By Joelle Tessler, Staff Reporter
NEW YORK -(Dow Jones)- With solid corporate demand and robust
spending on infrastructure by phone companies and Internet service
providers, most big data networking equipment makers should meet or beat
third-quarter earnings estimates in the third quarter, analysts said.
In the latest quarter, networking companies also saw an easing of the
pricing pressure as well as strong sales volumes, said SG Cowen
Securities Corp. analyst Chris Stix.
The two networking companies with quarters ended in August, 3Com
Corp. (COMS) and Cabletron Systems Inc. (CS), have been coping with
company-specific troubles over the past year, but Nutmeg Securities
analyst Andy Schopick believes their fortunes are starting to turn.
3Com posted operating earnings of 24 cents a share on $1.4 billion in
revenue in its first quarter, compared with a 15-cent loss on $1.6
billion in revenue in the year-ago quarter. Revenue, which the company
said would be flat sequentially, rose 2.2%, and earnings were four cents
a share above estimates. Many analysts think the company has worked
through bloated distribution channel inventories and sluggish 56K-modem
sales that hurt it earlier this year.
Still, the sequential increase in revenue in 3Com's latest quarter
was caused mostly by sales of a noncore product, the Palm Pilot
hand-held computer. International sales fell 10% sequentially.
Cabletron Systems earned nine cents a share on $370.6 million in its
fiscal second quarter, compared with 36 cents on $371.3 million in
revenue in the year-ago quarter. The results were one penny above the
mean estimate of analysts, in large part because of an increase in huge
gross margins.
Cabletron has been dealing with a heavy concentration of older
products such as intelligent hubs and a large presence in shared media,
which is being replaced by switched products. Shared media sales
contributed 14% of revenue in the quarter, while switching sales
contributed 55%.
Many companies are spending to upgrade their networks to fast
Ethernet and gigabit Ethernet technology from Ethernet, said Hambrecht &
Quist Inc. analyst Farrokh Billimoria. Many are also installing Layer 3
switches, which can perform many of the functions of routers but cost
less than half as much.
Revenue in the LAN business is growing at a rate in the mid-to-upper
teens year-over-year, Pyykkonen estimates.
But even while corporate demand was solid in the third quarter,
analysts warned that this market could slow substantially as 1999
spending plans get set, since many large companies that buy data
networking equipment, especially financial-services firms, have been
hurt by the economic turmoil.
The analyst believes enterprise spending could grow at a rate of 10%
or less in 1999.
Sales of wide area networking, or WAN, equipment to carriers - phone
companies and Internet service providers - should also show robust
growth in the latest quarter. Just about all of the major telecom
companies - ranging from the traditional leaders such as AT&T Corp. (T)
and the Baby Bells to emerging independent carriers - are spending
heavily to add bandwidth and upgrade their networks to handle data
traffic and integrate voice and data, said Sanford C. Bernstein & Co.
analyst Paul Sagawa.
At the same time, the rapid growth of the Internet is driving strong
spending by Internet service providers. This has created robust demand
for frame relay and asynchronous transfer mode, or ATM, switches in
particular, Stix noted. Pyykkonen estimated the wide area business was
growing at a rate of more than 20% year-over-year - with growth rates in
the mid-to-high-20% range for some products, like ATM switches.
Unlike the enterprise market, the carrier market should remain
strong, analysts believe.
Pyykkonen projects Cisco Systems Inc. (CSCO), the industdry leader,
earned 33 cents a share in its fiscal first quarter, which ends in
October, compared with 26 cents a year earlier. Looking ahead, Stix
warned that Cisco - which gets about 75% of its revenue from the
enterprise market and 15% to 20% from financial-services companies -
could feel the effects of slower corporate spending next year. The
analyst recently cut his long-term revenue growth estimate on Cisco to
25% year-over-year from 30%.
Fore Systems Inc. (FORE) already has warned Wall Street that
operating results for its fiscal second quarter, ended in September,
will be nine cents to 10 cents a share - below previous views. Fore
earned seven cents a share a year ago. Fore said it had strong demand
and bookings in the quarter, but that it couldn't ship certain products
before the end of the period since orders were back-end loaded.
Fore's revenue also was hurt by a product transition in an ATM switch
for the service provider market. Sales of the DC-power version of the
company's ASX-1000 switch dropped off as carrier customers delayed
purchases to wait for Fore to ship the DC-power version of ASX-4000 in
early October.
In addition, the company faced some inventory management problems
with its fixed-configuration Ethernet switches in its latest quarter as
it built up too much inventory of its ES-2810 switches, which don't yet
have an ATM uplink, and not enough of its ES-3810 switches, which have
the uplink.
The mean estimate on Xylan Corp. (XYLN) is for earnings of 22 cents a
share for its third quarter, versus 10 cents a year earlier. One of
Xylan's two biggest customers, Alcatel SA (ALA), warned that it wouldn't
meet profit forecasts for the year.
This came on the heels of Xylan's warning in July that sales to its
other major customer, International Business Machines Corp. (IBM), would
be down sequentially in the third quarter.
SG Cowen Securities' Stix projects Ascend Communications Inc. (ASND)
earned 32 cents a share in the third quarter, compared with 20 cents a
year ago. As a pure play in the WAN market, Ascend is benefiting from
the strong spending by phone companies and Internet service providers as
they build out their networks.
Stix believes the company should show "modest but real growth" in its
access concentrator business and close to 25% sequential growth in its
ATM switching business.
Many analysts believe the company's strong position in the carrier
data networking market makes it an attractive target for a big
telecommunications equipment company looking to expand beyond voice
equipment into data gear.
- Joelle Tessler; 201-938-5285
Copyright (c) 1998 Dow Jones & Company, Inc. |
