Foundry Stock Slides on Q1 Results

Despite its flurry of recent activity in the Layer 4-7 space, Foundry Networks Inc. (Nasdaq: FDRY) dipped below analyst expectations when it posted its first-quarter results yesterday.

The news was not well received by investors. In after-hours trading, Foundry shares were down $3.85 (27.2%) to $10.30. In regular trading yesterday, shares had fallen $1.04 (6.85%) to $14.15.

Revenues for the first quarter of 2004 were $104 million, compared to $91.1 million in the first quarter of 2003. Foundry net income was $19.9 million, or 14 cents per diluted share in the first quarter, compared to net income of $13.4 million, or 11 cents per diluted share in the same period last year.

However, these figures were some way below analyst expectations of 17 cents per share and $113 million revenue.

Foundry executives on last night’s earnings call attributed the company’s weak results to its first-quarter performance in Japan, and "seasonality," citing the fact that the first and third quarters of the year are traditionally its most "challenging."

But it wasn’t all doom and gloom. Foundry continues to be a strong player in the federal government space, which accounted for nearly a third of the company’s quarterly revenues. Key wins came from the US Army and US Navy.

The company is also planning to build on its recent product announcements in the Layer 4-7 switch space. Foundry CEO Bobby Johnson says, “We will shortly have more product announcements in the 10-Gigabit Ethernet arena with a specific focus on decreasing the price per port.”

Foundry will also be announcing 10-Gigabit Ethernet and Gigabit Ethernet interfaces for its Terathon offering this quarter, according to Johnson. These will be capable of full wire-speed IPv6 at 480 million packets per second.

And, tantalizingly, there is more to come at the forthcoming NetWorld + Interop conference in Las Vegas. Johnson says, “We expect that we will have new announcements not yet covered on this conference call that will involve strengthening our overall product portfolio and strengthening our security appliance offerings.”

— James Rogers, Site Editor, Next-gen Data Center Forum

Cut_d_Crap 12/5/2012 | 1:53:33 AM
re: Foundry Stock Slides on Q1 Results a couple of salient points that should have been mentioned in the article:

a. alex henderson of salomon smith barney pointed out that the guidance given for the 2nd quarter is lower than the revenues/earnings for Q4/03 and asked why would foundry forcast a downward trend while talking up the economy - to which mr. heffner hemmed and hawed no answer

b. another analyst asked mr. johnson to explain where future growth will come from - to which mr. johnson responded people will flock to foundry because of the name brand recognition and vertical market positioning of price/performance

c. the downward sales trend in japan was not fully explained

d. the decline in gov't business was not fully explained

e. one gov't contractor (un-named) represented 12% of foundry's total revenue - this is a whole lot of business held in one basket

f. the gov't represented 1/3 of foundry's total revenue - i remember when this used to be a strong danger signal

g. foundry was asked about their distribution strategy - to which mr. johnson responded all sales direct sales (direct touch through channels)

all in all, this paints a rather gloomy picture for a company experiencing gross margin pressures on the low-end and increased competition on the high-end (re: cisco catalyst 6500).

where will foundry's future growth come from? collecting cash in the bank does not do anything for future revenue potentials.
Iipoed 12/5/2012 | 1:53:31 AM
re: Foundry Stock Slides on Q1 Results As a previous early employee and a large stockholder (due to long ago exercised options) I must agree 75% with Cut-d-Crap's points. Bobby Johnson is not a marketing guy, his quarterly press conferences are fairly straightforward. Take a look at Extreme's conferences, Gordon Sitt is marketing oriented and paints a fairly rosey picture even though they continue to lose more money every quarter and their employee turnover is one of the highest in the industry. But Their stock went up because analysts want to believe in marketing hype. Foundry always makes money, in fact this last quarter was their second hightest in gross sales. They are a tightly run company headed by a true engineer. They just do lousy financial conferences if you call straight shooting and lack of wishful forward guidance being lousy.

Analysts these days want pie in the sky coments. The majority had placed future prices for FDRY at between 25 and 40 now they seek to cover their asses.

If you look at the past few years what has been Foundry's direction has been the tech sectors direction. Yet they still make 20 million net or more every quarter. Also think it is kind of interesting that they just brought a second VP of sales the spent 5 years handling Cisco's carrier business and spent the last year or so at Force 10.

They however do need a influx of technology in their product mix. Geez I wish they would somehow get together with Juniper
laserbrain2 12/5/2012 | 1:53:20 AM
re: Foundry Stock Slides on Q1 Results Iipoed -

>>They just do lousy financial conferences if you call straight shooting and lack of wishful forward guidance being lousy.

Analysts these days want pie in the sky coments. The majority had placed future prices for FDRY at between 25 and 40 now they seek to cover their asses.

That sounds like a whole lot of wishful thinking. Analysts want real growth. Yes, they want it big. But if you don't have it you don't have it. Pay me now or pay me later. You seem to be arguing for pay me later.
BlueFox 12/5/2012 | 1:53:12 AM
re: Foundry Stock Slides on Q1 Results Analysts these days want pie in the sky coments.

