Cabletron announces not-so-great expectations

Electronic News, March 9, 1998 by Heidi Elliott

Boston--Cabletron Systems Inc. expects lower revenues when it reports final fourth quarter sales results at the end of this month.

Last week the Rochester, N.H.-based company said it expects quarterly revenues in the $305 million to $320 million range, a drop of 16-20 percent compared to $380.6 million a year ago. Earnings per share are expected to be flat, or experience a small loss before non-recurring charges on a fully diluted basis.

President and CEO Don Reed, in issuing the company's warning, attributed the situation to multiple factors, including operating expenses related to closing its acquisition of Digital Network Product Business and a shortfall in sales. He also noted the company is putting itself "back on track."

Cabletron products include LAN and WAN switches, remote access products and network systems software.

"The results of the fourth quarter are clearly mixed," Mr. Reed said in making the announcement. "But I remain extremely positive--not only for the direction in which Cabletron is moving, but for the direction in which the industry is moving as well."

Analysts agreed. "The company is widely recognized as being in a turnaround mode. To have a quarter that comes out a little flaky is somewhat expected," said William Becklean, senior vice president and head of the technology research group at Tucker Anthony Inc. "Everyone has expected this would be a tough road," said Esmerelda Silva, an analyst with International Data Group, Framingham.

The company has taken action to make itself more competitive with the likes of Cisco Systems and Bay Networks, though analysts and the company say the company should have acted sooner. Steps include the acquisitions of Digital Network Products Group and Yago Systems and its switch router; reorganizing its workforce, with a reduction of 600 employees; and a move away from a direct-sales model toward increased reliance on the reseller channel. "A lot of things should have been done a few years ago that they didn't do. Now, they're paying for it," said Ms. Silva.

Cabletron spokesman Darren Orzechowski noted the company's sales mix traditionally has been 80 percent direct sales, with 20 percent through reseller channels. Thanks to recent acquisitions, the mix will be 60 percent direct sales, with 40 percent through resellers. The company has even signed on distributors Ingram Micro and Tech Data to resell its products. Mr. Reed's goal is to have 40 percent direct sales revenues, with 60 percent coming through channel sales. "They have to do that. The direct sales model isn't sufficient anymore. It can't put enough feet on the street," said Mr. Becklean. u