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Fore stock drops 17 percent

Fore Systems' stock drops more than 17 percent on news that Japanese revenues are not going to be up to expectations.

The stock of Fore Systems (FORE) dropped more than 17 percent today on news that Japanese revenues are not going to be up to expectations. But the company says the market overreacted.

The company's stock closed at 25-3/4, down 5-3/8 from the previous day's close of 31-1/8.

"Japanese business has been off for a while, which is nothing new," said company CEO Eric Cooper. He added that he didn't understand why the sudden negative reaction.

Cooper speculated that the stock's reaction was related to comments that an analyst at Goldman Sachs released regarding the Japanese revenue.

The Goldman Sachs analyst could not be reached for comment, but according to a report released today by the firm, Japan is not an issue. "We expect a modest sequential increase in sales to Japan, from a very low level, five to six percent of total sales, in December," the report stated.

Cooper said an original announcement about a slowdown in the Japanese market was made last September. Fore manufactures high-performance networking products based on ATM (asynchronous transfer mode) technology.

"In this market, it is very unforgiving for anything slightly negative," said one analyst, who asked not to be named. "This is an extremely nervous market. The company said Japan isn't going to be up to expectations, so if you give the fund manager any reason to feel more nervous, they are out."

Cooper said that in the quarter ending December 31, Japanese sales accounted for five to six percent of the company's revenue. That is down from the previous year's results of about 25 percent of revenue coming from Japan. He added that from the third fiscal quarter to the fourth, ending in March, the change should be slight.

"A fluctuation in something that is five percent of revenue will account for maybe one or two percent" on the bottom line, said one analyst. He added that when investors hear anything about Japan or the Far East, they tend to overreact.

That seems to be the case today. Cooper said he expects the fourth fiscal quarter result, which will be released at the end of April, will not show much of a slowdown from the December quarter for Japanese sales.

Another possibility for the stock drop is that investors have been wondering whether the quarter is back-end loaded, which means most of the sales will be accounted for in the final month of the quarter, and often the company will not know if it will meet expectations up until the final days.

The Goldman Sachs report said, "Stock decline on reports of a 'back-end loaded quarter' seems overdone. Consistent with the company's earlier statement, the quarter is back-end loaded, but there is not reason to change any estimates or ratings."

The company has 60 to 65 percent of sales scheduled for the month of March, and the report said "there is more than enough activity in the pipeline to support current forecasts."

But the report of a back-loaded quarter is not new. "Historically, 60 to 65 percent of our revenue will fall in the last month of the quarter. That has been a pattern for most networking companies," said Cooper.

Fore indicated at a Goldman Sachs luncheon on February 14 that this quarter would be consistent with previous quarters, according to the report.

In January, the company reported a net income of $15.3 million, 16 cents a share, for its third fiscal quarter ending December 31 before charges related to acquisitions, beating analysts' expectations. The results were up from $8.5 million or 9 cents a share a year earlier. Fore has not missed Wall Street's expectations in three years as a public company. "We are focused on a portion of the networking industry that analysts say has a potential for robust growth for years to come," said Cooper.

Goldman Sachs is also positive about the growth prospects for the company. "While it is difficult to know what Fore's March quarter results will be, we continue to believe that Fore's near-term and long-term business outlook is very good," said the report.