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Cabletron Plunges After Analysts Cut Rating and Estimates

The stock fell 42% even though the company beat earnings expectations for the latest quarter.

Cabletron Systems

(CS) - Get Report

fell sharply Thursday after the network hardware and software company told analysts that it would abandon parts of its networking business that were expected to generate $60 million in revenues during this quarter.

One Wall Street analyst lowered his rating on the stock and others significantly slashed their earnings and revenue expectations Thursday, one day after the company posted fourth-quarter earnings that exceed Wall Street's forecasts.

Shares of Cabletron dropped 21, or 42%, to close at 28 7/8 on Thursday.

Cabletron said late Wednesday that its operating earnings had risen to $28.1 million, or 15 cents a diluted share, compared with $3.8 million, or 2 cents a share, in the year-earlier quarter. The 13 analysts who cover the Rochester, N.H.-based company had predicted earnings of 14 cents a share in the latest quarter, according to

First Call/Thomson Financial

.

But opinions about growth prospects for the company, which is in the midst of a large restructuring effort, varied widely.

Ajay Diwan, an analyst at

Goldman Sachs

, issued a report stating the company had missed his revenue expectations for Smartswitch routers by $10 million.

"This is Cabletron's most important product and the slower than expected growth is a serious concern," wrote Diwan, who downgraded the stock to market perform, the equivalent of a buy rating, from market outperform, the equivalent of a strong buy rating. Diwan's firm has done no recent underwriting for Cabletron.

Diwan also noted that the company was pulling out of several slow-growth product segments, including shared hubs, adapters and low-end switches. That disclosure was not included in the company's earnings statement, but other analysts said the news could be derived from a conference call Wednesday night or from a sudden $60 million drop in the revenue guidance provided by the company.

Jim Davidson, a principal at

Silver Lake Partners

, a California venture capital firm and a major Cabletron investor, said it still believes the sum of Cabletron's parts is greater than the whole.

"The Goldman analyst seems to believe that things are going more slowly, that things are off schedule,

blah

,

blah

,

blah

, and obviously that's affected the market," Davidson said. "This is an environment that's looking for reasons to sell stocks."

Other analysts interpreted the results from the Smartswitch router business as positive and said the revenues exceeded their expectations. But Paul Johnson, a

TST Recommends

Robertson Stephens

analyst who was cheered by "strong sales" of Smartswitch routers, lowered his earnings and revenue estimates for next year. Johnson rates the stock buy, and his firm did not disclose whether it has done recent underwriting for Cabletron.

Cabletron is transforming itself into a management company, dividing its business into

Riverstone Networks

,

Aprisma Management Technologies

,

Enterasys Networks

and

GlobalNetwork Technology Services

. Analysts expect Cabletron will offer stock in Riverstone and Aprisma this year and Enterasys and Global Network will go public in 2001.

"Management and the directors and probably the new investors are stretching to ensure that every piece of the business that goes forward has this extreme sensitivity to the new economy," said Matt Robison, analyst for

Ferris, Baker, Watts

. "It might be the right thing, but they blew people away with their apparent disregard for earnings."

Robison rates the stock a strong buy, and his firm has not done underwriting for Cabletron.

Several analysts said they regard the company's management highly and expect strong growth from the strategy. But even these analysts were baffled by the company's seemingly sudden decision to abandon up to 25% of its quarterly revenues. Aside from $50 million in sales to

Compaq Computer

(CPQ)

that will disappear from first- quarter estimates, the company will also lose predicted revenues from an additional $10 million in discontinued operations, analysts said.

Diwan, the Goldman analyst, wrote that he expects an additional $30 million in lost revenues as the company's operations are disrupted by the reorganization process.

"I don't think anyone was anticipating that they would clean house so thoroughly all at once," said Matt Sue, analyst for

Lehman Brothers

. "The smarter thing would have been to milk things until the IPO process."

Lehman rates the stock buy, and the firm has done no underwriting for Cabletron.

Goldman's rationale in lowering its rating included the fact that the stock price briefly surpassed its price target of $50. Rating the stock a buy after Thursday's price plunge is a rather safe bet, several analysts said. The stock now trades $10 below $43.50, the price on Feb. 24 when Silver Lake Partners agreed to invest up to $200 million in the company. Silver Lake is buying $200 million worth of preferred stock, convertible at $40 a share, and will also receive rights to buy shares of the subsidiaries.

Cabletron did not return calls seeking comment.