Foundry Pumps Up the Market
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