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Bay falls victim to market confusion

Along with other networking equipment makers, the company finds that there is technology confusion in the marketplace.

The easy part is over for Bay Networks (BAY).

The company sent out the usual warning flares with the announcement yesterday of a revenue and income shortfall for its current quarter: weakness in overseas markets, longer sales cycles, and--more ominously--technology confusion in the marketplace.

Although Bay has been buoyed by an upturn in fortunes after a sometimes-bloody period of executive departures, it has evidently fallen victim to the same problems experienced throughout the networking market, save for monolith Cisco Systems, which seems to be immune to short-term woes.

"There's a reason they're called 'the usual excuses'--they happen usually," Fred McClimans, CEO of market watcher Current Analysis, observed. "This should come as no surprise."

Bay, along with other networking equipment makers, is also encountering confusion in the marketplace, as the variety of options available makes decisions daunting and forces a harder--and longer--sell.

As an example, many network administrators may be holding off on decisions about their next upgrade until they see the raft of new gigabit-speed equipment promised by many firms.

Gigabit Ethernet is the next version of classic Ethernet technology, the dominant means for connecting PCs and server machines to a network. A standard for the technology is in the final stages of approval and should be ratified by June.

Also, some potential net gear buyers may find that a technology such as ATM (Asynchronous Transfer Mode) better fits their needs. Special services, such as secure connections across the public network in a scheme dubbed VPN (virtual private networks), could also delay network equipment choices.

"Unfortunately, companies like Bay and 3Com have left themselves vulnerable to something like this while a company like Cisco is not as vulnerable," McClimans said. "Cisco is in a different market position and can get away with a lot of things smaller vendors can't."

Cisco retains a large share of equipment in corporate networks and service providers and even competitors agree that the firm has been able to build a $6.6 billion business by leveraging that installed base to sell other network components.

In some respects, Cisco has left Bay, Ascend Communications, Cabletron Systems, and others more exposed to the short-term market fluctuations. And even the 800-pound gorilla of the networking market has made it clear that future quarters could be influenced by the same factors that are causing these competitors to miss their numbers.

Bay CEO David House has overseen something of a renaissance at the firm since his arrival in the fall of 1996. But his initial cuts and reorganizations can go only so far in relation to the bottom line.

In an interview last fall, House noted that his first moves after taking the reins at the computer networking company were simple and the big challenges for the firm were those that lay ahead.

Networking firms continue to see sales challenges in certain corners of the world, particularly in various Pacific Rim nations, where economic woes are slowing spending in the information technology sector.

Although the long-term viability of the networking market remains strong in the eyes of most, several short-term factors could pinch profits at networking firms, as reported earlier this year.

In the financial community, Bay's announcement set off a myriad of reactions: Credit Suisse First Boston upgraded the stock to a "buy" while First Albany downgraded the firm from a "buy" to "neutral." The company's stock has been up more than $2 today.

Industry observers are now looking toward 3Com's third-quarter announcement, due next week, to see if Bay's woes will extend to other networking industry players. A consensus analyst estimate for the firm pegs earnings for the quarter at 15 cents per share, according to First Call.