has Wall Street seething, its old products are tottering and giant competitor
is tromping into its territory. But don't throw Newbridge on the networker junk heap yet.
Investors pummeled Newbridge's stock Tuesday after the networker late Monday warned of a drastic profit shortfall for the January quarter, making it the third straight quarter that the company has preannounced disappointing earnings. Its stock tumbled 5 1/2 to 20. Its earnings release is expected Feb. 24.
Some sell-side pros already feel misguided. Analyst Richard Woo at
, a Toronto-based investment bank, says Newbridge execs told him on Jan. 22 that they were comfortable with Wall Street profit estimates and his own revenue estimates of roughly $453 million (Canadian) for the quarter.
"I was told that everything was still on track," Woo says, and he mailed 200 copies of a bullish research note to clients on Jan. 26.
Then on Monday, just one week later, Newbridge said its fiscal third-quarter revenue will be roughly $360 million -- a $100 million shortfall from the estimates. Woo said on Tuesday that he is reviewing his bullish call. "This is just totally unacceptable," he said. Woo's firm has no underwriting relationship with Newbridge.
Newbridge spokesman Paul Goyette says the company kept its message consistent until a quarter-end quiet period took effect on Jan. 16. After that, it could only reiterate the prior message to Woo.
Part of Newbridge's problem stems from the softening in sales of products such as its time division multiplexing, or TDM, an aging technology for phone carriers. Frame relay products, which ship digital signals in packets, were soft as well.
At the same time, Cisco, the leading networker, is raiding Newbridge's roost with an asynchronous transfer mode, or ATM, product that some industry insiders say is less appealing than Newbridge's. (This type of ATM technology operates deep in the hearts of large phone and data networks.) Cisco, for instance, landed a sizable contract with the carrier
U S West
last month, presenting a new threat in the phone-carrier business.
Cisco's advantages in the battle include an aggressive and well-staffed sales team. More importantly, Cisco already sells phone carriers a mountain of "routers" -- multilingual computers that send messages between different networks on the Internet. So Cisco is leveraging its dominance in one business to penetrate another, taking something of a
approach. Cisco marketing director Stan Kramer says Cisco wins accounts because of both its flexible technology and its routers.
Despite all this, it's unlikely that Cisco will steamroll Newbridge, a belief shared by at least one money manager.
The Cisco threat is "real -- I'm worried about it, but I know that with its technology Newbridge can gain market share," says Pierre Bernard, vice president of Montreal-based
T.A.L. Investment Counsel
. Bernard bought about $72,600 (U.S.) of Newbridge stock Tuesday morning, adding to his position. He sees an undervalued long-term play in Newbridge.
Newbridge's future growth hinges on the rise of the ATM technology. Phone carriers like Newbridge's ATM product, the 36170, and they are studying with interest a new 36190 model built largely by Newbridge's close partner
Cisco's router business isn't rock solid either. Competitors are pushing alternatives such as "layer-three switches," and the result of that battle is anything but clear.
In places, an ATM switch does the job of a router, and some folks expect it to supplant at least some of Cisco's business here. ATM technology is just getting started, while routers are a mature technology. Newbridge arguably builds the strongest ATM switch for the "wide-area network" of a phone carrier.
Newbridge also remains a well-entrenched supplier to phone carriers, and it has lost neither its customer base nor its technology appeal.
"These guys have a much bigger presence than Cisco with phone networks," says analyst Michael Neiberg at
. While he bumped Newbridge to hold from buy after listening to the morning conference call with analysts, Neiberg doesn't expect Newbridge to exit the scene. His firm has done no underwriting for Newbridge.