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Foundry halved on profit warning

Shares of Foundry Networks (Nasdaq: FDRY) were halved in afterhours trading Tuesday after the company said its fourth quarter earnings would fall way short of Wall Street estimates.

Foundry, which provides networking gear, said it expects fourth quarter earnings of 11 cents a share to 14 cents a share. Earnings tracking firm First Call Corp. projected a profit of 24 cents a share.

Investors didn't handle the news well as Foundry shares fell 16.25 to 16.75, or 49 percent, on the Island exchange. Foundry's 52-week high is 212.

Citing reduced capital spending by Internet service providers and e-commerce sites, Foundry projected sales of $100 million to $110 million. Gross margins will be in the 62 percent to 64 percent range.

Tad LaFountain, an analyst at Needham & Co., forecasted fourth quarter revenue of $132 million. LaFountain initiated coverage of Foundry with a "hold" rating on Dec. 12, but upgraded it to a "buy" on Tuesday.

"We believe that precious little has changed since our initiation of coverage eight days ago except a $20 decline in the share price," said LaFountain in a research note Tuesday. Talk about bad timing.

However, Foundry hinted that it was caught off guard by the developments in the fourth quarter. In a statement, CEO Bobby Johnson said communications companies cut back on spending "in the last few weeks." Foundry's warning also confirms rumors that the company would miss its quarter. Market rumors were also circulating that Cisco (Nasdaq: CSCO) was aggressively targeting Foundry's largest customer, America Online (NYSE: AOL), said LaFountain, who couldn't confirm the rumors.

To battle the downturn, Johnson said the company will continue to pump out "innovative new products." Foundry said it will give guidance for fiscal 2001 when it reports earnings in January. "Although fiscal year 2001 guidance is expected to be slightly lower than earlier estimates, we still expect to show a strong year-over-year improvement," the company said.

Wall Street is expecting 2001 earnings of $1.09 a share, according to First Call. >