Foundry Bucks the Trend
The company, which had one of the hottest technology IPOs in 1999, was punished by investors last year after it disappointed the Street’s third-quarter expectations (see Foundry's Fallout). But a year later, the company is making waves by actually reporting profits and improved earnings.
”They didn’t get a lot of respect about 12 months ago,” says Stephen Kamman, an analyst with CIBC World Markets. “But over the last several months they have been doing an excellent job of repositioning the company to focus on enterprise customers.”
Last night after the market closed, the company announced a profitable quarter, improved gross margins, and revenues slightly higher than analyst forecasts. Net income rose sharply to $7 million, or $0.06 a share, from $1.9 million, or $0.02 a share, a year earlier. Revenues came in at $76.6 million from $74.7 million a year earlier. The average revenue forecast by analysts was $75.9 million. Earlier this month, the company had pre-announced that it would exceed expectations.
Shares in the company shot up $0.99 (15.84%) to $7.24 today as investors reacted positively to the news.
But the increase in revenue and the profits aren’t the only good news the company had to report. While he didn’t give official guidance, Bobby Johnson, president and CEO of the company, said on the conference call that the company is well positioned going into the fourth quarter. It hit record high backlog levels in the third, and its book-to-bill ratio, a measure of future orders divided by billed orders, was greater than 1.0. Johnson also said that October was tracking along with the first month of the previous two quarters. Analyst Mark Sue, of CE Unterberg Towbin is confident the company will meet his fourth-quarter estimates of roughly $78.7 million.
The company also saw an improvement in gross margins to 53.6 percent up from 52.7 percent. Analysts believe this may be because Foundry is more insulated from pricing pressures because it focuses on higher margin modular switches instead of small stackables. Unlike its competitor, Extreme Networks Inc. (Nasdaq: EXTR), which generates most of its revenue from low-end stackable switches, 80 percent of Foundry’s third-quarter revenue came from chassis-based products.
But Foundry’s success is not necessarily indicative of an enterprise spending recovery, say analysts (see In Search of... Enterprise Rebound). The company has just handled its business better than its competitors in what will likely continue to be a difficult market, says Kamman.
“They have done really well shifting their business from service providers to enterprise,” he says. Indeed, this quarter the company reported that 85 percent of its sales were from enterprise customers. This is a big shift from 1999 when half of Foundry’s business was from service providers and the other half from enterprises. Cisco Systems Inc. (Nasdaq: CSCO) and Extreme, Foundry’s two largest competitors, generate roughly 80 percent of their business from enterprise customers, as well.
In the past, most of Foundry’s service-provider business came from Web hosting companies with large data centers like Exodus Communications Inc. But now most of those players are either in trouble or out of business. So Foundry has shifted its sales strategy to focus on large enterprise customers building out their own data centers. Health care organizations, universities, and local, state, and federal governments are all sectors that Johnson says have been big contributors to the company’s bottom line. He said during the call he expects those revenue flows to continue steadily into 2003.
“We continue to believe that relative to the sector, Foundry’s business is stable,” writes Kamman in a research note published this morning. “We continue to be impressed with Foundry’s ability to add new customers, maintain new product flow, and generate solid cash flows.”
— Marguerite Reardon, Senior Editor, Light Reading