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Warning hammers Foundry shares

Shares of the company fall nearly 45 percent in after-hours activity after the network equipment maker says fourth-quarter earnings will not meet expectations.

Shares of Foundry Networks fell nearly 45 percent in after-hours activity after the network equipment maker said fourth-quarter earnings will not meet expectations.

Excluding noncash charges, the company expects earnings of 11 cents to 14 cents a share, about half what Wall Street analysts had predicted. Financial analysts had expected Foundry to report earnings of 24 cents a share, the consensus estimate of 24 analysts surveyed by First Call/Thomson Financial.

The young network equipment maker also expects fourth-quarter revenue of between $100 million and $110 million, far below the $128 million that some analysts had predicted.

Foundry builds network equipment that speeds Net traffic for businesses and Internet service providers. The company, a darling of Wall Street after posting five consecutive profitable quarters since going public, joins 3Com and Lucent Technologies as networking hardware companies that have recently announced profit warnings.

Foundry executives in a statement attributed the shortfall to a decrease in spending by customers on both sales to Internet service providers and e-commerce Web sites. 3Com and Lucent also blamed their earnings warnings on slower equipment sales to telecommunications service providers.

Foundry executives declined to be interviewed, but the company said in a statement released after the markets closed that it expects next year's financial results to fall short of estimates. Foundry still expects strong year-to-year growth, however.

The company will provide more details for the next fiscal year when it releases fourth-quarter earnings Jan. 16.

Foundry "has too much exposure" to Internet service providers, said Paul Johnson, an analyst at Robertson Stephens, who added that the ISP market is also where the company has seen the majority of its recent growth.

"Anywhere they go for other customers, they'll have to compete with Cisco and Extreme (Networks), which are very well-run companies," he said.

Johnson believes that Foundry can wean itself off the ISP market through international expansion and the introduction of new products.

One analyst, however, believes most of Foundry's woes this quarter are caused by slower-than-expected sales of networking hardware to struggling Internet companies.

"During the weeks between Thanksgiving and Christmas, they didn't get some of the repeat orders from dot-com customers" that they expected, said Epoch Partners analyst Seth Spalding, who said he talked to Foundry executives Tuesday.

In after-market trading, the San Jose, Calif., company's shares fell $13.75, or nearly 45 percent, to $16.88, making it the largest percentage loser on the Nasdaq after the markets closed. In regular trading hours, Foundry fell $2.38 to $30.63.

Shares of Extreme Networks, a Foundry competitor, fell $13.25, or 28 percent, to $48.56 in after-hours trading.