Cisco Feasts on Aching Avaya
Analysts say
Avaya
(AV)
is having an off quarter, but investors seem to sense deeper troubles.
Shares of the Basking Ridge, N.J., office phone maker hit a 52-week low this week after a Lehman Brothers report said sales remained sluggish despite heavy discounting. The drop capped off a 30% decline in the stock this year.
The latest setback comes just a quarter after Avaya beat expectations and topped its peers in terms of office phone revenue. But analysts poked holes in the seeming success story even then, saying that the company's acquisition of
Tenovis
helped boost sales and mask the underlying weakness in Avaya's core business.
Now, seeing reports that sales are still slow, investors aren't willing to wait around for the official report from the company.
Welcome to the latest round of margin madness.
Tech hardware makers like Avaya,
Nortel Networks
( NT),
Lucent Technologies
( LU) and
Cisco Systems
(CSCO) - Get Report
continue to be pinched by stingy buyers and aggressive rivals. And choosing to fight rather than run, the gearmakers have had to slash prices to make sales. In this game, profit margins are always the first casualty, say investors.
"I think the issue gets to the heart of the business model," says one hedge fund manager who has no positions. "Hardware is a tough business to try and stabilize margins in these days. And that's all people really care about."
Avaya declined to comment.
Office Hangups |
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Avaya and Nortel are the leaders in the office phone market. But businesses are shifting toward voice-over-Internet-protocol phones to better mesh calls with their data networks. Both Avaya and Nortel offer hybrid systems that bridge old-line phone tech with advanced IP networks. Meanwhile, Cisco, taking the pure IP route, has managed to wrestle a good portion of the market away from Avaya and Nortel.
Since IP is the growth market for phone system sellers, Cisco has managed to spoil the fun for the hybrid gear sellers.
One independent Avaya sales manager confirmed most of the points made in the Lehman report. He said the company was showing increased interest in his sales projections and urging him to close deals before the quarter's end. "It sounds like direct sales business is soft and they were not going to meet" the CEO's targets, said the sales manager.
He also confirmed that Avaya has been cutting prices on some of its midrange systems. "Cisco is attacking them at the edge, hurting them in the small and midsized business markets," says the sales manager.
But one quarter's lowlights don't make the entire story, says the sales rep, who is encouraged by two product upgrades Avaya is expected to announce later this year to fight Cisco on features rather than price.
But until Avaya proves it can restore its prices and find a way to mend its narrowing margins, the stock might not jump back to life.
As the hedge fund manager says: "Once the momentum comes out of stocks like this, that's all that matters."