thestreet.com on FORE (many ASND references)
Top Stories: After Turnaround,
Fore Faces More Hard Work
By Kevin Petrie
Staff Reporter
7/22/98 3:33 PM ET
Fore Systems' (FORE:Nasdaq) shares have soared 75%
in the past four months as the once struggling
computer networker rebounded in its core business.
But without a successful push into a new, tougher
market, the stock's run is done, observers say.
"You don't see a lot of people who want to put it
into their portfolio," says analyst Spencer Punter
with Integral Capital Partners, a former Fore
investor. Fore's bullish second-quarter earnings
conference call last week failed to lure Punter
back, in part, he says, because of Fore's
valuation -- 59 times trailing earnings and 41
times fiscal 1999 earnings estimates.
The hard work in Fore's year-old turnaround now
looms large. Since his promotion in January, CEO
Tom Gill has cemented Fore's core business with
corporations, which constitute 80% of revenue. But
severe price competition and technology shifts in
that market have turned Fore to a potentially more
lucrative yet tougher market -- furnishing phone
carriers and Internet service providers with
asynchronous transfer mode, or ATM, products that
serve as a computer network's vertebrae. There it
encounters Ascend (ASND:Nasdaq), which has a long
history with carriers such as AT&T (T:NYSE). Until
Fore scores an Ascend-size contract with an
old-guard carrier, Punter and other pros figure
the stock will sit where it is.
Investors, smitten with companies such as king
networker Cisco (CSCO:Nasdaq) and Ascend, were
slow to warm to Fore's recovery. The company
topped analysts' estimates four quarters in a row,
but not until early March did shares snap out of
their holding pattern. The stock was trading today
at 26 1/16, down 5/16.
"They made a turnaround," says analyst Ned Brines
with money manager Roger Engemann Associates. "In
retrospect, we could have made some money and
didn't get in there." Brines' firm exited Fore
Systems in early 1996.
Fore's earnings have ticked upward steadily since
they cratered over one year ago. Last week, the
company reported net income of $14.4 million, or
14 cents per share, one penny higher than the
First Call consensus and up from $5 million, or 5
cents per share, one year earlier. Revenue jumped
51% to $144 million from $95 million. Gross profit
margins held steady at 56%.
Fore deserves full credit for defying Cisco in the
business of supplying corporations with ATM for
local-area networks. Fore grew its market share to
32% in the first quarter, the top spot, from 29%
in the prior period, according to researcher
Cahners In-Stat Group. Cisco holds a 22% market
share.
"Cisco takes a supermarket approach," says Fore
Vice President Ron McKenzie. "We really try to
have a focused solution."
And Fore holds the edge in the technology. An ATM
pioneer in 1994, it now builds the most bug-free
and easily managed systems for corporations.
Yet the toughest work is ahead.
"For the next year or two, I think they'll do just
fine," says Dave Passmore, president of the
consulting firm NetReference, which did a small
job for Fore months ago but does not currently
work for the company. But then Passmore expects an
attack from old ethernet networks that have been
upgraded to run at faster speeds. Passmore says
many network managers might choose to upgrade
their ethernet systems with products from Fore
rivals such as 3Com (COMS:Nasdaq) rather than
install cumbersome new ATM gear. Some fast
ethernet equipment prices, he says, have fallen a
surprising 75% in the last year, compared to about
30% for ATM products.
Fore, which derives a quarter of its revenue from
ethernet now, wants to prove that the two
technologies complement one another. In May, the
company paired with chip titan Intel (INTC:Nasdaq)
to develop joint ATM-ethernet products. Jeremy
Duke, an analyst at market researcher Cahners
In-Stat, says Intel gives Fore a nice promotional
tool for its existing ATM units, but it fails to
tap new growth opportunities.
Murky takeover rumors about Fore seem unlikely to
bear fruit for now as well. Investors say Lucent
(LU:NYSE), which is building its data portfolio
through a chain of acquisitions, is more likely to
snap up Ascend than Fore to build its ATM
technology.
Fore's biggest struggle -- and, at the same time,
biggest opportunity -- involves the phone-carrier
business.
Fore already has landed deals with new carriers
such as Level 3 (LVLT:Nasdaq) and cable companies.
But the larger ATM opportunity comes with old,
established carriers such as Bell Atlantic
(BEL:NYSE) -- and Fore runs smack into mighty
Ascend when it tries to land those contracts. Bell
Atlantic has resold Fore products to corporations,
but it deploys mostly Ascend gear in its own
network. Fore's low-cost ASX 4000 product,
expected to ship next month, is widely considered
a tremendous product, but selling it to big
carriers requires the patience of Job. Carriers
often test equipment for months before deploying
it.
Even at Fore customer UUNet, an arm of WorldCom
(WCOM:Nasdaq), Ascend comes out the winner. In the
first quarter, UUNet paid Ascend $61 million for
"frame relay" and related gear -- more than twice
Fore's total sales to ISPs and carriers.
Fore's McKenzie says emerging carriers such as
Level 3 and cable companies represent a great
opportunity, and he's optimistic the ASX 4000 will
mine the market for riches. But other new carriers
like Williams (WMB:NYSE) already have committed to
Ascend, leaving scraps for Fore.
Fore has "to build the internal pipeline of
business," with a sales staff and such to serve
carriers and ISPs, says Duke at Cahners In-Stat.
"And that's no small feat." Short of being
acquired or making a radical change in the
business plan, Duke says it will take Fore at
least one year to gain significant revenue with
carriers and ISPs. |
