Foundry Gets a Fed Boost
Uncle Sam helped push Foundry Networks Inc. (Nasdaq: FDRY) to the high end of its revenue target for the first quarter of 2003.
Foundry had pre-announced its earnings back on April 10, predicting revenues between $89 million and $91 million (see Foundry Preannounces Q1). Its actual revenue, as reported last night, came in at $91.1 million, up from $86.7 million in the previous quarter. Net income was $13.4 million, or $0.11 per share. This compares with a net income of $10.5 million, or $0.08 per share, in the prior quarter; and net income of $1.0 million, or $0.01 per diluted share, for the same period in 2002.(see Foundry Boosts Q1 Revenue, Profit).
Despite these results, the company’s stock still traded down $0.24 (2.36%) to $9.91 today.
Foundry appears to be outperforming competitors such as Enterasys Networks Inc. (NYSE: ETS) and Extreme Networks Inc. (Nasdaq: EXTR). Cisco Systems Inc. (Nasdaq: CSCO) is the only competitor that has surpassed it in earnings growth, says Erik Suppiger, an analyst with Pacific Growth Equities Inc.
Foundry attributed its 5 percent growth in revenue to strong sales to the United States government, which made up 30 percent of the company’s overall revenue. This percentage, which is up 15 percent from a year ago, marks an all-time high for Foundry. Tim Heffner, CFO for the company, said that roughly 20 percent of the company’s revenue came from a single, unnamed government integrator. The company expects continued revenue from this integrator, which has already booked about $7 million in business in April.
Consistent with the past few quarters, Foundry did not provide guidance for the coming quarter or the rest of the year. Bobby Johnson, the company’s president and CEO, also warned that even though the company has experienced significant success in the government sector, it's an unpredictable market. “We’re glad we are executing well in this sector,” he said. “But it is unpredictable. Right now, we’re not providing guidance, and we don’t have particular insight into when these contract awards will roll out.”
Analysts also warn that the government success could be too much of a good thing.
“We are concerned that the company’s exposure is fairly high at 30 percent,” writes Suppiger, in a research note published this morning. “We feel that the U.S. federal government is aggressively spending on communications. However, visibility into the government sector is low, so sales can be volatile from quarter to quarter."
Still, Johnson seems to believe that it is a lucrative vertical for the company and that Foundry will continue to focus resources on it. In the past year, the company has doubled the number of sales and support for its government division.
Gross margins improved to 58.9 percent on a mix of higher-end products, and its book-to-bill was again greater than one, signaling that the company already had orders in the pipeline for the current quarter.
Analysts are also encouraged by the company’s breadth of new products as it moves forward. As the company enters what is usually a seasonally strong quarter, Mark Sue of CE Unterberg Towbin says he expects it to benefit from new product momentum from its JetCore-based products along with new products based on its Power of Ethernet (POE) technology such as the FastIron Edge 2402POE and 4802POE.
During the conference call, Johnson also mentioned that the long awaited Mucho Grande 10-Gbit/s switching platform will be unveiled at the Network+Interop tradeshow in Las Vegas next week. While 10-Gbit/s Ethernet switching is not expected to be a big money maker anytime soon, the company says this new platform will serve as the basis for new product additions for the next couple of years.
— Marguerite Reardon, Senior Editor, Light Reading