Foundry Networks reported better than expected earnings and revenues for the second quarter (July 25, 2001). The company reported revenues of $88.6 million, up sequentially by 7.3%, and $16 million above consensus forecasts. Earnings per share were $.07, which was $.02 higher than estimates. Other financial results — I won’t bore you with the details — were equally impressive. Every metric except accounts receivable, which was up $12 million, went in the right direction sequentially.
And yet, Foundry traded down after hours that day, because most analysts focused on CEO Bobby Johnson’s (wise, I thought) decision not to issue guidance for the coming quarter in light of current macroeconomic conditions. In declining to provide guidance, Johnson said “Historically the third quarter has been soft on network providers. The macroeconomic picture is a little bit cloudy with the summer vacation time in Europe and the U.S. economy is not responding to the interest rate cuts as fast as we’d like.”
In the question and answer session, Johnson also made it clear that this was just a continuation of Foundry’s cautious policy regarding guidance, and that nothing new had emerged to indicate a worsening of business conditions. Nevertheless, all of the good news was ignored and the stock traded down.
Only Salamon Smith Barney seemed to be able to read between the lines, stating in a report issued last night that “Our read of the tea leaves concludes management is simply giving themselves the flexibility in case there is a slowdown. In fact management stated that they are not looking for a slowdown and are being cautious in case there is one. Not a bad policy.”
Other notes from the conference call:
The book-to-bill ratio was above 1:1. Business in China is strong. The enterprise market is strong and now represents 60% of Foundry’s business, up from 50% a quarter ago. Foundry is seeing strength in the metro area market, and in the health care, education, and government verticals.
Inventory levels are down 20%. Layer 3 switching products generated $66 million in revenue, up sequentially by 13%, Layer 4 through 7 products generated revenues of $13 million, in line with forecasts and flat sequentially. 60% of revenues came from the United States, and there was a significant ramp up in revenues from China, which continues to be a pocket of strength in the world market for gigabit ethernet products.
Selling and marketing expenses are down, as are general and administrative expenses.
Foundry’s cash position on the balance sheet remains the same, at about $260 million.
This was Foundry’s tenth consecutive profitable quarter. The company announced several new significant products during the quarter which they expect to fuel continued growth.
Analysis: Metro optical networking continues to be the bright spot in the sector, as evidenced by recent earnings reports by ONIS, EXTR, and, now, FDRY.
These companies are positioned for growth in an industry that seems positioned for death. I believe that, based on the fact that Foundry’s quarter to quarter performance improved sequentially by almost any metric, that CEO Bobby Johnson is indeed being cautious, and that analysts are making a mistake in this case by focusing on the lack of guidance.
In fact, I have been arguing for two quarters now that the CEO’s of networking companies ought to provide no guidance in current macroeconomic conditions.
A close look at the numbers and the market indicate to me that current weakness is a buying opportunity.
Position: Long, Foundry
