What is PairGain Technologies Inc.'s (Nasdaq: PAIR) problem? The company said Friday it expects both revenue and operating earnings for the third quarter of 1999 to fall far below current expectations. Revenue shortfall is expected in the company's T1 access and subscriber carrier product lines, as shipments of its new Avidia system are still on hold.
Shares of the maker of DSL (Digital Subscriber Line) networking systems were tumbling 10 percent, down 1 1/4 to 11 5/8. First Call consensus called for a profit of 2 cents a share. This will be the third consecutive quarter the company has missed estimates. It slid after it missed estimates last quarter, blaming pricing pressure. Why is PairGain losing when every other company in the DSL space is seeing solid growth and market pick-up?
"It's timing," said Michael Pascoe, CEO and president in a conference call Monday. "We skipped a generation, and are about to announce next-generation products."
Pascoe added that about a dozen customer orders were on board for the company's Avidia System multi-service access platform, and may be announced this quarter pending approval. Shipments are expected to begin near the end of the quarter with volume production beginning during the fourth quarter.
The company played cat-and-mouse with analysts demanding shortfall specifics and the size and likelihood of the company's deal with MCI Worldcom (Nasdaq: WCOM), which would validate the Avidia System technology, and provide a big revenue boost for the company.
But Pascoe wouldn't bite.
PairGain said it couldn't comment on the talks with MCI, though said the deal could provide revenue in the "tens of millions" if it goes through.
"We don't have specifics, but its not going to be a 5 percent shortfall," said Pascoe, who finally agreed to an estimated 15 to 20 percent miss on revenue this qaurter. He also said gross margins would slide "a couple of percentage points because of the lack of revenue from new unit shipments."
Speculation on the MCI deal spiked PairGain shares Friday after an upgrade to "strong buy-aggressive" from "buy-aggressive," from Dain Rauscher Wessels.
In a research note, analyst George Notter said the upgrade ``is based on recent discussions with industry contacts, which suggest that PairGain has been selected by MCI WorldCom as its primary supplier of DSLAM equipment.'' Notter said although terms of the deal are still being finalized, such a win ``validates Avidia as a significant new product cycle for PairGain and allows us to project a significant improvement in the fundamentals of the business next year.''
Avidia competes with Lucent Technologies Inc. (NYSE: LU)'s Stinger product, which also provides high-speed data transmission over phone lines to local phone companies and Internet service providers
PairGain is currently buying back its stock, though it won't disclose purchase amounts until the end of the quarter.