Foundry Faces Tough Times

Earnings season off to a rocky start as switch vendor slashes its Q1 guidance, prompted by slowdown in government business

April 14, 2005

3 Min Read
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As earnings season cranks up once again, the first indications of the quarters winners and losers are starting to emerge. At this stage, Foundry Networks Inc. (Nasdaq: FDRY) has already sprung a downside suprise.

Last night Foundry announced its preliminary first-quarter results, cutting its revenue forecast from $100-$110 million to $84 million. The company attributed this shortfall to two key factors: a slowdown in U.S. Federal Government orders and worse-than-expected sales to North American enterprise customers (see Foundry Q1 to Fall Short).

The first sign of these problems emerged earlier this year when, despite announcing record annual revenues, Foundry admitted that Federal spending was a sore spot in its fourth-quarter figures. The firm blamed this shortfall on the shifting of budgets to the Iraq war effort (see War Fogs Foundry's Numbers).

However, Foundry is not the only switch vendor in this boat. Last week, rival Enterasys Networks Inc. (NYSE: ETS) also cut its guidance (see Enterasys Gives Q1 Estimate).

But it isn’t all doom and gloom. A research note from analyst firm CIBC World Markets predicts a better second half of 2005 for Foundry, thanks to recent sales hires and an uptick in Japan. “Government weakness is a concern,” it said. “But we see potential for a bounce back [in the second half of the year] following resolution of current budget constraints.”Foundry was unavailable for comment for this article. Its shares fell 41 cents today (4.34 percent) to $8.63.

Not all switching vendors are feeling the burn. In another research note, analyst firm Pacific Growth Equities Inc. said that rival vendor Extreme Networks Inc. (Nasdaq: EXTR) will report in line with guidance, and is better positioned than its rivals thanks to “better sales execution” and “lower exposure to Federal business.”

Against the backdrop of a “challenging” LAN switching market, the Santa Clara, Calif.-based vendor benefited from its strategic relationship with Avaya Inc. (NYSE: AV) and “a significant product upgrade,” according to the analyst firm.

Last month Extreme launched its Summit400 platform, a new family of Layer 3 fixed Gigabit Ethernet switches (see Extreme Debuts New Summit 400 ).

However, the security and traffic management markets present a much different picture. Pacific Growth Equities identified F5 Networks Inc. (Nasdaq: FFIV) as the stock with the greatest potential for upside earnings this quarter. F5's quarterly results are scheduled for April 20. The company's stock dropped 51 cents today (1.05 percent) to $47.54.Analysts at Pacific Growth cited the fact that the SSL VPN market accelerated in the March quarter and said that F5 benefited from a major upgrade to its Firepass product (see F5 Launches New FirePass Controller).

Pacific Growth also said channel checks indicate that demand for F5 products was very healthy in North America and Europe, and particularly strong in Japan. However, the firm warn that the security market is currently in transition, as growth in the firewall/VPN market gives way to emerging technologies such as intrusion prevention and SSL VPN.

How is Federal Government spending affecting your business? Tell us all about it by taking the latest NDCF poll: Pork City Payouts.

— James Rogers, Site Editor, Next-Gen Data Center Forum

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