In Search of... Enterprise Rebound

Experts agree that an economic recovery in the technology sector will likely happen in the enterprise before it hits the service provider market. For this reason, experts have been watching quarterly performances by players like Cisco Systems Inc. (Nasdaq: CSCO), Extreme Networks Inc. (Nasdaq: EXTR), and Foundry Networks Inc. (Nasdaq: FDRY) very closely.

As the third calendar quarter of 2002 comes to a close, the news is split. While Cisco and Extreme report slower demand and falling revenue, Foundry actually says it expects to beat revenue and growth expectations for the quarter that ended September 30th.

Does this mean that the enterprise market is rebounding? Not likely, say experts. While it’s true that Foundry’s business is improving, Alex Henderson, an equities analyst with Salomon Smith Barney says this is an anomaly rather than an indication of a trend.

“Foundry is benefiting from an upswing in its product development cycle,” he says. “Over a short period, it looks as though Foundry is outperforming its competitors. But historically it had a more difficult 2001, because of where it was in its product development cycle.”

Since the beginning of the year, Foundry has updated all of its products and improved the performance with its third-generation JetCore ASICs. Part of the company’s success, says Henderson, could be that it is now filling demand for higher performing products that it was unable to fill a year ago.

What’s more, Foundry has been aggressively targeting more enterprise customers, especially government contracts, a tactical strategy that seems to be paying off. In 1999 when the company went public, half its revenue came from service providers and half from enterprise customers. That split has become progressively disproportionate. Today, the company attributes nearly 80 percent of its revenue to enterprises and 20 percent to service providers, much like its competitors, Extreme and Cisco.

Henderson argues that numbers coming out of Extreme and Cisco are more representative of what is happening in the enterprise market. While Extreme and Cisco are still performing better than their counterparts like Juniper Networks Inc. (Nasdaq: JNPR) and Riverstone Networks Inc. (Nasdaq: RSTN, which are exclusively focused on service providers, they still seem to be struggling.

Take Extreme for example. Last night the company announced its first fiscal quarter earnings for 2003 (see Extreme Reports Q1 Earnings). Its net loss came to $4.7 million, or $0.04 a share, compared with a net loss of $36 million, or $0.32, for the same period a year ago. Revenue on the quarter decreased 7.1 percent to $100.6 million from $108.3 million last year. Gordon Stitt, Extreme’s president and CEO, attributed the decline to enterprise customers delaying orders.

Extreme had warned last month it expected revenues of about $100 million and a net loss of $0.03 to $0.04 per share. At the time this was well below analyst expectations. On the call last night, the company wouldn’t give specific guidance, but it reiterated its $90 million break-even point.

Additionally, Stitt said Extreme would reduce its work force during the current quarter to about 900 from about 1,000. The company had hinted of job cuts in September to help reduce expenses.

Cisco has also been projecting flat growth due to a lack of customer demand. Last week several analysts downgraded Cisco in anticipation of bad news when the company reports results on Nov. 6. Analysts now expect Cisco to earn $0.13 a share on sales of $4.87 billion, according to First Call.

Contrast all this news with Foundry’s preannouncement on October 3, 2002. The company announced that it is actually going to beat expectations for its third-quarter revenues when it reports next week. Specifically, the company expects to earn $0.04 to $0.06 a diluted share, compared with profit of $0.02 per share in the same quarter last year. Foundry said it sees third-quarter revenue of $75 million to $77 million, up slightly from the previous quarter.

As for the future, no one likes to predict.

“Is this a bottom? I don’t know,” said Stitt, in an interview earlier this week. “I think the enterprise will recover first. The drought has already been going on for two years now. In that time a lot of equipment has aged, and it will have to be replaced. Hopefully, that will create a backpressure that will force a recovery.”

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.com Movers and shakers from more than 100 companies – including Cisco and Riverstone – will be speaking at Lightspeed Europe. Check it out at Lightspeed Europe 02.

buliwyf 12/4/2012 | 9:31:35 PM
re: In Search of... Enterprise Rebound Given the massive restructuring at other companies how long can CSCO hold out until it cuts 20% of it's workforce? It's coming....
capolite 12/4/2012 | 9:31:22 PM
re: In Search of... Enterprise Rebound CSCO is concentrating on managing down people's incomes and saddling them with unrealistic expectations. This drives out the people who can find other opportunities and demoralizes the vast, silent majority who have to stay due to the economy. Cisco's strategy boils down to "we're the biggest, we're debt free, and we have $21B in cash." Combine that with the inbred cronyism in top management and you have the modern day equivalent of IBM in the 70's and 80's.
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