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Foundry Haunted by 'Lumpiness'

Light Reading
News Analysis
Light Reading
7/23/2004

For the second quarter in a row, Foundry Networks Inc. (Nasdaq: FDRY) has reported earnings short of analysts' estimates. But analysts, cheered by the company's consistent long-term growth, seem likely to continue rallying behind the stock.

Foundry may have gotten the amount of business analysts expected, but some large orders arrived at the very end of June, with shipment dates too late to be counted in its second quarter. As a result, Foundry missed the consensus estimate of $108 million in revenue.

Specifically: For the quarter ended June 30, Foundry reported profits of $15 million, or 11 cents per share, on revenues of $97.8 million, compared with profits of $16.8 million, or 14 cents per share, on revenues of $95.7 million for the same quarter a year ago (see Foundry Revenues Flatten in Q2).

In after-hours trading, Foundry stock hit $9.95, down roughly 14 percent.

In a conference call with analysts yesterday, CEO Bobby Johnson said the shortfall resulted from the "lumpiness" of Foundry's business. About 45 percent of the company's revenues come from service providers and U.S. government agencies, two groups that tend to place large orders at unpredictable time periods.

The result is that even if Foundry's business steadily grows, its quarter-to-quarter results fluctuate. "We believe the results of the quarter are more about the timing of the business than the health of the business," Johnson said.

But here's the point that seems to really exasperate analysts: Based on their consensus estimate, Foundry's revenues were short by $10 million. But it appears the $10 million is not included in Foundry's forecast for the September quarter, which calls for revenues of $100 million to $110 million and net income between 9 cents and 13 cents per share.

Called to the carpet on this point multiple times, Johnson simply said his company wants to be cautious with its predictions, particularly in light of some contradictory trends. The summer quarter tends to be slow, particularly in Europe -- but then again, it's usually the hottest quarter for Foundry's sales to the U.S. government, he said.

But then again, Johnson noted, government sales could get even more unpredictable depending on what happens in November's presidential election. "We still remember the election of the year 2000, and the lack of demand that occurred in December of 2000, so we're going to be cautious."

Foundry's revenue shortfall last quarter was due to weakened business in Japan. Specifically, reseller Mitsui & Co. Ltd., which had represented 16 percent of revenues, fell to less than 10 percent during the March quarter. Foundry reported no "10 percent" customers for the June quarter.

Despite the heartbreak of "lumpiness" (don't they have an ointment for that?), analysts say Foundry offers plenty for investors to like, including a five-year profitability streak that didn't stop during the downturn. "We believe the stock remains compelling," writes Samuel Wilson, an analyst with JMP Securities, in a note issued early this morning. "The company managed to generate $28 million in free cash and show outstanding U.S. enterprise bookings."

Separately, Johnson noted Foundry has at least two product announcements coming up this quarter: one in the company's traditional Layer 2/3 market and another in the firewall/security area.

— Craig Matsumoto, Senior Editor, Light Reading


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    Cut_d_Crap
    Cut_d_Crap
    12/5/2012 | 1:25:42 AM
    re: Foundry Haunted by 'Lumpiness'
    ...is the same thing as no point at all.

    Bobby Johnson used every excuse in the book to say absolutely nothing at all.

    "We see good signs for a recovery but we can't predict the future. Errr...ummm...with this being an election year, who knows?"

    One of the jobs of the CEO is to convey a clear and consise vision statement of where the company is going and how they are gonig to execute on that strategy. It is painfully obvious that Bobby Johnson has no strategy aside from relabeling existing products with new names.


    Examples:
    There is little difference between between the BigIron and NetIron versions of any of their products; NetIron versions have slightly more memory and a beefier CPU but all products use the same software code stream.

    Their latest announcement of a 10 Gigabit Ethernet ServerIron product is nothing more than a repackaging of the existing JetCore Gigabit and 10 Gigabit Ethernet modules in an existing 4-slot chassis, along with a CPU-based management module.

    Their latest set of stackable products are Mucho Grande interface modules packaged as a stand alone product.

    Where is the innovation in this?

    Foundry is a good company - don't get me wrong - with a proven track record of profitability.

    That being said, Foundry's problem now is Bobby Johnson; he launched the company (great job too) but is the major reason why the business cannot expand beyone the current revenue cap of just under $500M per year.

    It's time for the board of directors and stockholders to grow some balls, stand up, and demand a change at the top.
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