Investors shun Bay, Ascend

Bay Networks and Ascend Communications both post strong quarterly earnings, but investors still give them a thumbs-down.

3 min read
Bay Networks (BAY) and Ascend Communications (ASND) both posted strong quarterly earnings yesterday despite continued turmoil in overseas markets, but investors nevertheless gave the companies a collective thumbs-down this morning.

Bay stock fell as low as 11.2 percent, to 26-1/8, before closing at 27, down 2-7/16 over yesterday, as analysts, such as BT Alex. Brown, revised their estimates downward.

Ascend also was down slightly in morning trading, dipping as low as 29-7/16 before finishing the day at 29-13/16, down 15/16 from yesterday.

Bay Networks yesterday posted second-quarter earnings of $47.5 million, or 22 cents a share, compared with a loss of $172.9 million, or 90 cents a share, for the same period during the previous year. Bay reported a record $644.9 million in revenues, up more than 25 percent from the $514.5 million reported a year ago.

However, excluding a $12 million charge related to a change in accounting methods for certain information technology costs, the company would have posted profits of $59.5 million, or 28 cents a share, for the quarter.

First Call's consensus of analysts' estimates pegged the company's earnings for the quarter at 26 cents a share.

Bay's comeback since last year comes despite a growing perception that a variety of factors--including market maturation, year 2000 issues, and geographical economic uncertainty--could torpedo high-profit hopes. The upswing in the company's fortunes is directly tied to a change in management, with former Intel executive David House breathing new life into the firm after his hire in late fall of 1996.

Ascend also reported earnings that beat expectations yesterday, announcing net income of $47.6 million, or 24 cents per share, for the quarter, compared with earnings of $64.5 million, or 32 cents per share, during the same period last year.

First Call had estimated a gain of 22 cents per share for the company.

For the just-completed quarter, Ascend reported revenues of $292.5 million compared with $287.8 million for the same period during the previous year.

The financial performance of both firms this quarter flies in the face of a growing perception that a variety of factors--including market maturation, year 2000 issues, and geographical economic uncertainty--could torpedo the high profit hopes of networking companies in the near-term.

Analysts said the results bode well for a sometimes tumultuous market.

"I've seen increasing strength in the networking sector, despite the ongoing problems at 3Com and Cabletron Systems," said Noel Lindsay, analyst with Deutsche Morgan Grenfell.

The boost in Ascend's fortunes may be tied to the company's evolution into a billion-dollar networking player for service providers and WANs (wide area networks) via the acquisition last spring of Cascade Communications. That deal catapulted the firm into the same territory as Bay and Cabletron Systems but, as with most mergers, a shakeout period was inevitable.

"1997 was a year of transition for Ascend," Mory Ejabat, Ascend's president and CEO, said in a statement. "Through a combination of acquisitions and in-house R and D, we now go into 1998 as a broad-based supplier of wide-area networking products. A critical part of our strategy was the acquisition of Cascade Communications, which formed the nucleus of our core systems group."

For the year, Ascned reported sales of $1.16 billion, a 31 percent increase over the previous year's sales of $890 million. The company lost $124 million for the year, taking into account charges associated with acquisitions, among them Cascade, a deal that totaled more than $3.5 billion. For the 1996 fiscal year, Ascend reported $183 million in profits.