MMC Networks scrambles in wake of IBM-Cisco alliance

After watching its stock plummet 38 percent Tuesday, MMC Networks Inc. (Nasdaq: MMC) warned that a deal struck between Cisco Systems and IBM will put a sizeable dent in its fourth-quarter and fiscal 2000 revenues.

That'll happen when your two largest customers comprising almost three-quarters of your total sales decide to cut you off at the knees.

IBM's (NYSE: IBM) Global Services business will form an alliance with Cisco (Nasdaq: CSCO) to provide a variety of network integration services to Cisco's corporate customers while Cisco will make network technology parts, including network processors, in-house.

The five-year deal is valued at more than $2 billion.

MMC shares plunged 19 1/8 to 30 7/8 immediately after the deal was announced.

Company officials quickly fired off a press release detailing the expected impact of the pact and held an impromptu conference call with financial analysts.

In the release, MMC said the deal means IBM will be exiting the local-area-network switch/router business. Because IBM represented 23 percent of MMC's total sales in its second quarter, the company now expects a 5 percent to 10 percent sequential decline in fourth-quarter sales.

"IBM's decision will not materially impact the company's Q3 results but may result in approximately a 5 to 10 percent sequential decline in Q4 revenues," said CEO Doug Spreng in a prepared release. "MMC had forecasted IBM's business to be about 15 percent of FY2000 revenues and now expects this business to be negligible. However, based on the large number of design wins achieved outside of IBM, the company continues to expect sequential growth during FY2000 to be in the mid-teens."

The announcement and subsequent stock slide comes less than three weeks after A.G. Edwards upgraded the stock from an "accumulate" recommendation to "buy."

In fact, 11 of the 12 analysts covering the stock, several of which started coverage earlier this month, rate the stock either a "buy" or "strong buy."

IBM and Cisco were MMC's two largest customers, accounting for about 74 percent of its total sales.

Despite the unsettling news, MMC officials remain upbeat.

"Overall, the business climate with Cisco Systems and with MMC's other existing customers remains healthy and the company continues to be optimistic about the long-term prospects in the network processor market," it said in the release.

Last quarter, MMC earned $4.1 million, or 12 cents a share, on sales of $19.3 million.

First Call consensus expects the Sunnyvale, Calif. to earn 13 cents a share in the third quarter and 49 cents a share in the fiscal year.

The stock peaked at $57 a share earlier this year after bottoming out at $7.75 a share in October.

Reuters contributed to this report. >