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Technology Stocks : Cabletron Systems (CS: NYSE) -- Ignore unavailable to you. Want to Upgrade?

To: Roy F who wrote (5414)	12/3/1998 11:28:00 AM
From: Dr. Id	Respond to of 8358

Hambrecht & Quist report After the close yesterday, CS pre-announced their Q3FY99 earnings due to an expected shortfall in revs in the $330 million to $340 million range. This compares to our Q3 estimate of $385 million as a 12-14% shortfall. As a result, the company expects an operating loss of approximately $0.10/shr, compared to our estimate of a gain of $.10 before non-recurring charges associated with acquisitions. - The first reason for the shortfall is due to sales to Nortel and Lucent drying up pretty quickly during the quarter. This accounted for almost half of the revenue fall-off. Both internal use of CS products, mainly by NT, as well as reseller agreements did not remain at previous levels. - Second, as we had suspected, the Compaq relationship was not up to expected levels, and will come in flat for the quarter. Also as we had feared, CS does not expect for Compaq to purchase $300 million worth of product by June, as specified by the current OEM agreement. However, management did indicate that we can expect to see a renegotiated OEM agreement with CPQ before the 12/21 earnings release which will include an expanded set of products. Management indicated that the terms of the new agreement should allow them to attain the previously negotiated obligation over the next few quarters. - Lastly, there also occurred a decline in sales in legacy products, most notably in shared media. The company expects for this line of business to decline to 10% of revenues for the quarter, down from 15% last quarter. - Management also noted some pricing pressure, mainly competition with Cisco and said that it is not really product related. In addition, the company also repriced some older product lines, and needed to protect the channel. Lastly, the SmartSwitch router has gained significant market share and more than doubled quarter over quarter. The company also noted that once WAN interfaces are introduced that we could see that share increase even more. - Recommendation: We are maintaining our HOLD, as the company has struggled to expand its revenue line and the Compaq relationship (formely DEC) is now confirmed to be growing slower than expected. We will be looking to see if the renegotiated agreement will enable them to attain revenue goals. In addition, the impact of the Nortel/Bay acquisition was substantial and we are not confident that the decline has gone as low as it can. We remain optimistic that the YAGO product is doing well and gaining market share. We will be watching to see how it helps CS regain momentum while the Compaq relationship ramps.