Wall Street Beat: Networking under pressure

Facing a mature enterprise market and fierce price competition in the telecommunications infrastructure arena, networking vendors are coming under the gun.

One of the biggest tech losers of the week was enterprise networking software maker Neoware Inc., which focuses on the thin-computing market. Company shares went into free-fall Thursday, after the company announced that fiscal fourth-quarter revenue would not meet expectations.

The company forecast revenue of $23 million to $24 million for the quarter ending in June, missing analyst expectations, as polled by Thomson First Call, of $30.7 million. Company shares (ticker symbol: NWRE) fell by $8.41 Thursday to close at $11.78. Sales growth from new customers could not offset a slump in sales to existing customers, the company said.

On the hardware side of the networking market, shares of 3Com Corp. got a boost after the company announced plans to slim down and focus on core converged voice and data networking products for enterprises. 3Com is getting points with some investors for plans to “right-size” to fit market requirements. On Wednesday, the company said it would eliminate 250 jobs and close 21 facilities to cut expenses. On Thursday, company shares (COMS) closed at $5.10, up by $0.67.

3Com also announced that for its fourth fiscal quarter, it narrowed its loss to $0.01 per share excluding one-time charges, from $0.15 cents per share in the year-earlier period. Analysts had expected a loss of $0.04 per share.

However, revenue was under analyst expectations, so broker reaction to the news was mixed. While UBS Warburg raised its rating on the company to “buy” from “neutral,” Citigroup kept its “hold” rating. Citigroup analyst B. Alexander Henderson, in a research note, stressed that the better-than-expected earnings were due to interest income and refunds from the Chinese government relating to software sales in the company’s Huawei joint venture — not performance of core operations.

Networking vendors are getting hit with a double whammy. Competition in the few growth areas of the mature enterprise market — such as VOIP — is tough. Meanwhile, mobile communications in the wider telecom market presents great opportunities. But there have been so many vendors jockeying for position that prices of telecom infrastructure have been falling.

This is a driving force behind various mergers, such as the deal, announced in March, for a merger between Lucent Technologies Inc. and Alcatel SA. And just last week, Nokia Corp. and Siemens AG announced that they will merge their telecom infrastructure units to form Nokia Siemens Networks.

The fate of many network vendors is tied to the wider telecom market. On Tuesday brokerage firm Canaccord Adams downgraded its rating on Redback Networks Inc., from “buy” to “hold,” after the telecom networking equipment maker said it could experience a revenue hit this year, due to declining orders from BellSouth. Redback (RBAK) shares dropped by $2.31 to close Tuesday at $18.47.