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Foundry Faces Tough Times

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.”

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