This was on Ottawa Citizen online. The particle section from which it came is updated on Mondays. As a result, this was posted on the site the day before the earnings were announced. Good overview on Ottawa area high techs.
Monday 22 February 1999
Another missed quarter
Why our high-tech companies can't make their earnings projections Newbridge leads parade of transgressors
James Bagnall
The Ottawa Citizen
Lynn Ball, the Ottawa Citizen / Alan Lutz, chief operating officer, will explain tomorrow why Newbridge Networks missed its profit targets.
This wasn't in the game plan(/b)
Tomorrow evening, Alan Lutz, the chief operating officer for Newbridge Networks Corp., will host a telephone conference call to explain in detail why his company fell short of its financial targets for the January quarter.
It was the first such disappointment for Mr. Lutz, who joined Newbridge last June.
But, not surprisingly, investors have cut him very little slack. This is the sixth time in the past five years that Newbridge has surprised analysts with early warnings about missed targets.
Since Feb. 4, when Mr. Lutz unveiled his firm's third-quarter outlook, Newbridge shares have lost nearly 20 per cent of their value.
"This is very disappointing. A lot of people were willing to give Alan the benefit of the doubt, but this pre-release hurts," says Jim Kedersha, an SG Cowen analyst who has covered Newbridge for the past decade.
"People are going to say 'another pre-release? I'm never going to own this pig again,'" he adds. Mr. Kedersha, by the way, is not one of them -- his firm rates Newbridge a 'strong buy' at its reduced price.
Newbridge is hardly alone in falling short of consensus estimates. Some of this country's high-tech giants have recently offered investors early -- and unflattering -- portraits of their most recent quarterly results.
Toronto-based Geac Computer Corp. and JetForm Corp. of Ottawa both blamed excessive spending by their customers on problems associated with the year 2000 software bug.
ATS Automation Tooling Systems Inc. of Cambridge said a major customer had unexpectedly cut back orders for fiscal 2000, ending March 31. Lumonics Inc., a Kanata-based producer of laser manufacturing systems, warned last month that its December quarter would be a disappointment because manufacturers generally are cutting back on capital spending.
To a certain extent, these and other examples of what analysts call "pre-announcements" reflect the underlying turbulence of a high-growth industry that builds products with punishingly short life cycles.
See Quarter on page D2
Quarter: goes hed
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Even so, there's plenty of evidence to suggest that the number of pre-announcements is escalating, with importance consequences for investors and company management alike.
"There are more survey firms like First Call and IBES and they are constantly producing so-called consensus earnings that tend to be more and more specific," says Jean-Jacques Carrier, the chief financial officer of Kanata-based Mitel Corp.
"Companies that find themselves outside this range, even by a little bit, feel compelled to report this as soon as they know," he adds.
Indeed, eight of the biggest high-tech concerns in the Ottawa region have issued 21 earnings warnings in the past five years. Nearly three-quarters of these have occurred since mid-1997.
Even this survey understates matters because it excludes a host of early warnings that emanated from now-defunct or acquired operations such as Gandalf Technologies Inc., Milkyway Networks Corp. and Fulcrum Technologies Inc.
The biggest shortfalls are triggered by a sudden shift in the prospects of a company's core business. Early last year, revenue streams at Kanata-based Mosaid Technologies Inc., a designer of memory chips, were quickly siphoned off by a sharp drop in the price of memory chips globally.
The result: an early warning on Jan. 12, followed by a one-day, 31 per cent plunge in company share value.
When central business falls off suddenly, it's rare that a first warning isn't followed by others.
Mosaid issued another 'pre-release' last summer, again triggering a sharp falloff in its share price. Lumonics, which is facing a widespread decline in capital expenditures by its major customers, first signaled weakening sales last July, but followed this up with another warning last month.
Quick turns in regional economies have also been a catalyst for missed earnings targets. Many Canadian technology firms --including Newbridge, Northern Telecom Ltd. and Mitel Corp. -- depend on sales to Asia and Latin America to a greater extent than their U.S.-based competitors.
This accounts, at least in part, for the relatively greater number of early earnings warnings north of the border.
Up to a point, analysts can forgive these transgressions. "Growing companies are going to miss quarters occasionally," concedes David Kramer, an analyst with RBC Dominion Securities.
