Newbridge given yet another chance
It has missed its targets in five of eight quarters,
but investors are still drawn by its potential
Friday, May 14, 1999
SIMON TUCK
Technology Reporter
globe and mail
Ottawa -- It was February, 1998, and Newbridge Networks Corp., a Bay Street darling trying to
navigate its way through a particularly rough stretch of terrain, had issued a press release warning that
its earnings would come nowhere near analysts' expectations for its recently completed third quarter.
The communications equipment company said it would likely earn 10 cents a share during the quarter,
gigamiles off the 35-cent profit that a survey of nine analysts had called for. The prediction was also
well off its results from the same period a year earlier when it earned 36 cents. When it did report later
that month, Newbridge posted a loss of 82 cents a share or $144.3-million, largely because of
$181-million in writeoffs.
For most companies, the misstep would likely rank as a major disappointment but not a cataclysmic
event, particularly in the highly volatile technology sector. The usual remedy goes something like this:
Admit the problem, explain why it's circumstantial and won't happen again, and move on.
But with Newbridge, missing its targets was beginning to become a nasty habit. The announcement that
day marked three consecutive quarters tarnished by profit warnings. "Three strikes, you're out,"
screamed analysts over the next couple of days as they predicted that some in their business would
punish the company for its failures to guide them away from choppy waters.
"They've stepped up to the plate three times now and swung and missed," said Richard Woo, an analyst
at Thomson Kernaghan & Co. in Montreal, one of many who had accepted the company's view of its
own landscape and been burned. "And that's a strikeout."
Flash forward to May 4, 1999 -- less than two weeks ago -- and Newbridge is holding another
conference call with analysts and reporters. The front man, the circumstances and the explanation have
all changed to varying degrees but the purpose for the electronic gathering remains: Newbridge has
missed its numbers again, now five transgressions in the past eight quarters.
Alan Lutz, Newbridge's president and chief operating officer, said the shortfall was a supply problem
but admitted it wouldn't be easy to fix.
Analysts were shocked that that this could happen -- again. It was a "disaster," said Duncan Stewart, a
portfolio manager for Tera Capital Corp. in Toronto, following the company's release. "This speaks
enormously to management credibility."
As expected, investors responded the next day by punishing the share price, deflating it by more than a
fifth or $11.65 to $41.95 on the Toronto Stock Exchange.
And, as is often the case after a large, growing company takes a hit following a profit warning, the stock
has since rebounded. Even though the company has released no significant news in the two weeks since
the warning, Newbridge shares have reclaimed about half of the ground lost during the panic that
followed the warning. They fell $1.05 yesterday to close at $44.25 on the TSE.
A company survey of the 33 analysts who cover the company found only three had downgraded their
recommendations, with two of those three dropping to "buy" from "strong buy." Two more analysts --
both in the United States -- have since initiated formal coverage, both calling the stock a "buy."
Five strikes and still far from out?
Like the philandering spouse who would be the perfect partner if only they could do something about
that penchant for cheating, Newbridge can't shake its nasty habit of missing expectations. Yet investors
and analysts say they can't stop coming back for more for one overriding reason: Like the cheating
spouse, the company has irresistible potential and an ability to prove that people have short memories
when there's money on the line.
Despite its frequent missteps, Newbridge has very popular, sophisticated technology -- its flagship
asynchronous transfer mode (ATM) switching device in particular -- in an extremely lucrative market.
Many analysts say they can't abandon the Kanata, Ont.-based company while it's still demonstrating
strong and growing demand for its most important product.
"The demand side continues to be strong," says Mark Lucey, an analyst at Kearns Capital Ltd. in
Toronto, "and there is some hope in investors' minds [Newbridge] will fix the supply side, or at least
begin to."
Mr. Stewart said he thinks the share price has climbed back since the warning because investors believe
a takeover bid -- if there is one at some point in the next couple of months -- would likely be announced
at the massive Networld+Interop technology conference being held this week in Las Vegas. If no
announcement is made during the three-day event, Mr. Stewart said, Newbridge's share price could be
trimmed over the next few weeks.
Mr. Woo agrees that much of the recent reclamation can be pinned to continued rumours the company
is a strong candidate for a merger or outright purchase. "The stock is at its current levels because people
are betting on a takeover."
The usual suspects for such a deal continue to be Siemens AG of Munich, Newbridge's most important
partner, L.M. Ericsson Telephone Inc. of Sweden and Tellabs Inc. of Lisle, Ill.
The anticipation of a possible merger isn't just idle speculation. The data networking and voice
networking worlds are converging and specialists in the two subsectors are moving quickly to combine
forces. Three of Newbridge's leading data networking competitors -- Bay Networks Inc., Ascend
Communications Inc. and Fore Systems Inc. -- have already been purchased by larger voice networking
companies in the past year and demand for Newbridge may be rising as the two subsectors continue to
converge.
Bottom Line
As always, Newbridge shares are a source of great debate among analysts. Despite its record of missing
expectations, the majority still like the stock and continue to rate it a "buy" or "strong buy."
NEWBRIDGE NETWORKS CORP.: VITAL STATISTICS
Head office: Kanata, Ont.
Telephone: 613-591-3600
Website: newbridge.com
TSE symbol: NNC
Business: Design, manufactures, markets and services networking products and systems worldwide.
Share values
Trailing 12-month earnings per share...$1.21
Trailing 12-month PE ratio 36.57
52-week high $59.25
52-week low $24.00
Last close $44.25
Change from previous -$1.05
1-year total return 0.11%
59-month average annual return 11.23%
Top mutual fund holdings
% of total market value, as of March 31, *as of Dec. 31
Caldwell International 10.3
Caldwell Associate 7.8
Members Mutual 5.8
Caldwell American Equity 5.3
Transamerica Growsafe Canadian Equity 5.2
Allstar AIG Canadian Equity* 5.1
Caldwell Canadian Equity 5.0
Clarington Canadian Equity 4.1
CAMAF (Cdn-Anaesthetists) 4.0
London Life N. A. Equity (BG) 3.5
Source: Bloomberg Financial Services: Datastream; Globe Information Services
Report on Business Company Snapshot is available for:
NEWBRIDGE NETWORKS CORPORATION |
