|FDRY ($31~$23) Shares Fall Sharply on Shaky Forecast|
Thursday January 29, 1:36 pm ET
By Gretchen L. Wilson
NEW YORK -- Foundry Networks Inc. (NasdaqNM:FDRY - News)'s shares fell sharply Thursday after the maker of switches and routers for computer networks portended a more competitive 2004 and alluded to shaky demand from its largest customer.
The stock fell despite stronger-than-expected fourth-quarter earnings. On late Wednesday, the San Jose, Calif.-based company reported fourth-quarter net income of $24.1 million, or 17 cents a share, up from $10.5 million, or eight cents a share, a year earlier, and a penny a share above analysts' mean estimate.
But in the company's subsequent earnings conference call, Foundry Networks said many competitors in the industry are desperately seeking market share by introducing new product lines and dramatically lowering prices.
"It's well-known that there are very few healthy LAN switching companies, and we are just cautious that we are seeing some of our competitors do desperate acts," Foundry Chief Executive Bobby Johnson said, according to a transcript provided by CCBN StreetEvents. Mr. Johnson noted that some struggling competitors in the industry "have nothing to lose."
According to Foundry's most recent annual report filed with the Securities and Exchange Commission (News - Websites) , the company's most significant competitor remains sector leader Cisco Systems Inc. (NasdaqNM:CSCO - News) .
Other competitors include Extreme Networks Inc. (NasdaqNM:EXTR - News) , Juniper Networks Inc. (NasdaqNM:JNPR - News; JNPR), Riverstone Networks Inc. (Other OTC:RSTN.PK - News) , Nortel Networks Corp. (NYSE:NT - News) and Enterasys Networks Inc. (NYSE:ETS - News) .
At about 1:20 p.m. EST, shares of Foundry Networks were down $7.96, or 25%, at $23.62 on the Nasdaq Stock Market (News - Websites) .
In the conference call, Mr. Johnson said the company seeks to broaden its customer base and decrease its reliance on its largest customer, the U.S. government, which accounted for 32% of the company's sales in the latest quarter.
"While we are targeting this vertical market for additional revenue, we know that government demand can be unpredictable, both in scale and timing," he said, though he later added that the company's government business "remains strong."
Foundry's outlook, called alternately "cautious" and "conservative" by a number of Wall Street analysts, prompted a downgrade by WR Hambrecht & Co.
"Although impressed with the company's ability to consistently post strong results, we believe that, based on the likelihood of a more intense competitive environment during the latter portion of 2004, valuation has become a more critical concern," wrote WR Hambrecht's Ryan Hutchinson, downgrading the concern to "hold" from "buy."
Lehman Brothers analyst Jiong Shao said Foundry's near-term business seems to be solid but noted that concerns regarding government spending "seem quite valid."
"We are not seeing the government business decline dramatically in the near term, but -- longer term -- this customer concentration is a key concern," he said.
Mr. Shao said Foundry's U.S. government contracts, largely with federal bodies such as the Department of Defense, have grown rapidly over the last 12 months but noted that Foundry is trying "very aggressively" to diversify its customer base.
The Lehman analyst said the company may seek greater opportunities in its markets in Europe and Japan, adding that investors will have to wait and see how such efforts at diversification pay off.
WR Hambrecht makes a market in Foundry. It wasn't immediately clear whether Mr. Hutchinson owns any shares of the company.
Lehman Brothers does have an investment-banking relationship with Foundry, but Mr. Shao doesn't own any shares.
-Gretchen L. Wilson, Dow Jones Newswires; 201-938-5394