I wonder how they will deal with Google, which basically said in their IPO that they will not bother with short-term (quarterly) goals, and will focus on the long-term.

I hope Google succeeds. There is a reason why ANAL is part of analyst.
mgillespie 12/5/2012 | 1:52:40 AM
re: Foundry Stock Slides on Q1 Results I disagree and agree in the same breath.
Foundry hold a market share of 51% of the content switching market. Which means 1 in 2 of every clustered internet server or firewall sits behind a foundry server iron. This is by no means a market even remotely similar in size or revenue to conventional LAN switching. However it is a growing one. Layer4-7 switching is being exploited to increase service uptimes. Scale services greater than the scope of what a conventional computer can offer. And as internet transactions continue to increase the fact that they truly are smashing the opposition, can not be dismissed.
In addition with the emergence of the 6509 + sup720 the word on the street is it just doesn't have the port density to compete with the foundry at 10GE. This isn't an issue for most now, but perhaps it will be soon.
On top of this their marketing may have been subtle but it has been making people pay attention. Foundry now have hardware sitting at LINX, AMSIX, XchangePoint, MaNAP, and DE-CIX.
Which basically means that any ISP worth a salt in Europe is connected directly into a piece of their equipment.
Is it enough? Who knows... The netiron is still a heavily priced, and not immensely attractive product to most.
However, I think that foundry can not be dismissed to the bargain bucket. I would speculate that they are still one to watch in the future.
Just an observation.. what do you think?
Kind regards,
Cut_d_Crap 12/5/2012 | 1:52:34 AM
re: Foundry Stock Slides on Q1 Results merlin,
where do you get your market share numbers from? are they based on actual ports shipped or shipped revenues? since the serveriron product uses the same modules as does all of foundry's chassis based products, would not it be easy for them to double or even triple count their shipment and revenue numbers? also the layer 4-7 market space is actually contracting. many of the existing layer 4-7 players have dropped out of the market or have changed their product strategy because there is not enough market potential, product differentiation, and each installation requires an inordinate amount of customization.
Indy_lite 12/5/2012 | 1:52:33 AM
re: Foundry Stock Slides on Q1 Results I wonder how they will deal with Google, which basically said in their IPO that they will not bother with short-term (quarterly) goals, and will focus on the long-term.

Google is in its own class, similar Ebay or Qualcomm, unlike _all_ network equipment makers. The bottom line is all equipment/chip makers are basically different groups of people trying to build on the same idea, nobody really stands out with something revolutionary. Just like all bridge builders were building arch bridges. Google is one who all of a sudden built a suspension bridge like the SFGGB.

The unfortunate part is it is almost impossible to make something totally revolutionary in the network equipment space (after Cisco's first product). So there bounds to be many companies completing on price, so they all suffer in Wall Street. Google, Ebay, Qualcomm, Yahoo, MSFT etc, however, basically have monopoly power (with patents, or de facto standards that nobody else is allowed to copy). That is why Google like Barry Bonds can command such price, make so much money.
mgillespie 12/5/2012 | 1:52:32 AM
re: Foundry Stock Slides on Q1 Results The information came from a 4-7 seminar a few weeks back in London. And aparantly was mainly due to sales on the serveriron XL fixed config switch.
And, you're right the differences between products isn't great, however Foundry is the leader in GigE port density. I agree however that there are reasons that 4-7 switching may or may not fly contrary to predictions. Increased injection of ASIC based firewalls into the market with inbuilt load sharing ability, and operating systems doing the same.. it's tough to say.
I'll be interested to see how it grows.
Cut_d_Crap 12/5/2012 | 1:52:26 AM
re: Foundry Stock Slides on Q1 Results i take it the infomration came from a 'foundry sponsored' 4-7 seminar a few weeks back. as always, take information handed from the source with a grain of salt before believing it. as for being a gbe port density leader, are we talking raw port densities without regard to oversubscription and performance or are you referring to non-blocked port densities. it does make a difference when comparing foundry against the rest of the vendors in the industry. layer 4-7 is a viable technology but i do not believe that there is enough market/product differentiation out there to support the number of players competing in the space. cisco purchased arrowpoint, nortel purchased alteon, extreme purchased webstacks, meaning that theere is a requirement for the functionality.
robokon_tam 12/5/2012 | 1:52:18 AM
re: Foundry Stock Slides on Q1 Results Market Share for L4/7

There are some public 3rd reports that show martket share of L4/7 switch, in which vendors are measured in various dimensions.

Reports that vendors always use include: Dell'Oro and Infonetics.

Dimensions: Revenue, Port count (FE or GE), SSL capability, Chassis, Standalone (fixed), etc.

The funny thing is that every vendor always finds the best number for them to claim "Number 1". Even though one vendor is not "Number 1", he can easily claim that they are the vendor of "Fastest Growth".

Revenue Source

Some "big" vendors sell L4/7 switch in parallel with their L2/3 switch. However, public report shows clearly that the L4/7 pie will be far less than L2/3 switch. My opinion is that L4/7 only creates value but won't produce large revenue numbers. Therefore, even a company claims "huge" market share of L4/7, it create a little on revenue impact.

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