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Bright outlook doesn't stop Clarent share dive

The Internet telephony equipment maker is profitable and has received rave reviews by Wall Street analysts, but that hasn't stopped its stock from plummeting in recent weeks.

3 min read
Internet telephony equipment maker Clarent is profitable and has received rave reviews by Wall Street analysts. But that hasn't stopped its stock from plummeting in recent weeks.

Clarent, which makes technology that lets people make phone calls over the Internet, has seen its stock nose-dive in the last four months, from a high of $178.75 in early March to $30 in late May. It had begun to recover, reaching nearly $100 in mid-July before shooting straight down again to hover at around $40.

"It makes no logical sense," said analyst Jeremy Duke of Synergy Research Group. "They've been gaining market share. They've done voice over the Internet longer than most companies--folks like Lucent and Cisco. There's no rhyme or reason it took a hit."

The 4-year-old company last week announced its second consecutive profitable quarter, earning $228,000, or 1 cent per share, on revenue of $28.3 million. The company, which counts AT&T among its biggest customers, recently struck new or expanded deals with China Telecom and telephone companies in Spain and the Netherlands. Several Wall Street firms, including Robertson Stephens, have even given Clarent's stock a "buy" rating.

Despite the good news, Clarent's stock has fallen, possibly over competition and pricing concerns.

Though many financial analysts say the future remains bright for the company, Clarent faces formidable competition in the growing Internet telephony equipment market. Heavyweights, such as Cisco Systems, Lucent Technologies and Nortel Networks, and start-ups, such as VocalTec, are all selling the equipment that allows telecommunications carriers to offer Net telephony to their customers.

Lucent and Cisco are leaders in the market, although Clarent's share of the market has doubled in the past year.

Worldwide sales of Net telephony equipment reached $186.3 million in the first quarter of 2000, according to Synergy Resource Group. Of that figure, Lucent captured 27.5 percent of the market, while Cisco garnered 22.6 percent. Clarent was third with 12 percent, followed by 3Com at 10 percent and Nortel with 7.5 percent.

Investors may be concerned about Clarent's recent strategy of discounting its hardware. But analysts and Clarent executives say the business strategy is sound because the hardware discount helps drive the sale of its software, which allows telecommunications carriers to manage calls, monitor a network, and handle billing and subscriber information.

Overall last quarter, the company's hardware revenue remained flat sequentially, while revenue from software grew 38 percent, according to a research report by financial analysts at Robertson Stephens.

Clarent's software differentiates the company from its competitors, whose software is not as strong, Duke said. "It strategically positions them for the future, so they don't get run over by Lucent or Cisco."

Richard Heaps, Clarent's chief operating officer, agrees.

"We're quite clearly a software company that delivers hardware as packaging," Heaps said. "Our goal is to gain market share. And in order to be competitive, that means different pricing packages to get our software in place and that's what we've done."

As for Clarent's stock price, Heaps said he believes investors have simply sold off shares to take their profits. Heaps added that he is unconcerned about the stock price.

"Our stock price the last four months has been all over the place. Sometimes people take profits and push the price down more than it deserves to be," he said. "We just try to run our business, and so long as the fundamentals are in place and we do our job, the stock price" will go up.

Many Wall Street analysts have maintained a "buy" rating for Clarent.

Analyst Richard Shannon, of John G. Kinnard & Co., said Clarent has been successful in penetrating the international long-distance market and is poised to do well in the more lucrative domestic market.

"Clarent is rapidly attacking the opportunity through aggressive sales and marketing, selective acquisitions and heavy product development," Shannon said in a recent research report. "We believe that if Clarent executes its plan, it will be successful."