Cabletron Systems Announces Second Quarter Results; 200% Growth for Flagship SmartSwitch Router Fuels Third Consecutive Quarter of Positive Momentum - 2nd qtr of fiscal 2000 ended Aug 31, 1999 - Company Financial Information

Cambridge Telcom Report, Sept 27, 1999

Cabletron Systems, Inc. (NYSE:CS) Tuesday reported financial results for the second quarter of fiscal 2000 ended August 31, 1999.

Net sales for the second quarter were $356.6 million as compared with $349.5 million in the first quarter of fiscal 2000 and $370.6 million in the second quarter of fiscal 1999.

On a pro forma basis, net income was $12.5 million, or $0.07 per diluted share compared to pro forma net income of $7.3 million, or $0.04 per diluted share in the prior quarter, for sequential growth of 72% and 75%, respectively. Pro forma net income and earnings per diluted share grew 19% and 17%, respectively, compared to pro forma net income of $10.5 million and $0.06 in the same quarter a year ago. The pro forma presentation, for the current quarter, excludes the amortization of intangible assets related to purchase acquisitions of $7.5 million ($5.6 million, net of tax) and $10.0 million ($6.1 million, net of tax) of other income from a gain on an equity investment.

Pro Forma Condensed Statements of Operations (three months ended
August 31, 1999, May 31, 1999 and August 31, 1998)
(in thousands, except per share data)        (unaudited)

Second   First    Second
Quarter Quarter   Quarter
2000    2000      1999

Sales                                 $356,639  $349,533  $370,591
Pro forma net income                   $12,499    $7,282   $10,531
Pro forma net income per
share - basic                           $0.07     $0.04     $0.06
Pro forma net income per
share - diluted                         $0.07     $0.04     $0.06
Weighted average number of common shares
outstanding - Basic                   174,159   173,090   164,640
Weighted average number of common shares
outstanding - Diluted                 186,381   181,671   170,462
Pro forma earnings before interest, taxes,
depreciation and amortization         $33,101   $28,043   $26,342

Note: Pro forma results for the periods ended August 31, 1999, May 31, 1999 and August 31, 1998, exclude the amortization of intangible assets related to purchased acquisitions of $7.5 million, $7.4 million and $6.0 million, ($5.6 million, $5.3 million and $4.1 million, net of taxes), respectively, $10.0 million ($6.1 million, net of taxes) of a gain on an equity investment (reflected in August 31, 1999 other income), an inventory write-off related to product discontinuations of $15.2 million (reflected in May 31, 1999 cost of sales) and the associated $5.2 million tax benefit and a $23.7 million restructuring charge (also reflected in May 31, 1999 special charges) and the associated $9.2 million tax benefit.

"This is a fundamentally different company today than it was 6 months ago," said Piyush Patel, Cabletron chairman and CEO. "Fueled by product successes such as the SmartSwitch Router, which grew over 200% year-over-year, Cabletron is reasserting our position as the industry's technology leader. We have a clear strategy and direction, we are focused on execution and we now have clear visibility into our business fundamentals."

Including all charges and other income, actual net income, for the quarter ended August 31, 1999, was $13.0 million or $0.07 per diluted share. This compares to an actual net loss of $22.5 million or $0.13 per diluted for the quarter ended May 31, 1999 and actual net income of $6.4 million or $0.04 per diluted share for the quarter ended August 31, 1998.

Last week, at Networld Interop in Atlanta, the Company announced that it has formed an independent business unit to develop, market and sell SPECTRUM, the industry's only multi-vendor enterprise management platform. The Company decided to create the business unit to unlock the full value of the SPECTRUM product, which grew more than 20% sequentially.

"This is the right decision for Cabletron and for SPECTRUM," added Patel. "Customers have already responded with a great deal of excitement about SPECTRUM becoming the de facto standard for network management in their multi-vendor environment. Many of our traditional hardware competitors plan to partner with us to bring native SPECTRUM functionality to their platforms."

During the quarter, Cabletron made significant gains in the service provider market, where it has focused on high-growth segments. Cabletron has focused on the edge of the Internet, where enterprises need to hand-off massive amounts of information securely and reliably to their Internet service providers or leased line connections. It is here, too, that service providers need to route converged voice, video and data traffic to their customers.

The Company has targeted cable companies, competitive local exchange carriers and Internet service providers providing Web hosting and collocation services. Its xDSL modem, which it acquired from FlowPoint, is one of the leading customer premises equipment (CPE) devices in the DSL market. The SmartSwitch Router (SSR), which has also helped the Company win major accounts in the enterprise market, is rapidly becoming a standard platform for Internet service providers. The SSR was certified by UUNET for use in its points of presence (POPs) throughout its extensive network.