PairGain Drops CEO, Issues Warning
PairGain Technologies Inc. warned Thursday that fourth-quarter results will fall significantly short of expectations because it has lost a major customer while stiffer competition is forcing prices lower.
The Tustin-based designer and manufacturer of high-speed networking systems, which has been the repeated subject of takeover rumors this year, also announced the appointment of a new president and chief executive, Michael Pascoe, to take over for former Chief Executive Chuck Strauch and former president and company co-founder Howard Flagg.
Strauch and Flagg had not been favorites among some investors. Strauch will continue as chairman of the board and Flagg becomes executive vice president for business development.
The company also said it would take a $1.5-million write-off because an investment has gone sour.
Acknowledging that the bottom line is being affected by falling product prices, Pascoe also said PairGain’s markets continue to offer significant long-term potential.
Pascoe, the new chief executive, had previously been president of Newbridge Networks-US, a division of Ontario, Canada-based Newbridge Networks Corp.
Analysts had projected fourth-quarter earnings of 16 cents a share. A year ago, the company earned $12.8 million, or 19 cents a share, on revenue of $74.5 million.
Trading in the company’s stock was halted just before U.S. markets closed. The shares were off nearly 9%, or 85 cents, to $9.06. The announcement came after the markets closed.
The company’s core business, developing products for high-speed networks used in corporate settings, has come under significant price pressures as competition grows. And while the emergence of new broadband technologies that run over regular copper telephone wires offer hope for a turnaround late next year, the near-term health of the company will suffer, industry analysts said.
“The upside story of broadband access to the home is probably a mid- to late-1999 story, so they’re going to be limping along here for a couple of quarters,” said John Todd, a networking analyst with Wedbush Morgan Securities in Los Angeles. He downgraded his rating on the company’s stock last week.
While the next few quarters will be rough, the company continues to report profits. In the third quarter, the company earned $12 million on revenue of $76.4 million, both increases over previous years.
The company did not return telephone calls.
In addition to acknowledging increased price pressures, the company said it had lost its status as a primary supplier for Bell Atlantic Corp. The company did not say how much revenue had been expected from that account.
New York analyst Michael Neiberg, who downgraded the stock Thursday, said analysts “had underestimated what the impact of the competition was going to be this year and next.”
But PairGain remains an attractive takeover target for a larger company looking to bolster its networking systems offerings, added Neiberg, who is with ING Baring Furman Selz. Previous rumored suitors had included Lucent Technologies Inc., ADC Telecommunications Inc., Advanced Fibre Communication Inc. and L.M. Ericsson.
“They own customers and they own technology, and those are two things that every company needs,” he said.
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Falling Short
PairGain Technologies said fourth-quarter earnings and revenue will fall below expectations as business slows and prices slump. The warning came after the stock market closed, but PairGain shares fell 9%. Weekly closing stock prices, sales and earnings, in millions:
Stock Closings
April 10 23.11
May 8 19.44
June 26 16.88
Aug. 7 13.63
Oct. 9 6.22
Nov. 27 10.66
Thursday’s close: $9.06
Net Sales, Net Earnings
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Source: Bloomberg News
