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Foundry Stock Founders

Light Reading
News Analysis
Light Reading
7/19/2000

Foundry Networks (Nasdaq: FDRY) stock plunged 16 percent in mid-day trading today following the company's earnings release on Tuesday night.

The company reported revenue of $88.8 million for its second quarter, representing sequential growth of 27 percent over the $70.0 million in the first quarter of 2000 and 269 percent year-to-year growth over the $24.1 million in the second quarter of 1999. Net income for the second quarter, excluding non-cash charges for amortization of deferred stock compensation, was $23.5 million or $0.19 per diluted share, compared with $19.3 million or $0.15 per share in the first quarter of 2000, an increase of 22%.

At noon, Foundry shares were down $20.56, at $103.56.

Foundry's earnings were good--but the pattern for the quarter has so far been that unless networking companies completely annihilate expectations, their stock gets hit. Analysts had expected $0.16 a share in earnings from Foundry, so the company beat consensus by .03 cents. In comparison, Juniper recently reported earnings of $.08, nearly doubling the consensus estimates of $.04.

Perhaps even more of a concern, however, is Foundry's position in the routing market. The company has made a lot of noise about moving out of the enterprise switching market and into carrier-based routing. However, its announcement of its first router for the core of the Internet met with a luke warm reception (see Judgment Day for Foundry Core Router). And the move means the company is competing with routing giants Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR).

Gina Sockolow, an analyst with Brean Murray, points out that Foundry reported 27 percent sequential growth, yet Juniper, which focuses purely on routing, just announced 77 percent sequential growth, indicating it is growing market share at a faster rate than Foundry.

Sockolow calculates that Foundry is selling its routing products for $50,000 to $100,000 each--at the low end of the spectrum--and that the company will not have Multiprotocol Label Switching (MPLS) in the product until next year.

"That indicates to me they're not selling to ISPs, they're selling to the enterprise [corporate networking]," says Sockolow. "You can't say you won't have MPLS until next year and say you're selling to the ISPs."

However, some analysts believe Foundry's pursuit of the router market will pay off. "They say it will grow from 5 percent of revenue to 25 percent of revenue, and I think they will hit that number," says Chet White, vice president of equity research at First Security Van Kasper.

--By R. Scott Raynovich, Executive Editor, Light Reading, http://www.lightreading.com

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