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Bay stock defies loss

Bay Networks stock gains ground even after it reported a second-quarter loss of $173 million--worse than Wall Street's average estimate.

Bay Networks' (BAY) stock gained ground today even after the networking vendor reported a second-quarter loss of $173 million, which was greater than Wall Street's average estimate.

Bay's stock traded as high as 24 and ended the day at 23-5/8 a share, up 1/ 2 from its close of 23-1/8 yesterday. The company announced its quarterly results after the market's close yesterday.

Noel Lindsay, an analyst with Deutsche Morgan Grenfell, pointed to three events that eased volatility in the stock.

"The real consensus was lower than what was stated in [First Call]. The company met with a cluster of analysts before they entered their quiet period. They gave analysts some uncomfortable body language when talking about the quarter and so we recalculated our earnings. Some analysts will tell their firm's sales force to revise the earnings but may not go through the effort to formally change their recommendation," Lindsay said.

He also noted investors are more concerned about Bay's long-term performance and had already discounted its ability to perform in the short-term.

Finally, he added that the company's balance sheet is in better condition these days, demonstrating a decline in account receivables, higher turns of inventory, and strength in all product lines and geographies.

But as indicated in the income statement, the company's performance was not reassuring.

Much of that red ink can be attributed to an acquisition spree, as Bay plucked NetICs, a Fast Ethernet switch maker, and Penril Datability Networks, a modem company, to the tune of $165.5 million. The company also took a $41.7 million hit for consolidating product lines, inventory, and office space during the quarter.

Bay reported a loss of 90 cents per share after the charges. The loss per share, even discounting various expenses, fell far short of analyst estimates.

Bay reported revenue of $514.5 million for its second fiscal quarter, which ended December 31. That represents a five-percent drop compared to 1995 second-quarter revenues of $541.6 million. Bay, however, is ahead of 1995 figures for the fist six months of its fiscal year, reporting revenue of $1.04 billion for the 1996 period, compared with a $999.4 million 1995 figure.

Bay attributed the declining revenue figures for the quarter to increased pricing competition in the switching market. Bay makes hubs, switches, and router networking gear that connect individual desktops and groups of connected PCs and servers to a network.

Newly appointed chairman, president, and CEO David House said the company spent much of the quarter meeting with customers to develop plans to augment its current line of products and services.

"We are currently developing action plans, and the input from these campaigns will form the core of our strategy as we move forward," House said in a prepared statement.