.
Whether Bay can buy its
way into the future remains
to be seen.
There are three product segments in the network
market: enterprise products; low-end products;
and products for carriers and Internet service
providers (ISPs).
Cisco owns the enterprise space. But Bay may be
able to succeed in the low end, with products
designed for workgroups and branch offices.
Trouble is, 3Com Corp. already owns that
market.
Still, "Bay has a better opportunity to unseat
3Com in the low end than they do to unseat
Cisco in the enterprise," says John Armstrong,
networking analyst at Dataquest Inc., a market
research firm in San Jose, Calif.
The best long-term opportunity, however, may be
in the carrier space. "That's going to be a huge
strong market over the next five years,"
Armstrong says.
But right now the carrier space is Bay's weakest
area. Its product line is incomplete compared with
those of Cisco and Ascend Communications Inc.,
and analysts doubt that Bay can catch up.
Even Raezer, who rates Bay stock a "buy,"
describes the long-term outlook this way: "3Com
gets the low end, Cisco gets the high end and the
carriers, and Bay and Cabletron get squeezed."
So where will Bay end up? A likely endgame
involves acquisition. Telecom companies like
Lucent Technologies and Nortel are shopping for
data networking expertise as the worlds of voice,
video and data converge.
Carney says Bay can succeed on its own and
compete not only against Cisco but against
Lucent and Nortel as well. The key, he says, will
be making the world more aware of Bay's
technology, through savvier sales and marketing.
| top |
See also:
The race for market share
Bay Networks versus the rest of the pack.
Neo Networks
Some little guys are getting ready to take on the
industry giants.
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