Cabletron cements new strategy with profit

The network equipment maker continues its rebound, earning a third-quarter profit of $22 million and beating Wall Street estimates by 2 cents.

Network equipment maker Cabletron Systems continued its corporate rebound today, beating Wall Street estimates by two cents.

Cabletron, boosted by strong sales to Internet service providers (ISPs) and telecommunications firms, posted a net income of $22 million, or 12 cents per share for the fiscal third quarter. During the same quarter last year, the company lost $23.8 million, or 14 cents a share. Wall Street had expected earnings of 10 cents per share, according to a consensus of analysts polled by First Call.

For the quarter that ended Nov. 30, revenue jumped 13 percent to $371.7 million from $329.9 million a year ago.

Today's results mark the fourth consecutive quarter the company has posted a profit. Cabletron has struggled in recent years as it lost market share to networking giants Cisco Systems, Nortel Networks, and other firms. After posting a $29.3 million loss in fiscal 1999, Cabletron has spent the past year trying to turn the company around.

Cabletron chief executive Piyush Patel said recent efforts to cut costs and target the lucrative service provider market helped the company grab some solid returns in the third quarter.

The company historically has sold networking devices to large businesses, with these types of sales still accounting for a large part of Cabletron's revenue. But Patel said sales to service providers surged 27 percent to $63 million in the third quarter, compared to $49 million in the second quarter of this year.

Patel also said the company has also succeeded in cutting costs by moving some corporate operations, such as human resources and customer relationship software, onto the Web. In fact, 18 percent of third-quarter sales derived from the company's Web site, he said.

"I feel comfortable with the progress we've made so far," Patel said.

Cabletron executives said sales of its flagship product--the SmartSwitch Router--increased 18 percent in the quarter. Sales of its network management software jumped 17 percent, while revenue for professional services and support doubled.

Despite the strong results, CIBC World Markets analyst Martin Pyykkonen said he is maintaining a "hold" recommendation on Cabletron's stock.

While revenue from service provider sales account for 17 percent of Cabletron's overall revenue, Pyykkonen said that the company needs to raise that percentage.

"I give them credit for the operational, incremental improvement, and they're headed in the right direction," he said. "But I'd like to see service provider revenue to reach 30 percent. It's a better margin business [than the enterprise market]."

Patel said he expects the company's service provider revenue to reach 30 percent of all sales by the end of next year.

Cabletron executives today said the company will continue its telecommunications push by targeting the software rental market. The company next quarter will release new hardware and software aimed at helping service providers rent business software over the Web.

To better compete against Cisco and start-ups like Juniper Networks, in the spring Cabletron will release its new high-speed SmartSwitch Router, the SSR 32000, which will allow carriers to offer dial-up Internet access, wireless, and high-speed digital subscriber line (DSL) access, executives said.

The company has also turned its Spectrum network management software unit--now called Aprisma Management Technologies--into a subsidiary with plans to spin it off by the middle of next year.

Pyykkonen said the company has developed a good strategy, but needs to execute on its plan. "Cabletron has always been good with technology. It's a market that wants good technology, so Cabletron is well positioned for that. Now they need to turn that into sustainable, high growth."

In other news, Cabletron today said it completed the sale of its FlowPoint subsidiary, a maker of DSL technology, to Efficient Networks. Cabletron receives 13.5 million shares of Efficient, which accounts for 25 percent of the company.

The companies also announced today that that Cabletron will resell both FlowPoint and Efficent products.

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