Networking slump affects stocks

Despite the fact that it is facing some problems that go beyond an industry-wide slowdown, Ascend?s (ASND) announcement that it would miss expectations pushed a number of networking stocks slightly down today.

Ascend's stock sunk below its 52-week low to hit as low as 30 in early trading, before recovering somewhat to end the day at 32-3/8, down 2-7/8 over yesterday. It was among the most actively traded stocks on Nasdaq, with over 30 million shares trading hands. Other networking stocks also tipped back slightly from yesterday's closing prices: Cabletron Systems (CS) closed at 32, down 5/8 from yesterday; Cisco Systems (CSCO) lost 1 to end the day at 73-1/8; Bay Networks (BAY) closed at 38-5/8, down 7/8; and 3Com (COMS) fell to a close of 51-1/4, down 1/2 over yesterday.

According to analysts, the list of hurdles the networking industry faces is long: a weak Japanese economy, product delays, longer product cycles, the slowdown in Internet infrastructure in some parts of the world; and ongoing efforts to create a standard for 56-kbps modems.

Analysts expect these issues to continue contributing to a sector-wide slowdown from 100 percent year-over-year growth, into early next year.

Earlier this year, a number of companies acknowledged problems in the Asia/Pacific region. In July, officials at Fore Systems blamed some of its slowdown on a significant decrease in revenue from the Asia-Pacific region--particularly from Japan, where Fore has a significant business presence. The company's sales in Asia have dropped to 4 percent from 20 percent of the company's overall revenue stream.

"We are definitely seeing a big fight for market share. The market is still very intact and the pie is still very big," said Richard Woo, an analyst with Thomson Kernaghan & Company. But increased competition also has taken its toll. Woo said the market has expanded from two competitors to five or six. "Everyone is seeing more intense competition," he said.

The reason Ascend?s stock took a beating today is because investors were surprised to find that Ascend?s secure hold in Asia was loosening. The company said last night that a decreased demand for PCs in Japan also is slowing demand for Ascend's ports.

Woo explained that Ascend's problems go beyond a slowdown in the industry?s growth. The company's delays in getting products to market has impeded upon some of its earnings. "All of those problems are solvable," he said. "But their tone in guiding the investment community was more positive than the reality."

And so it is a mixed earnings bag for the industry?s September quarter. Companies facing decreased profits from a year ago include Ascend, which is expected to report earnings of 18 to 20 cents a share, compared with 29 cents a year ago, according to First Call. Meanwhile, Bay is expected to report profits of 18 cents per share, off from last year's results of 25 cents.

But networking giant Cisco is expected to come in at 58 cents, compared to 47 cents last year; 3Com is expected to report 54 cents, up from 50 cents last year; and Newbridge Networks (NN) is expected to report 31 cents a share, compared to 26 cents a year ago.

So while the near term will be pulled back by the slowdown, the potential for a rebound is right around the corner. One issue that will fuel the upswing is the awaited standard in the 56-kbps arena, say analysts.

Woo said there is a huge potential for growth, but people are hesitating because there is no standard as of yet.

"Why would you buy something if you don't think someone will support it?" Woo said. "People are waiting and there is a lot of pent-up demand. Once that issue is resolved, there will be a revitalization in terms of sales growth."

While there may be a slowdown in demand, growth is still strong in the sector. But "investors have grown accustomed to fabulous gains in revenues and earnings," said Wendy Abramowitz, an analyst with Argus Research, in a recent report. "We regard the current period of tepid market demand as a digestive phase, rather than as a paradigm demand shift."

For the most part, results won't dip below last year's results, said Woo. "But we are not seeing the strong momentum growth of last year. Rather, we are seeing the growth rate at about 30 percent."

Another issue affecting results is weakness in the Japanese economy. That has contributed to a slowdown in PC sales, and infrastructure build-out has been put on the back burner.

While it would seem logical that the economic conditions would affect everyone across the board, for the most part Ascend has maintained overall share there, said Joseph Noel, an analyst at Hambrecht & Quist.