Foundry's Revenue: Rising Again?

Foundry Networks Inc. (Nasdaq: FDRY) is building a case for a recovery. The company looks to have had a strong January and February despite the lagging overall market, and it may beat estimates for growth in its next quarterly report.

One source close to the company says the it will handily beat Wall Street estimates. Meanwhile, the people making those estimates appear to be racheting up their optimism.

"I’m not looking for a dramatic upside on the sequential growth," says Erik Suppiger, an analyst with Pacific Growth Equities Inc. "But I wouldn’t be surprised with growth in the low to mid-single digits. If they do end up posting sequential growth, that should be positive for the stock."

The company pre-announced last quarter that it would beat expectations for the quarter (see Foundry Pumps Up the Market). It reported revenue of $86.7 million or 13.2 percent sequential growth in revenue from the previous quarter (see Foundry Posts Q4 Results).

Overall, the company is in good financial standing. Its cash flow is positive, increasing to $48.9 million in 2002 from $32.6 million in 2001, according to Optical Oracle . The company also has no debt and $326.5 million in cash and short-term investments. In terms of financial strength, Foundry is running second to Cisco Systems Inc. (Nasdaq: CSCO) in a recent evaluation of IP switching and routing players by Optical Oracle.

Mark Sue, an analyst with CE Unterberg Towbin, published a research note on the company today, raising his revenue expectations. Instead of a slightly down quarter with $85 million in revenue, he believes the company will remain flat with the previous quarter or will be slightly up sequentially.

“With strength during January extending into February, in a more linear quarter than anticipated, combined with recent share gain, we believe Foundry remains well positioned for the quarter ending in March,” he says in the research note.

Sue attributes the increased revenue to gains in incremental spending from service providers, such as AOL Time Warner Inc. (NYSE: AOL) Another positive for the company is its ability to move from one enterprise vertical to another. Sue believes the company has gotten particularly good traction with the military through its partnership with General Dynamics Corp.

The company has also recently expanded its sales force in Japan. Last quarter, Japan made up 14 percent of the company's total revenue. After talking to distributors in Japan, Sue believes that percentage will increase in the second quarter as the company gains marketshare from both local equipment vendors and Cisco.

Along with Japan, Foundry is also expected to see gains in China. Europe, on the other hand, is only expected to produce flat growth. The company is also expected to improve gross margins once again. In the third quarter 2002 the company reported gross margins of 53.4 percent. It improved those margins to 54.7 percent in the subsequent quarter.

While the company clearly has been focused on expanding its opportunities in Asia and has done well selling to existing customers, part of its current success can be attributed to the fact that it entered this quarter with a significant backlog of orders, says Suppiger.

But the big question on everyone’s mind is how Foundry has managed to keep its revenues so high, while its overall sector suffers. Cisco, the leader in IP routing and switching, is expected to see declines this quarter. Enterasys Networks Inc. (NYSE: ETS) and Extreme Networks Inc. (Nasdaq: EXTR) also aren’t expected to have positive quarters.

Foundry’s technology may be the answer. It has an interesting mix of high performance, functionality and low cost that makes it an attractive alternative to bigger players like Cisco.

But analysts warn that Foundry could lose that edge. Cisco, Enterasys, and Extreme are each expected to announce products with similar functionality and features this summer. But Foundry doesn’t seem worried. The company is convinced it will continue to execute well.

“We’ll be making some new announcements this year too,” says Adam Stein, director corporate marketing for Foundry. “Plus, we are focusing on certain applications within a growing list of vertical markets. And once you’ve established traction with customers, it’s much easier to sell more best-in-class gear to them.”

The company is trading down $0.32 (3.66%) to $8.42 today.

— Marguerite Reardon, Senior Editor, Light Reading

Editor’s note: Light Reading is not affiliated with Oracle Corporation

valleyguy 12/5/2012 | 12:28:37 AM
re: Foundry's Revenue: Rising Again? My take on Foundry's "secret." Actually there are three I can think of:

1) Solid financial management.
2) Solid product line that's just plain better than the 6000 and anything Extreme's got.
3) Growing list of Cisco haters in the market.

Cisco's losing share to Foundry and Juniper despite their best FUD efforts. Cisco has a diluted way of carving up the markets they're in to confuse the investment community into believing that they're gaining share when they're simply losing business to competitors. It's good marketing but followers of this business know better.

The industry needs more Foundrys and Junipers.
Iipoed 12/5/2012 | 12:28:37 AM
re: Foundry's Revenue: Rising Again? Cisco may be losing a bit of ground. Recent market-share expansion at rival Juniper (JNPR:Nasdaq - news - commentary - research - analysis) in the core router arena and better-than-expected sales at computer networking foe Foundry (FDRY:Nasdaq - news - commentary - research - analysis) suggest that Cisco is losing some traction.

"We believe Cisco, with 80% high-end routing share and 50% low- to midrange switching share, has been retracing its prior share gains back to competitors such as Juniper Networks and Foundry Networks,"

Of course what FDRY sells in a year Cisco sells in less than a month and what JNPR sells in a year Cisco sells in two months. Doubt CRISCO is too worried.
materialgirl 12/5/2012 | 12:28:27 AM
re: Foundry's Revenue: Rising Again? What can Foundry have that other Ethernet vendors don't? Do they have a super fast ASIC that does all sorts of wire-speed packet processing? Neat management software? In a market like Ethernet where everything fits together, its hard to see why one vendor would do any better than another over time.
Iipoed 12/5/2012 | 12:28:26 AM
re: Foundry's Revenue: Rising Again? They have senior management that is heavily involved in all aspects of their business. They have senior salespeople. They have one of the lowest if not lowest turnover of employees in the industry. They did now go out an overly spend hiring Cisco and 3com castoffs to swell their sales forces as did others that have now had significat layoffs.

They have Bobby Johnson, say what you will, he founded, financed and still makes himself available for sales calls and even signing off on POs. He gets the most out of his people.

Oh by the way Fork lift upgrades are what Cisco makes its margins on. Foundry prefers to engineer products that have the most cost effective migration path amongst their product line.
lightbulb0 12/5/2012 | 12:28:13 AM
re: Foundry's Revenue: Rising Again? What a nighhtmere to Cisco should Juniper merges with Foundry.
materialgirl 12/5/2012 | 12:27:58 AM
re: Foundry's Revenue: Rising Again? Foundry's management might be the best, but customers buy product, not management. In a plug and play Ethernet world, how can anyone over time differientate their product, their revenues or their margins?
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