At Newbridge Networks, Finance Means Having to Say You're Sorry

In its conference call, Newbridge executives apologized to investors.
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SAN FRANCISCO -- Rarely is a conference call with investors as larded with feeling as

Newbridge Networks'

(NN)

was Tuesday night. In Newbridge's case, the feeling was frustration.

Newbridge, a Kanata, Ontario-based networker, struck a mournful tone last night as it warned of its fifth profit disappointment in eight quarters. "On behalf of the management team, I apologize for any impact on your credibility with your clients that this may have caused," COO Alan Lutz said to roughly 250 analysts and investors.

Lutz' candor was almost as refreshing as it was unsettling. The stock closed down 7 15/16, or 22%, to 28 7/8 Wednesday after falling as low as 27.

Several in the financial industry said an apology from a top executive is a rare move. "Nobody ever says I'm sorry," says one short-seller, who is not currently involved with the stock. "We're all big boys. It means they feel they misled investors."

Newbridge occupies a great position in communications: building robust switches for the networks of phone carriers. But it has repeatedly had trouble executing -- usually the easy part for well-positioned network companies. Newbridge says it wasn't until this quarter that it awakened to problems in its ability to meet the erratic flow of orders. The company lost control of supply lines, manufacturing capacity and order entry because of a flood of customer orders late in the quarter.

When the curtain closed on the quarter, Newbridge had $115 million of unfilled orders. Says Lutz: "This management team has been stunned by the fact that we had such a positive opportunity with orders, and that we blew it on sales."

In the next two quarters Newbridge hopes --

hopes

-- to streamline operations, outsource some of production and better handle the flood of customer orders that come in late in the quarter.

While Newbridge lost a contract with

MCI WorldCom

(WCOM)

, Lutz says that the company saw orders for its flagship product, the MainStreetXpress 36170 switch, jump 50% from the prior quarter. He expects to hold onto blue-chip customers such as

Bell Atlantic

(BEL)

and

SBC Communications

(SBC)

.

"There's a real chance we can button the whole thing up in the next two quarters," says Lutz. But he adds that there is no simple solution.

The company has fallen short on prior predictions -- and that's where much of the frustration comes in. "There's a credibility that's been tarnished here," says analyst David Beck with

TD Securities

.

"It was only last week at our tech conference that they were relatively bullish," says Erik Suppiger, analyst with

Hambrecht & Quist

, who rates the stock a hold. H&Q has no banking ties to Newbridge. Indeed, Newbridge executives spoke to institutional investors the morning of April 28, about 100 hours before its quarter closed.

Some investors are trying to look beyond the pain. "I think it's pretty easy to get kind of emotional and to take it personally," says one investor, who claims to have made money trading Newbridge for several years. But "it's dangerous to get so emotional and throw in the towel because the growth is so strong."