The best way for companies to retain the respect of the analysts who cover them is to provide consistent and realistic guidance about upcoming 'softness.'
Mitel and Ottawa-based software giant Cognos Inc. both win high marks from analysts for their ability to provide timely, solid understanding of shifts in the firms' prospects.
Cognos deserves special praise because it operates in such a potentially volatile industry. As much as 20 per cent of the company's sales of software licences are generated in the last week of the quarter, making precise forecasts very difficult.
Yet, Cognos has issued only two early warnings since the early 1990s --and both of these were part of regular forecasts delivered along with normally scheduled earnings releases.
Scott Penner, an equity analyst with Oakville-based Lincluden Management, says: "These guys are great at providing benchmarks. For example, they've said they expect 50 per cent of their new licence sales in the fourth quarter will be Web-based. This is how you can follow their progress".
This approach calls for smart managers, very much in tune with their market's directions. It helps that Cognos enjoys a dominant position in its chosen niche, business intelligence software tools. This hegemony gives it more control over things like pricing and predicting contract wins.
Donnie Moore, Cognos' chief financial officer for the past 13 years, also pays close attention in the final days of each quarter to the closing of software licence sales exceeding $50,000 U.S. These can sometimes be the difference between making the quarterly numbers or not.
More to the point, good forecasting flows from close communications within the firm and between its managers and outside suppliers and distributors. Cognos' most senior managers have been together since the late 1980s, and have become adept at interpreting the information flowing in from global sales offices.
Cognos still issues sales warnings from time to time. But, because it tends to be further ahead of the curve, it has been able to do so in a more controlled fashion at a time of its choosing.
On these occasions, the share price has tumbled badly. But when management speaks confidently about future sales prospects -- as it did last December -- the company's share value spikes up significantly. This reflected investors' confidence in what the company was saying.
In sharp contrast, when companies fall well short of targets, managers find it awfully difficult to restore the firm to grace.
A case in point is Ottawa-based Simware Inc., which is having trouble winning back the enthusiasm of investors despite posting five straight quarters of improved profits.
The company's slide occurred shortly after it went public in 1995 at $10 U.S. per share. Late last week, it was trading at less than 40 per cent its IPO price.
One of the most surprising recent tumbles involved JetForm, which enjoys a dominant share of the global market in electronic forms software. On Feb. 4, the Ottawa-based firm revealed it would post a loss of 36 cents per share compared to a consensus forecast profit of 13 cents per share.
The culprit: JefForm's major customers stopped buying enterprise-wide software, as they focussed instead on fixing Y2K problems, and on evaluating how they should incorporate the Web into their e-forms strategy.
Again, Cognos -- which is facing similar issues -- provides a sharp contrast. JetForm's chief executive, John Kelly, acknowledges part of the answer may lie within.
"We had not anticipated the extent of the shortfall and we are evaluating ourselves as to why we didn't know that better," he said last week at a conference sponsored by the Canadian Investor Relations Institute.
Like his counterpart at Newbridge, Mr. Kelly is expected this week to host a conference call for analysts and offer some preliminary conclusions about why his firm so badly misread its market.
In many ways, Mr. Lutz' job will be the easier one. After all, Newbridge's main product line -- high-speed switching networks based on asynchronous transfer mode (ATM) technology -- is doing quite well.
The real culprit in Newbridge's missed January quarter was a decline in sales of its older product line, which uses time division multiplexing (TDM). Sales of TDM products fell to $165 million from $195 million in the October quarter -- mainly because of weakening economies in the Pacific Rim and Latin America.
The net result was a quarterly profit of 17 cents U.S. per share -- 5 cents U.S. short of the consensus forecast.
"I've had a lot of people say 'I've told you so,'" says Paul Silverstein, an analyst with New York-based BancBoston Robertson Stephens. "But they're not focussing on why Newbridge missed the quarter, just on the fact that it did.
That's part of Newbridge's lengthy legacy of failing to deliver promised results. The only way Mr. Lutz can overcome it, says Mr. Silverstein, "is to execute his game plan. It would help a lot if they start exceeding their estimates. But it's not going to happen overnight."
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