Wall St. slams Cabletron

By Jim Duffy
Network World, 12/07/98

Rochester, N.H. - Shareholders and analysts are calling for new blood at Cabletron after the company shocked Wall Street by saying it will report a loss for the third quarter.

Cabletron says it expects to post a loss of 10 cents per share for its fiscal third quarter ended Nov. 30, rather than the 11-cents-per-share gain forecast by Wall Street analysts and First Call, a financial tracking firm. Cabletron says its third-quarter revenue will fall to the range of $330 million to $340 million. Revenue for the same period last year totaled $331.8 million. Last week's announcement caused Cabletron's stock to plummet 35%.

The jolt prompted some analysts and shareholders to call for President and CEO Craig Benson to sell the company while he can still get a good price for it. Short of selling the company, others are calling for Benson to step down.

"I think Cabletron's almost going to be compelled by competitive conditions and market forces to seek out a strong partner," says Andy Schopick of Nutmeg Securities. "It makes sense for Cabletron to align with and merge with a larger entity that's seeking a strong data networking presence."

"I think Benson is the problem, and I've said that all along," says Craig Johnson, principal at The PITA Group in Portland, Ore. "The company takes on the character of the main person."

Benson says Cabletron is not for sale. Some analysts say it would be a tough sell anyway.

"Who's going to buy them?" asks Scott Heritage of Warburg Dillon Read. "I don't know of anybody that would be that interested in buying them now."

Benson says the company will also forge ahead with its current management structure.

"My top management team has been turned over," Benson says, adding that most senior managers have been at Cabletron for less than 18 months. "I've never been CEO before."

Reasons for the fall

Cabletron was hurt by a revenue shortfall due to Nortel Network's purchase of Bay Networks; flat revenue from business with Compaq/Digital; and a weak quarter in the declining shared hub market, analysts say.

Cabletron management says that about half of the revenue shortfall was due to Nortel's purchase of Bay. Cabletron not only provided Nortel with equipment for its internal network but also worked with Nortel jointly in customer accounts.

The decline in Nortel business was expected, despite statements made by Cabletron and Nortel last June that their Power Networks program would continue. Power Networks is a two-year-old alliance between Cabletron and Nortel to co-develop integrated voice/data multimedia network products.

Sales of shared-media hubs, meanwhile, have ramped down considerably due to the industry's uptake of switched LANs.

"Two years ago, 70% of my business was in shared network products," Benson says. "It's now 10% or less. That's 60% of my business blown away. Most people are bankrupt after that happens."

Cabletron is, therefore, banking heavily on its SmartSwitch Router to turn its fortunes around. Revenue for that product doubled in the third quarter compared with last quarter, according to Warburg Dillon Read. That figure would put SmartSwitch Router sales in the $30 million to $40 million range.

But analysts say the company still needs something else. Before last week's decline, Cabletron's shares had risen 23% from their Nov. 18 close based on optimism about sales of new products.

"They do appear to have an execution problem on the distribution side," says Michael Duran of Lazard Freres in New York. "Ultimately, all of the execution problems are owned by management."

Lazard Freres has downgraded its Cabletron stock rating from hold to sell. BancBoston Robertson Stephens, however, has reiterated its buy rating due to "management's aggressive focus and the company's new product pipeline."

But some users say they would be receptive to new leadership or a new owner.

"I could see somebody like a Lucent as a good thing not only for Cabletron but for the customer base as well," says Ken Sorenson, director of networks and systems at Butler University in Indianapolis.