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October 6, 2000

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Foundry Networks

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Subject:  A Look at Foundry's Numbers
Author:  jayseae

As I posted my numbers for Extreme recently, and there seems to have been some interest generated (both good and bad), I wanted to update my spreadsheet and do the same for Foundry, as the two companies are probably the closest we may find in terms of maturity, markets and the like.

Please note - the two are not identical, not by any means. Several similarities, but that's about it. As many have said, and as I believe is absolutely true, Foundry has taken more of a broad approach to the markets while Extreme has focused a bit more on their strengths. Not sure which will turn out better as yet - but then, that's what makes it fun!

It has also been mentioned, and I am interested in, seeing a comparison between Extreme and Foundry, as they are after all quite similar. I posted some comments about Extreme when I evaluated Brocade, and despite not intending to cause confusion, I think I may have. Those were simply the two stocks I had recently completed analysis on. While both technology stocks, they aren't really anything near one another. BruceBrown makes a great summary in this post about how Brocade's market environment allowed for a much 'cleaner' start out of the gate than that of Extreme.

Lest anyone think I'm slamming Extreme, or Foundry that matter, as I'll likely say some things here that could be interpreted as negatives, please read this before continuing.

Foundry has exhibited solid growth rates, though they have yet to see the absolute explosion that Extreme attained in the latest quarter. Still, nothing wrong with a solid 27% growth, which they've maintained for two quarters now. I'm looking forward to the next announcement. I also want to see Extreme's next announcement, as any affect from former 3Com customers should be minimized. For now, Extreme gets the nod in revenue growth - the removal of 3Com customers may change this in the future, however.

FDRY Shares Outstanding: 126,760

06/30/00 03/31/00 12/31/99 09/30/99
QTR seq growth 26.8% 27.0% 41.8% N/A
TTM seq growth 54.1% 74.5% 141.8% N/A

Foundry's Free Cash Flow figures are all over the map. Not sure what to think. Positive, definitely, as the numbers are quite good. They are undoubtedly spending more at this point for the buildout to support their growing sales. I'm going to keep an eye out here and see if this stabilizes a bit, as this should provide some great cash flow to Foundry. I have to give the nod to Foundry in the FCF battle, as Extreme's are more consistent - but they have seen negative flows, as well as a high margin of just 5.5%! Tough call though. Perhaps Extreme is building more intelligently, controlling their expenses. We'll have to watch. Neither are bad, however, so I'm not too concerned.

06/30/00 03/31/00 12/31/99 09/30/99
FCF 6.7 18.4 8.5 9.1
FCF margin 7.6% 26.3% 15.5% 23.5%
QTR seq growth -63.4% 116.1% -6.7% N/A

The direction of the balance sheet I like very much. Flow Ratio has declined steadily for the last three quarters. Still a touch on the high side, but certainly headed in the right direction. Very nice. DSO has remained relatively constant around 50 days, though it is trending up - I'd like to see a bit better collection here. DIO has also trended up, to 81 days in the most recent quarter. DPO is also trending up, which is just fine by me. Unfortunately the net effect is that Foundry's CCC number is a whopping 60 days. Now don't take this wrong, as it's not bad. Compare to a Finisar at 150 days, or Extreme at 17 days, or the constantly amazing Brocade at -18 days (yes, that's a negative number!). It quickly becomes apparent that some companies manage their balance sheet better than others. But keep in mind that these companies are all still growing. No doubt about that. This number, like most others, should get better as efficiencies of scale and the clout of the company improves. Extreme's flowie is going in the wrong direction, but they've got a better grasp on the other metrics. This may be something of a draw now, but going forward I like the direction of Extreme's numbers more than that of Foundry's.

06/30/00 03/31/00 12/31/99 09/30/99
Flow ratio 1.20 1.45 1.64 7.16

DSO 54.4 50.9 47.2 47.6
DIO 81.6 74.0 70.6 71.9
DPO 78.2 73.7 31.8 49.0
CCC 57.7 51.3 86.0 70.4

ARG/SG (seq) 1.3 1.4 1.0 N/A
ING/SG (seq) 1.3 0.8 0.5 N/A
PYG/SG (seq) 1.1 6.3 -0.5 N/A

AR seq growth 35.4% 36.9% 40.8% N/A
IN seq growth 35.2% 22.0% 21.4% N/A
PY seq growth 30.3% 169.3% -19.8% N/A

Margins are where Foundry starts to shine. Obviously, if you're making more money on your product, the better chance you'll have some left over at the end, all other things being equal. Extreme is no slouch, but the end result of 20% NOPACT margins for Foundry really attracts my attention! EPS growth is solid, and if you watch it, you'll notice that Foundry has roughly 2x the number being reported by Extreme (with approximately 125% of the shares, in case you're curious).

06/30/00 03/31/00 12/31/99 09/30/99
Gross Margin 65.7% 64.5% 61.3% 55.6%
Operating Margin 37.4% 39.1% 30.6% 24.4%
Net Margin 25.3% 25.8% 16.4% 24.4%
NOPACT Margin 24.3% 25.4% 19.9% 15.9%

NOPACT EPS 0.1705 0.1403 0.0867 0.0487
NOPACT EPS (TTM)0.4462 0.2757 0.1354 0.0487
QTR seq growth 21.5% 62.0% 77.9% N/A

Free Cash Flow (Cash-King Margin) Explained:

Flow Ratio Explained:

Cash Conversion Cycle Explained (Including DSO, DIO, DPO):

Using NOPAT Explained:

NOPACT Explained:

Also, for those who haven't seen it, I've run the same sort of numbers for Brocade. I do realize, and realize well, that Brocade, Extreme and Foundry serve vastly different markets (though Extreme and Foundry obviously less so). In fact, I said as much in this post, though I may be guilty of not stressing that enough. I did (and do) think that evaluating these relative newcomers to public life, all experiencing great growth rates in exploding markets, provides for an excellent illustration. Mean anything? Probably not. But it does serve to show you what is possible.

Disclosure: I own shares of BRCD and FDRY at this time.

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