Bay's stock up, Fore's flat on earnings

With networking customers sitting on the fence over which evolving technology to buy, both Bay Networks and Fore systems announce a drop in quarterly profits.

6 min read
While Bay Networks (BAY) appears to be enjoying the fruits of a rebound on Wall Street with a new share-price high, Fore Systems (FORE) stock was virtually stagnant in trading the day after both networkers announced quarterly results.

In the aftermath of earnings results that beat Wall Street expectations, released after the market's close yesterday, Bay's stock rose more than 10 percent in early trading and closed the day above its 52-week high at 31-5/8, up 2-3/8 from yesterday. The company's previous high was 30-5/8 back in September.

Fore's stock has seen little movement from the year's depths. Shares of Fore rose 3.6 percent to close at 14-7/16, up 1/2 over yesterday. Fore yesterday announced earnings results that met analysts expectations, which were reduced as the quarter closed.

Officials at Fore blame some of the slowdown on a significant decrease in revenue from the Asia-Pacific region--particularly from Japan, where Fore has a significant business presence. Tom Gill, Fore's COO and current CFO, said sales in Asia have dropped from 20 to 4 percent of the company's overall revenue stream year-over-year.

Gill attributed some of the precipitous shortfall to a decline in funding for government ATM projects within Japan, a major source of sales for Fore. He noted that the company has not made a smooth transition to the commercial Japanese market.

Gill said the company still expects to grow 5 to 10 percent over the next quarter.

With networking customers sitting on the fence over which evolving technology to buy, Bay Networks (BAY) and Fore Systems FORE yesterday announced a drop in quarterly profits that reflected the marketplace's uncertainty.

Before one-time charges related to two acquisitions, Bay reported fourth-quarter earnings of $30.5 million, or 15 cents a share, for the quarter ending June 30, compared to net profits of $55.1 million, or 28 cents a share, a year ago. Those acquisitions aside, Bay's fourth-quarter results beat analysts' expectations by 3 cents.

However, taking into account the $148.5 million spent to finalize the two purchases, the company reported a net loss of $118 million, or 59 cents a share.

Bay posted a slight increase in quarterly revenues to $543 million, compared with $535.5 in sales for the same period last year. Revenue for the entire fiscal year came in slightly more than $2 billion, up roughly 2 percent over the previous year. Excluding charges, the company earned profits of $118.6 million for the year, or 59 cents a share.

Fore didn't fare so well on the profit side. The company announced first-quarter earnings of $5 million, or 5 cents per share, a 56 percent decrease from the $11.4 million or 12 cents per share it made during the year-ago quarter. Fore's numbers were in line with downgraded expectations announced earlier this month.

Fore, however, reported a 14 percent jump in revenue for the quarter to $95.4 million.

The networking industry is going through a transition where customers are waiting to see which technology will offer the enhancements they need to take them into a multimedia networking future. ATM has long been thought of as a natural for this network evolution, but some believe Gigabit Ethernet can fill that roll.

As Fore Systems' growth curve slows, industry observers note that the company's singular focus on ATM technology may not be serving it well as customers search for companies that offer a variety of product options. At the same time, a re-energized Bay Networks may be finding takers for its comprehensive line of networking gear.

"These results demonstrate that we are beginning to make progress," Bay CEO David House said in a prepared statement.

Bay looks to be in much better shape as its fiscal year ends than when it began. The company's earnings took a nosedive in the first quarter, prompting the departure of chief executive Andy Ludwick. Former Intel wunderkind House arrived and refocused the company on a strategy called "adaptive networking" that aspires to take customers from their current network layouts to networks optimized for traffic on IP, the dominant communications protocol of the Internet.

"The strategy definitely shows a focus," noted Don Miller, an analyst with market researcher Dataquest. "I don't think you can say that it has caught hold yet. A lot of it has to do with products that have not shipped yet."

In April, Bay's CFO David Rynne advised a gathering of analysts at a technology conference that the firm's revenues for the year would be largely flat, despite the significant growth rates normally associated with the networking sector. The flat growth expectations are largely due to turnaround efforts taking place within the company, he said.

In May, Bay formally unveiled its new "adaptive" focus. That road map has since undergone some revisions, specifically in the area of switching gear--a booming market in networking.

To shore up its Gigabit Ethernet plans, Bay spent $155 million to acquire start-up Rapid City Communications in June, speeding development efforts in the gigabit arena. That acquisition represents a portion of the one-time charge in the quarter. The other relates to the acquisition of Isotro Network Management.

While Bay appears to be ready for a resurgence in Silicon Valley, Fore may face some challenges. The Pittsburgh, Pennsylvania-based company's high-speed ride on Wall Street appears to have ended, at least temporarily. That has led some to wonder about the future of ATM technology.

Once trading around $40 per share, the company's stock has been lodged in the low teens of late.

Nevertheless, Fore CEO Eric Cooper remains optimistic.

"Although we have experienced a slower rate of revenue growth in recent quarters, we believe we are well positioned to benefit from the continuing demand for high-performance networking solutions," he said in a statement.

Fore released preliminary results at the start of this month indicating that earnings would be 2 to 3 cents below expectations for its just-completed first quarter. That move spawned a lawsuit filed by a Fore shareholder earlier this month in the United States District Court for the Western district of Pennsylvania charging the firm with misleading investors. The suit also alleges that Fore executives took advantage of the high stock price to sell shares in the company before the subsequent fall.

Cooper responded to the charges by stating that they are "completely without merit" and the company "plans to defend this action vigorously."

Cooper also recently denied merger rumors involving Fore that are rampant in the industry. One source said two offers--one from Ascend Communications and another from an unnamed networking rival--were spurned by the Fore braintrust, even though the stock price offer in each instance was significantly more than where Fore is currently trading.

Customers may be finding that all roads do not lead to ATM, as the Fore mantra says. Once thought to be a high-speed technology for connecting desktops, interconnecting departments in a building, and providing a high speed "backbone" link between sites over the wide area, ATM might be relegated to only one of those three markets--the wide area connection option, according to industry observers.

ATM has stagnated as a desktop connection and, at the workgroup level, many customers appear ready to extend their investments in Ethernet with the latest gigabit-speed version of the technology. Gigabit Ethernet is due to make a big dent in the market early next year when a standard is finalized, according to estimates from several market researchers.

Some Fore executives appear to be buying into the notion that the pot of gold in networking these days resides in the overabundance of Gigabit Ethernet start-up firms trying to remain viable or be plucked by a larger player. Several have left the firm for greener gigabit pastures, including Jeffrey White, who was once director of marketing for Fore's enterprise business unit, but left earlier this month to join Packet Engines.