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Networking Roundup: Foundry, Nortel, Alcatel

Posted on Monday, Aug 4th 2008

I had earlier discussed in my Online Video Beneficiaries series consolidation among the networking dwarfs so that they can be stronger competition for Cisco.

On July 21, Brocade announced plans to acquire Foundry for $3 billion. Foundry’s shares jumped more than 30% while Cisco’s lost 2%.

With this deal, Cisco once again faces strong competition in a niche area of end-to-end data center solutions (read my recent post on the competition from F5 and Juniper). The deal is expected to close in Q4.

That same evening, Foundry also reported results for a strong second quarter driven by increased North American sales. Revenue was $160.7 million, up 12% y-o-y and 7% q-o-q. Net income was $18.3 million or $0.12 per diluted share and non-GAAP EPS was $0.17. The Street had expected revenue of $153.5 million and earnings of $0.15. During the quarter, Foundry bought back shares worth $15.7 million.

By region, North American commercial revenue accounted for a record 58.2% of total revenue. Service provider revenue accounted for 27% of revenue, up from 23% last quarter. The US federal government accounted for about 17.3% of revenue.

Foundry is currently trading around $17 with a market cap of about $2.5 billion.
Foundry Chart

On August 1, Nortel Networks Corporation (NYSE/TSX: NT) reported its Q2 results. Revenue grew 2% to $2.62 billion, beating the analyst estimate of $2.51 billion, an increase which was helped mainly by a deferred revenue release in the Carrier business. However, losses were $113 million, including $67 million in restructuring charges. This compares to net losses of $37 million last year and $138 million last quarter. Excluding charges, net loss per share was $0.13; analysts were expecting losses of $0.03 per share.

Q2 gross margin was 43.1%, compared to 41.1% last year and 41.6% in Q1. The cash balance was $3.07 billion, down from $3.22 billion in Q1. The deferred revenue balance at the end of Q2 was $2,529 million, down by $314 million during Q2 2008 and $580 million year-to-date.

By segment, Carrier Networks (CN) revenue decreased 2% y-o-y and 15% q-o-q to $1.04 billion. Enterprise Solutions (ES) revenue grew 3% y-o-y and declined 5% q-o-q to $0.61 billion. Global Services (GS) revenue grew 9% y-o-y and 4% q-o-q to $0.54 billion. Metro Ethernet Networks (MEN) revenue was $378 million, up 4% y-o-y and 16% q-o-q.

Orders were $2,153 million, down from $2,683 million last year mainly due to lower CDMA orders in North America and lower orders from the LG-Nortel joint venture, compounded by the economy factor.

Nortel says general macroeconomic weakness, competitive pressures and the potential of further reduced capex by key North American CDMA customers are challenges that it is up against. But to get over them, it first needs to get a strategy in place. For 2008, it expects revenue growth at a low single-digit percentage rate and gross margin at 43%. It is currently trading around $6.5 with a market cap of about $3 billion.

Nortel Chart

Another networking dwarf, Alcatel-Lucent, has had a tough time with its turnaround. On July 29, the company announced its Q2 results and that the CEO and chairman will be stepping down to bring in new leadership that will hopefully turn around the company. Shares surged by 4% on the news.

CEO Pat Russo will be leaving the company by the end of the year while chairman Serge Tchuruk will leave by October. The company will have a revamped management and board. Former Lucent Technologies CEO Henry Schacht will step down immediately. The 2006 merger with Lucent hasn’t yet reached a comfortable position in its three-year integration plan, and the slow economy has made things even harder.

For Q2, Alcatel-Lucent reported group net loss of €1.1 billion and adjusted loss of €222 million (€0.10 per share) in Q1 2007. Since its merger, the company has yet to post any profit. Revenue was €4.101 billion, down 5.2% y-o-y and up 6.1% q-o-q. At constant currencies, revenues grew 1.7% y-o-y and 8.5% q-o-q. Analysts had expected profit of €0.04 on revenue of €4.1 billion.

By segment, Carrier revenues declined 3%, Enterprise revenues grew 7% and Services revenues grew 16%. Due to reduced spending by its key customer, Verizon, in North America, CDMA revenue took a harder-than-anticipated hit.

For Q3, the company expects its revenue to be flat to slightly down sequentially. For the full year, it reiterates its earlier guidance. The stock is currently trading around $6, down about 50% since the merger.

A-L Chart

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