The plunge of MMC Networks (Nasdaq: MMCN) could offer a lesson for all those investors gobbling up shares of the newly-public networking related companies. It pays to have a diversified customer base.
MMC, which makes processors for networking applications, plunged nearly 40 percent to 30 7/8 Tuesday after IBM (NYSE: IBM) and Cisco (Nasdaq: CSCO) teamed up on a $2 billion pact for network technology, parts and services.
So why is this a big deal for MMC?
Cisco and IBM represented 74 percent of MMC's revenue in its most recent quarter.
That's a problem.
After the bell Tuesday, MMC (estimates) said the IBM-Cisco deal won't hurt its third quarter, but could dent the fourth quarter. MMC CEO Doug Spreng said IBM's deal with Cisco means Big Blue is leaving the local area network (LAN) switch/router business. There goes 23 percent of MMC's sales.
MMC, which topped estimates with second quarter earnings of 12 cents a share on sales of $19.3 million, said it expects a 10 to 15 percent decline in fourth quarter sales. MMC (financials) also estimated that IBM would have represented about 15 percent of new business in fiscal 2000. Growth for the fiscal 2000 is expected to be in the mid-teens.
MMC's plight is not that uncommon.
If you drilled through the Securities and Exchange Commission filings you'd find that most of the best performing IPOs this year are networking companies that depend on just a few customers.
Redback Networks (Nasdaq: RBAK), Brocade Communications (Nasdaq: BRCD), Juniper Networks (Nasdaq: JRPR) and Copper Mountain Networks (Nasdaq: CMTN) dominate the top IPOs for the year, gaining at least 474 percent in just a few months. And most of them have just a handful of customers.
MMC is comparable to the latest batch of networking concerns in only one respect -- it lacks a diversified customer base.
MMC is just the latest victim to fall because it depends on just a few customers. Ciena Corp. (Nasdaq: CIEN), which makes telecommunications equipment, was pummeled in 1998 because it lost some business when MCI and Worldcom merged and couldn't land new business. Ciena has its act together now, but was rattled for a year.
MMC may recover in time.
Another lesson to be learned from MMC is that Wall Street tends to overreact. Given the big fall yesterday MMC shares could see a bounce today as bargain hunters emerge.
"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.
We'll see if analysts run to MMC's defense.