Newbridge Back to Its Old Ways (News) November 2, 1999

Newbridge Back to Its Old Ways

By Brian Graney (TMF Panic)
November 2, 1999

Proving once again that it knows how to disappoint better than anyone in the business, Canadian wide area networking (WAN) products maker Newbridge Networks (NYSE: NN) bodychecked investors with a fiscal second-quarter earnings pre-announcement this morning. Revenues are seen coming in at C$480 million, or roughly 10% below analysts' estimates. Earnings per share are envisioned between U.S. $0.08 and $0.10, down from last year's $0.18 and short of the First Call mean estimate of $0.20. The head of President and COO Alan Lutz was sent rolling as a consequence, but that failed to placate the investing masses who sent the company's share price lower in early trading.

The warning marks the third pre-announcement in four quarters for Newbridge, which apparently is not satisfied with the dubious distinction it garnered for itself by warning in three out of the four reporting periods in fiscal 1998. The only bright spot for the company came in August, when investors rejoiced as the firm actually managed to turn in fiscal Q1 earnings ahead of expectations. Then again, Lutz had guided analysts on a conference call back in June to lower their Q1 forecasts, so that "surprise" really didn't count. There will be no such rejoicing this quarter, justly warranted or otherwise.

Sales of the company's core WAN packet equipment, which represented 72% of total revenues in Q1, experienced year-over-year growth of 40% in the period. That sounds great, right? As a heady as that type of growth may seem, it is below what most observers had been expecting. After 61% year-over-year WAN packet growth in Q1, analysts were expecting similar growth in Q2. Instead, WAN-related growth will probably drop by about 5% sequentially.

Last week, main rival Lucent Technologies (NYSE: LU) reported WAN growth of 46% in its September quarter (according to Merrill Lynch estimates), so it appears that Newbridge's market leadership in areas such as ATM+IP switched routing is coming under fire. According to data relayed to analysts recently by a company executive, Newbridge had a 25% share of the ATM carrier switch market in 1998, outdistancing the 20% share held by recent Lucent merger-mate Ascend and Cisco Systems' (Nasdaq: CSCO) 19% share. It will be interesting to see Cisco's results next week and whether it, too, was able to snatch market share away from the stumbling Newbridge this quarter with faster growth in this segment.

Newbridge said most of the WAN packet selling problems occurred in North America, where revenues were essentially unchanged from a year ago. That's not a good sign for a company that derives about half of its total revenues from the Americas and saw double-digit sales growth in the U.S. last quarter. Revenues from Europe are holding up well, however -- so well that the region's general manager, Pearse Flynn, has been tapped to take Lutz's place and try his hand at fixing the company's problems in the Western Hemisphere.

Chairman and CEO Terence Matthews said issues such as "sales effectiveness" and the firm's "ability to scale customer-facing resources" will receive attention in the months ahead as Newbridge tries to restore some semblance of investor confidence in the company. Putting the customer first is always a good idea in any business, but it is especially important in Newbridge's ATM+IP switch business where strong competitors such as Lucent and Cisco are threatening to overtake the firm's market leadership.

Fighting off the advancing rivals won't be a cakewalk, and the main question for investors right now appears to be whether Matthews and his new COO are up to the challenge. If Newbridge continues to have problems standing its ground in coming quarters, then Matthews himself may not last the current hockey season.

Related links:
Newbridge Networks Web site
Newbridge Networks message board

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