Cabletron gains on earnings surprise

Cabletron Systems is one of the few companies in that market that's managed to please analysts, topping fourth-quarter results by a penny Wednesday and saying it is comfortable with first-quarter estimates.

That's a feat most of its competitors haven't been able to do. In the past few weeks, companies including Nortel Networks and Cisco Systems have slashed earnings and sales estimates.

And investors cheered accordingly as Cabletron shares were up 96 cents, or about 9 percent, to $11.95 by market close. Earlier, shares hit $13. Analysts said the good news seemed to be more related to positive steps taken by Cabletron, as opposed to a brighter outlook for the industry.

"I would say we are executing very well. I challenged our employees to work 12 hours a day, and they responded by working harder," CEO Piyush Patel said in an interview. "I think we have the right strategy and are working hard to achieve it."

Cabletron has been converting itself into a holding company that controls four different network equipment businesses: Riverstone Networks, which sells metropolitan area infrastructure technology to service providers; Enterasys Networks, which sells network technology to large enterprises; Aprisma Management Technologies, which makes infrastructure management software; and GlobalNetwork Technology Services, a network consulting firm.

The company has already spun off its Riverstone unit as a separate entity in an initial public offering, and management announced Wednesday that it will spin off the Enterasys and Aprisma units directly to shareholders, instead of through IPOs.

That announcement was met with general approval by analysts, although they noted that it would entail increased administrative expenses.

Erik Suppiger at J.P. Morgan H&Q reduced earnings estimates for 2002 from 50 cents per share to 45 cents, based on the spin-out costs. But he raised revenue estimates slightly, from $1.4 billion to $1.43 billion.

He noted that the reason the company is able to spin off the units without IPOs is because it has enough cash on hand, $1.2 billion, to handle the additional expenses.

"We believe this ample supply of cash enables Cabletron the flexibility to fund growth for each of its subsidiaries while being opportunistic in current market environments," he wrote.

As SG Cowen analyst Christin Armacost noted, the company can always hold IPOs if the market improves. She reduced her 2002 earnings estimate to 47 cents per share from 54 cents and raised revenue estimates from $1.31 billion to $1.39 billion.

She also lowered her price target from $27 to $22, "to reflect current market multiples of comparable companies," although she said it did not mean she was losing confidence in the company. Indeed, she and several other analysts said the shares are currently undervalued.

The company's strong presence overseas may have helped it escape the rough North American market relatively unscathed, analysts noted. International sales accounted for 46 percent of revenues, up from 42 percent in the prior quarter.

It's also benefited from a new product mix that had bumped up gross margins--they rose from 51.7 percent to 52.7 percent. Patel said Thursday that the company has eliminated some slowing product lines.

The Riverstone and Enterasys units provided the most fuel for growth. Sales of switch routers to service providers and to the enterprise markets were strong, and both those units said their book-to-bill ratios was greater than 1, indicating growth ahead.

"With a focus on large customers combined with a refreshed product portfolio, Cabletron has managed to post solid revenue gains in a difficult spending environment," wrote analyst Mark Sue at Lehman Brothers, who reiterated a "buy" rating on the stock. "With a strong book to bill ratio of 1, combined with long term strategy for growth, we believe Cabletron, led by CEO Piyush Patel, is likely to succeed in its efforts to increase sales, improve efficiency, and aggressively target new networking opportunities," wrote Sue.