******** A MUST READ **********
Bad news week rattles
Newbridge
An early profit warning, a bankrupt
affiliate and rumours of a lost contract
have knocked the company's shares down
to size. But it might, James Bagnall writes,
simply be a case of bad news running in a
pack.
James Bagnall
The Ottawa Citizen
In relatively quick succession, Kanata-based Newbridge Networks
Corp. has delivered three pieces of bad news, and the net impact has
been a 25-per-cent drop in its share price to $36.30 on the Toronto
Stock Exchange from $48.70 on Feb. 4.
Last week, Newbridge warned investors that results for its quarter
ended Jan. 31 would be worse than analysts were expecting. On
Wednesday, one of its affiliates -- West End Systems Corp. of Arnprior
-- declared bankruptcy. A few days ago, Newbridge learned privately
that a major wireless technology customer, WIC Connexus of Toronto,
was considering alternate suppliers, including archrival Cisco Systems
Inc.
Isolated bits of bad luck and poor timing, or evidence of more systemic
problems?
So far, the answer appears to be the former. For instance, some analysts
believe Newbridge might have erred on the side of caution when it
provided early warning of results for its third fiscal quarter.
James Kedersha, an analyst with SG Cowen of New York, points out
that the company could have waited until its regular release date, then
announced that it was winding down its Vivid business unit (computer
networking products) and taking a one-time restructuring charge.
"Analysts like this sort of thing because it cleans the slate," said Mr.
Kedersha. "Newbridge shares might have been dragged down a bit but
probably nothing like they were after the pre-announcement."
Instead, Newbridge simply noted that sales of its Vivid products had
tumbled to virtually nil -- and took the consequences.
As for the other aspects of Newbridge's performance, Mr. Kedersha
noted, sales of the firm's older telecommunications product lines weren't
out of line with historical averages and the newer products are doing
well.
Nor is Newbridge's investment strategy in tatters following the
bankruptcy of West End Systems. Although West End was one of the
first startups to receive an equity injection from Newbridge, its failure
comes hard on the heels of a couple of healthy successes.
Late last year Newbridge sold its stake in both Cambrian Systems
Corp. and Vienna Systems Corp., both of Kanata. The net result will be
that Newbridge will realize a very healthy gain for its third fiscal quarter
ended Jan. 31.
No doubt the most worrisome recent development for Newbridge was
the revelation that WIC Connexus has apparently shifted its primary
allegiance to Cisco. Newbridge announced with great fanfare last August
that WIC Connexus would, over the next four years, purchase about
$225 million worth of its next-generation wireless communications
systems.
WIC's parent company -- WIC Western International Communications
Ltd. -- was taken over bid by Shaw Communications Inc. Shaw officials
declined to comment yesterday. But it"s no secret that Shaw is a
customer of Cisco and almost certainly would standardize on its
equipment.
Clearly, the loss of such a contract would be a blow to Newbridge. It
was an important early win in a burgeoning industry of advanced
wireless systems known as local multipoint distribution systems
(LMDS). The U.S. in particular auctioned off dozens of LMDS licences
last year and the new owners are trying to figure out what kinds of
systems they should install to offer high-capacity wireless phone and
data service.
In the early stages of this market, it's vital for companies such as
Newbridge to establish momentum. The coming weeks should tell the
tale of whether the rumored loss of WIC Connexus has affected
Newbridge"s chances to doing so.
Newbridge has already announced four LMDS victories (including the
WIC Connexus contract), while Cisco and its partner, Bosch Telecom
Inc. of Richardson, Texas, have yet to proclaim any.
However, this will likely change soon. Tom McCabe, the vice-president
of product management for Bosch, says his company and Cisco have
already been awarded five LMDS contracts, including one each in
Europe and Latin America and three in the U.S., but haven"t yet
announced them.
He also pointed to an coming trade show on Feb. 22 and 23 in San
Francisco.
"There will be what we believe to be fairly meaningful announcements
made there," he said.
Northern Telecom Ltd., another major player in the LMDS business,
might outdo Cisco. Nortel is a sponsor of that trade show and company
officials said yesterday that they have soon-to-be-unveiled commitments
from 22 LMDS service providers around the globe.
Newbridge, for its part, says it has six unannounced LMDS contracts in
the bag, including two each in Europe, Latin America and the U.S. Of
course, it's impossible to say on the basis of contract wins alone who's
really ahead in the early going because individual deals vary significantly
in size.
The Kanata firm also has a few weapons at its disposal in trying to
preserve its piece of the WIC Connexus contract. For example, the
federal regulator -- the Canadian Radio-television &
Telecommunications Commission -- could intervene to prevent Shaw, a
cable operator, from offering LMDS service. Newbridge also says it has
the right to bid on future pieces of the WIC Connexus network.
Technical merit does not appear to be an issue. All the major players --
including Newbridge, Cisco and Nortel -- are developing solutions that
are constantly evolving. It"s safe to say that none can yet provide
everything that service providers like WIC Connexus want but all will
eventually get there.
Even if Newbridge loses the WIC Connexus business to Cisco, it's not
the end of the world, analysts say.
Paul Silverstein, an analyst with New York-based BancBoston
Robertson Stephens, pointed out yesterday that the potential value of the
WIC Connexus contract might be less than advertised because the
Toronto-based wireless service provider has been "hindered primarily
by financial constraints."
The original contract had envisioned a 23-city rollout, but the company
has apparently scaled back its plans -- at least for the moment -- to
providing service in Toronto and Vancouver.
Mr. Silverstein added that Newbridge had been recording minimal
revenues from this contract because the rollout had been relatively slow.
At the same time, Newbridge's other major LMDS contract -- a
$270-million piece of business involving Ottawa-based MaxLink
Communications Inc. to be spread over four years -- is much further
advanced. It"s also considered secure.
"We are very well satisfied with the progress being made with
Newbridge," said Joel Bell, the deputy chairman of MaxLink, "We
expect to be in the market by mid-year."
After the past week, those are comforting words for the wireless
engineers at Newbridge. |
