PairGain Posts Profit Warning After Stock’s Rise
Tustin-based PairGain Technologies Inc. on Friday warned that its earnings this quarter will fall “well below” expected results, meaning that the company might post its first quarterly loss since 1995.
The announcement came after the close of U.S. markets, a session in which PairGain’s stock surged 23% in heavy trading on a report that the company was close to securing a contract to supply MCI WorldCom Inc. with communications equipment.
PairGain officials declined to comment on the increase in the stock price or the WorldCom report, which came from an analyst at Dain Rauscher Wessels in Minneapolis.
The stock rose by $2.38 to $12.88 a share in trading of 15.7 million shares, making PairGain the ninth most active issue in U.S. markets.
PairGain attributed the earnings shortfall to lower sales in its core business--high-speed data transmission products.
Analysts expected the company to earn more than $2 million, or about 2 cents a share, in the third quarter, according to a survey by First Call Corp. During the same period last year, the company earned $12 million, or 16 cents a share, on revenue of $76.4 million.
The company is trying to move into higher-margin data transmission products. It said Friday that it would begin shipping its Avidia line near the end of this month and begin high-volume production soon after. The system allows telecommunications companies and operators of large private networks to deliver high-speed voice, data and video over traditional copper telephone lines.
But for now, both revenue and profit margins of the company’s core business are sagging. The timing of the announcement, right after positive reports on the company, promises to send the stock reeling on Monday. The stock slumped by $2.88 a share Friday in after-hours trading.
“This is the yin and the yang of PairGain,” said John Todd, a financial analyst at C.E. Unterberg, Towbin. “The stock has been driven by waiting for Godot, the big [Avidia] contract. Now that there is news that they are getting it, sure enough, their core business falls apart.”
Although the company’s future looks bright with promising technology products behind it, questions about the company remain, Todd said.
“My question is: Is this [Avidia] business going to be any better than the one they have?” Todd said.
It’s a case of PairGain running in order to keep up. Competitors including Lucent Technologies Inc., Orckit Communications Ltd. and Alcatel Alsthom S.A. are working on similar technology.
Friday’s earnings warning for the quarter is only the latest development that has staggered the company.
Last week, PairGain agreed to plead guilty to a federal criminal charge of improper internal accounting and said it will pay a $1.4-million penalty resulting from 1995 investments with a Beverly Hills money management firm.
Should PairGain register a loss this quarter, it would be the fourth consecutive quarter in which profits have fallen below year-earlier earnings. In July, the company reported a 91% plunge in second-quarter earnings.
PairGain is scheduled to release its third-quarter results on Oct. 14.
