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Optical/IP

Foundry Pumps Up the Market

Foundry Networks Inc. (Nasdaq: FDRY) expects to beat expectations when it announces its 2002 fourth-quarter earnings later this month. Last night after the market closed, the company announced that its quarterly revenues will be in the range of $84 million to $87 million, ahead of analyst consensus of $79 million to $80 million (see Foundry Sees Rising Revenues).

The good news helped push the company’s stock up $1.56 (19.14%) to $9.71 today. It also helped boost the general networking equipment market, and it added some fuel to a broader market rally. In midday trading, the Light Reading Index rose 4.10 to 105.79.

This marks the second quarterly uptick for Foundry. It also came in ahead of expectations in the third quarter in October when it reported $76.6 million in revenue (see Foundry Bucks the Trend). This was up from $74.7 million a year earlier.

But analysts caution that the company’s performance isn’t indicative of a recovery in the enterprise and telecom carrier switch market, which is valued at roughly $2.7 billion.

"Companies like Foundry and Extreme can do well and it doesn’t mean that the market is improving,” says Stephen Kamman, an analyst with CIBC World Markets. “The one to really watch is Cisco.”

Unfortunately, for the industry, Cisco Systems Inc. (Nasdaq: CSCO) isn’t expected to announce good news in February when it reports its results for the quarter, which ends in January. Most analysts are predicting the company’s revenues to be down 2 percent from the previous quarter’s $4.8 billion (see Chambers Fires Up Market). Kamman says he expects revenues to continue to fall, with Cisco reporting a 3 percent decline for the quarter that ends in April.

“Cisco is an indicator of where things are headed,” he says. “And every kind of anecdotal resource from Cisco suggests that business was more cautious in December and will be in January. The outlook for the first quarter of 2003 looks bleak, too.”

Extreme Networks Inc. (Nasdaq: EXTR), which competes with Cisco and Foundry in the Layer 2 and Layer 3 switch market, reported dismal quarterly results on Monday (see Extreme Reports Q2 Results). Net revenue for the second quarter of fiscal 2003 was $90.2 million, compared to $100.6 million for the first quarter of fiscal 2003.

So why has Foundry been doing well when its competitors are doing so poorly and the outlook for the industry is so bleak?

Foundry executives say they saw strong sales of products based on their new Jetcore ASIC technology. This could indicate that current customers were upgrading existing equipment with new Jetcore-based line cards. The company also says it saw sequential growth across all geographies. Specifically, deals in Japan were strong and business returned to Europe during the quarter.

Analysts expect Foundry’s momentum to continue. The company says it posted a book-to-bill ratio greater than 1.0, meaning it is taking in as many new orders as it is filling. Also, this positive book-to-bill should help quell investor concerns that Foundry dipped into its backlog, says Mark Sue, an analyst with CE Unterberg Towbin, in a research note published this morning.

Overall, analysts are revising their sales models up and are positive on the company's potential.

"We continue to like Foundry for its strong cash flow, leverage, and success in penetrating the enterprise market," writes Kamman in his published research note. "We remain cautious about the overall Layer 3 market in 2003, but Foundry could hold up well." — Marguerite Reardon, Senior Editor, Light Reading
metroshark 12/5/2012 | 12:54:05 AM
re: Foundry Pumps Up the Market Looks like Extreme got about 10 million less revenue than what was expected and Foundry got about 10 million more. Could it be that Foundry is just stealing market share from Extreme since they have better/cheaper/newer products?
True_10_Gig 12/5/2012 | 12:54:02 AM
re: Foundry Pumps Up the Market I heard noise indicating that Extreme lost a major APAC customer (Poweredcomm), accounting for the unexpected extraordinary $10M loss for the quarter. This customer used to make regular quarterly purchases of EXTR gear but they stopped cold due to issues.
Iipoed 12/5/2012 | 12:54:00 AM
re: Foundry Pumps Up the Market Keep in mind the different business models of each company. Foundry is 80 to 90% direct sales. Senior management is heavily involved in most sizeable deals. Their senior managment maintains tight control over margins and support.

Extreme is the reverse in marketing throught resellers and two tier stocking distributors distributors (can you say tech data, Anixter/Graybar type companies). No one needs product sitting on their shelves anymore.

Another interesting point is that an increasing number of laid off Cisco middle management has been taking positions at Extreme. A lot of conflicts between the old and the new sales types now exist.

Extreme's margins have begun eroding while Foundry's have been moving up.

All in all Foundry has a much better cost of ownership proposition when you consider their overall architecture.

of course what both companies sell in a year Cisco probably spends on their national sales meeting.

deepciscothroat 12/5/2012 | 12:53:50 AM
re: Foundry Pumps Up the Market Foundry is impressive. They continue to surprise us. Not winning big enterprise but strong in Federal and onesy twosy metro at Riverstoned's expense. Extreme is gone. We aren't seeing them anywhere. Next quarter the whole thing comes crashing down and management exodus follows. Our dead weight moves on yet again to wreck another one. Maybe they will go to Juniper.

Force 10 a startup in Milpitas is the one to watch in that business. They have a hot box.

We will kill them all eventually. 18 months we will have our 10 gig box ready. "Let's go."
Iipoed 12/5/2012 | 12:53:43 AM
re: Foundry Pumps Up the Market I agree with your vision. Do you think that F10 can make it alone however? Doubtful. Boy I wish Foundry would team up with them but not likely. Too bad about Extreme, but when you put all your eggs into distributor sales you are bound to lose control and with loss of control margins then head in a downward spiral.

By the way what is the name of the 10 gig box. Will it be a blade fitting into the 6500?
deepciscothroat 12/5/2012 | 12:53:31 AM
re: Foundry Pumps Up the Market Can't tell you what it's called yet. We changed the name and fired the project manager, and have a new team working on it. Luca is working on it now. Guru Singh has a good team. Will take us awhile to get it working (Q1 04 will have beta) but we will eventually. Then you should short Foundry.

Foundry and Force 10 would be a good match but Bobby thinks he can do it all himself (spend $100M on a competitive box). A more intriguing match would be Juniper and Force 10. At least then someone would give us a scare. It's no fun out there with no one to fight. And we're a pretty dull place when there's no one to keep us honest. Juniper gets into enterprise and has a switch. Force 10 has the financial resources and the brand. They won't do it though. Force 10's CEO won't sell (even to us--we tried). And Juniper now that Scott is out won't be taking any risks.

We're lickin' our chops.

BlueFox 12/5/2012 | 12:53:29 AM
re: Foundry Pumps Up the Market We will kill them all eventually. 18 months we will have our 10 gig box ready. "Let's go."

18 months!!!! ROTFL. By then your competitors will be selling 100 Gig cards for less than your 10 Gig
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