U.S. Networking Companies Face Slower Growth: Industry Outlook
Bloomberg - June 22, 1998, 3:28 EST
June 22 (Bloomberg) -- Cisco Systems Inc. will turn in solid
earnings growth this quarter, while its traditional computer-
networking rivals will either struggle or be purchased amid
falling profits on equipment sold to corporate customers.
Earnings at 3Com Corp., Cabletron Systems Inc. and Bay
Networks Inc. -- which last week agreed to be bought by phone-
equipment maker Northern Telecom Ltd. -- are expected to fall,
hurt by price cuts and slowing sales of older equipment.
Cisco, the No. 1 maker of equipment used to link computers
to the Internet, will benefit from strong sales of its expensive
routers. Still, its corporate sales are slowing, and it
faces powerful rivals in Northern Telecom, Lucent Technologies
Inc. and Ascend Communications Inc. as it tries to boost sales to
phone companies and Internet service providers.
''The competitive landscape in this industry is changing
fast,'' said Martin Pyykkonen, an analyst at CIBC Oppenheimer,
who rates Cisco and Ascend ''buy'' and 3Com and Bay ''hold.''
While the corporate market ebbs, sales of new equipment to phone
companies and Internet service providers are expected to reach
more than $50 billion annually by 2002.
Cisco's profit is expected to rise to 47 cents a share in
the fourth quarter ending in July, up from 37 cents a year ago,
according to estimates gathered by IBES International Inc.
New Competitors
To get a jump on Cisco, Lucent and Northern Telecom have
gone on buying sprees, spending more than a billion dollars each
to acquire data-networking companies.
Though Northern's purchase of Bay may be the largest
acquisition in the networking industry, valued at $9.1 billion
when it was first disclosed, it won't be the last.
Other acquisitions are likely to follow involving large
phone-equipment makers like Lucent and network-equipment makers
Ascend, Cabletron, 3Com or smaller firms Fore Systems Inc. and
Xylan Corp.
''This (Northern's purchase of Bay) is just the tip of the
iceberg,'' for telecommunications-networking acquisitions, said
Craig Johnson, an analyst at the Pita Group in Portland, Oregon.
Bay is expected to earn 12 cents a share in the quarter
ending in June, according to IBES. That's less than the 15 cents
it earned last year. The company has stumbled since it was forced
to cut prices when Cisco and 3Com lowered prices on competing
products.
Ascend Ascends
Among Cisco's rivals, Ascend is best positioned to take
advantage of the growth in the phone carrier market, because
the powerful switches it acquired when it bought Cascade
Communications Corp. last year are in strong demand by local and
long-distance companies.
Ascend also has established customer relationships with many
online service providers thanks to sales of its remote access
concentrators, which route incoming Internet calls.
The company will earn 28 cents a share in the quarter ending
in June, according to IBES. Although that's less than the 31
cents it reported a year ago, it will be Ascend's fourth
consecutive quarter of earnings growth.
''Ascend is hitting on all cylinders,'' said analyst Joseph
Noel of Hambrecht & Quist Group, who rates the stock ''buy.''
Ascend's strong performance makes it a possible acquisition
target for Lucent and others, analysts said.
''They have the technology and customer relationships the
telcos need,'' said Johnson of the PITA Group.
Cabletron, 3Com
Earnings at both Cabletron and 3Com are expected to fall
well short of year-earlier profits. For 3Com, it will be the
third straight quarter of steep decline because of slowing sales
of its telephone-based modems and competition from Cisco for its
networking systems.
3Com has cut prices on some low-cost computer switches by 50
percent this year, and modem prices have fallen almost as much.
Now, prices on more expensive gear also are starting to fall.
''The question is how much the price competition for the
high-end stuff will hurt them,'' Pyykkonen said.
Cabletron is suffering as sales of its older gear using an
outdated technology have plummeted. Though it bought Yago Systems
Inc. in January to get switches that are 10 times faster than
existing products, they have yet to generate significant revenue
for the company.
''This company is in bad shape,'' said Scott Heritage, an
analyst at UBS Securities who rates Cabletron ''hold.''
Xylan, Fore
Smaller companies Xylan and Fore are expected to report
higher profits as each benefits from increased sales in
their market niches.
Fore gets two-thirds of its revenue from sales of switches
using asynchronous transfer mode, or ATM, technology. Those
switches, which combine voice and data traffic on the same
network, have been boosted by a delay in a standard for a
competing technology.
Xylan makes expensive, sophisticated switches used by large
businesses and government agencies. The company has been helped
by strong European sales through a distribution agreement with
French telecommunications giant Alcatel Alsthom SA.
Company 2nd-Qtr Year-Ago Number of
Estimates EPS Analysts
Cisco Systems Inc.^ $0.47 $0.37 35
3Com Corp.+ 0.18 0.48 35
Bay Networks Inc.@ 0.12 0.15 28
Cabletron Systems Inc.& 0.06 0.38 24
Ascend Communications Inc. 0.28 0.31 26
Fore Systems Inc.) 0.13 0.05 16
Xylan Corp. 0.19 0.07 11
Shiva Corp. 0.03 (0.03) 9
^4th fiscal Qtr ending July
+4th fiscal Qtr ended May
@4th fiscal Qtr ending June
&1st fiscal Qtr ended May
)1st fiscal Qtr ending June
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