Spirent Slumps on Update

Spirent Communications plc saw its share price slump by 17 percent on the London Stock Exchange this morning after issuing a trading update that highlighted reduced profitability in its main division.

The stock dropped 7.5 pence, just over 17 percent, to 36 pence after the company said first half revenues (to July 2) are expected to be "in line with market expectations," but that operating profit in the Performance Analysis division for the first six months of this fiscal year is expected to be £4 million to £6 million ($7.4 million to $11 million) lower than the £8.3 million ($15.3 million) it had anticipated.

On average, industry analysts had expected the division to generate operating profits of £9 million ($16.6 million) in the first six months, but that consensus has now dropped to between £3 million and £5 million ($5.5 million to $9.2 million). Spirent says it doesn’t expect to recover that shortfall in the second half of the year.

The company also warned of a chance that first half revenues might not hit targets as "the bulk of our revenues for the second quarter are usually realized during the last weeks of June."

London-based analyst Michael Blogg of Arbuthnot Securities Ltd. reckons the impact on the stock is "more than I would have expected," as the market had been geared up for bad news. "There was always the possibility of further downgrades," says Blogg.

The analyst believes the company is still in transition, and "I expect to see progress in 2007. There are signs that customers are interested in new products and are testing and trialing them."

The Performance Analysis division -- which provides fixed and wireless test tools to equipment firms and test labs -- accounted for about 70 percent of the company's fiscal 2005 revenues, and is largely holding up the company while the Service Assurance division (network monitoring software) restructures and adjusts to an increasingly IP-centric world. That means the company's share price is particularly volatile to any changes in outlook for that part of the business. (See OSS Lapse Hits Spirent and Spirent Cuts Back OSS Group.)

The company says a "tough market background with volatility in demand," including a delay in orders, has hit its first half performance, and that some product launch delays, notably the latest update to its TestCenter, and higher levels of investment have also hit profitability. (See Spirent Updates Test Center.)

Spirent has undergone a significant overhaul in the past year, having sold a major chunk of its non telecom-related business and made a coupe of niche acquisitions. (See Testing's Tasty Tidbits, Spirent Buys Wireless Test Firm, and Spirent Buys VOIP Test Firm.)

— Ray Le Maistre, International News Editor, Light Reading