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CABLETRON WARNS OF DISMAL Q3 RESULTS, RESTRUCTURING CHARGE

Cabletron Systems Inc is warning that its third-quarter numbers will fall well short of analysts’ expectations. The Rochester, New Hampshire company says it expects revenues for the quarter to be between $330m and $340m, down from $361m a year ago. Wall Street was expecting something closer to $390m. Based on that projection, Cabletron figures net income will fall in the range of $0.08-$0.12 per share – when the First Call consensus was $0.39 – down from $0.44 last year. Cabletron shares reacted violently to the announcement, falling $7.50, or more than 32%, to $15.6875 in midday trading. The poor showing for the current quarter follows disappointments in both the first and second quarters. Cabletron says that management does not yet have all the relevant information for the third quarter to fully explain the situation, but offers the somewhat vague excuse of a significant order shortfall at the end of the quarter, blaming weakness in certain market segments and expected federal government contracts that failed to close during the quarter. The company says the lion’s share of its orders come at the end of each quarter and, with longer sales cycles and customer response time, predicting quarterly orders is becoming increasingly difficult. The company also says its current cost structure adversely affected margins. Analyst Noel Lindsay at Deutsche Morgan Grenfell attributes the gross margin problem to continued aggressive pricing of LAN switches and persistent declines in the company’s shared media hub business. In the wake of the bad news, Cabletron says it is realigning its business strategy, adopting what it describes as a more focused approach to distribution methods in core areas, as well as becoming more active in its development of partnerships and its search for acquisitions. Whether this realignment means job cuts is unclear, but Cabletron estimates it will take a pre-tax charge of $25m-$30m in the fourth quarter. The charge is expected to include duplicate facility costs and the write-off of non-core business assets. Cabletron will release final third-quarter results on December 22, placing a nice lump of coal in shareholders’ Christmas stockings.

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CBR Staff Writer

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