Foundry Flies on 10-Gig

Foundry Networks Inc. (Nasdaq: FDRY) took a step toward renewed stability with its second-quarter results last night, boosted by strong demand for its 10-Gbit/s Ethernet switches.

Foundry reported second-quarter revenues of $96.6 million. Although this figure was down from $97.8 million reported in the same period last year, it was well above analyst estimates of $87.08 million, and ahead of first-quarter revenues of $84.6 million (see Foundry Reports Q2 Results). Earnings were 7 cents per share on net income of $9.6 million in the quarter, in line with analyst estimates, compared to 11 cents on net income of $15 million in the year-ago quarter.

Foundry's rebound appears driven by its high-speed Ethernet gear. Foundry's shipment of 10-Gbit/s ports grew 53 percent between the first and second quarters of this year. And enterprise sales rose 20 percent in the quarter.

Foundry is one of a number of vendors, including rivals Cisco Systems Inc. (Nasdaq: CSCO) and Extreme Networks Inc. (Nasdaq: EXTR), that are driving down the cost of 10-Gbit/s switches. It's a message that resonates with customers that need faster Ethernet to cope with increased data volumes, particularly in high-end enterprises and telcos. (See Foundry Boosts 10-Gig Plans, 10-GigE Price Drops Continue, Cisco Bombs 10-GigE Pricing, and Components Fuel 10G Ethernet Takeoff.)

Foundry's strategy in 10-Gbit/s appears to be working, relative to the competition. The vendor continues aggressive pricing against Cisco (see Foundry Drops 10-GigE Prices). And it's also beefed up its products with security and traffic management.Foundry introduced its first home-grown security products during the quarter, and execs say the company will continue to focus on security in the future (see Foundry Flashes New Hardware).

Foundry has also received a boost from its support of Power Over Ethernet (POE), a LAN connectivity standard used to support emerging technologies such as voice over IP (VOIP) and wireless. POE lets IP phones draw power from the switch the same way old-school telephones do, making the newer phones more palatable to consumers. The vendor's POE port shipments jumped 220 percent between the first and second quarters.

Foundry's rebound is welcome news to its investors. The early part of this year was not exactly a bed of roses, as the vendor was dogged by a slowdown in U.S. federal government orders and worse-than-expected sales to North American enterprise customers (see Foundry Q1 to Fall Short and Foundry Faces Tough Times). For now, it seems that focusing elsewhere has paid off.

But the competition is doing better as well. Analyst John Mark Duncan of Pacific Growth Equities Inc. believes Extreme, as well as Foundry, is benefiting from a rebound in the market for Layers 2 and 3 LAN switches. In a guidance note, he predicted that Extreme will exceed his estimate for breakeven earnings on $95.6 million when it reports its own results next month.

The federal government could also be a continuing sore point for Foundry, with sales remaining flat this quarter. In the past the vendor has felt the effects of budgets being shifted to the Iraq war effort (see War Fogs Foundry's Numbers).Nonetheless, Foundry CEO Bobby Johnson said the company's federal issues could be temporary: There were several deals that could really have added to our results in Q2 in the federal sector that didn’t happen because of funding." These were delayed, rather than lost, he added.

In trading this morning, Foundry shares rose 86 cents (8.33 percent) to $11.19.

— James Rogers, Site Editor, Next-Gen Data Center Forum