Visual shares take a beating

Rockville company had issued warning of low earnings


July 07, 2000|By Mark Guidera | Mark Guidera,SUN STAFF

Investors punished Visual Networks Inc. yesterday after the Rockville-based maker of Internet management software warned that quarterly earnings into the middle of next year will fall far short of Wall Street expectations.

Shares in the company plunged $14.25, or 54 percent, to close at $12.

Earlier in the day, shares hit a 52-week trading low of $10.375, well off the 52-week high in March of $87.50.

Almost 20 million shares traded hands, compared with the stock's average daily volume of less than 1 million.

As investors pummeled the stock, five brokerages that cover the company weighed in with downgrades, including Goldman Sachs Group Inc., Merrill Lynch & Co. and Janney Montgomery Scott LLC.

Visual Networks warned that it expects pro forma earnings for the second quarter, which ended June 30, will be $32.2 million, or 1 cent a share.

That is 83 percent less than the 6 cents a share expected by a consensus of analysts polled by First Call/Thomson Financial.

The company plans to issue second-quarter earnings Thursday.

Visual Networks Chairman and Chief Executive Officer Scott Stouffer blamed the earnings shortfall on the company's difficulties in merging its business operations with those of New York-based Avesta, an e-business software company it bought this year in a $415 million deal.

The executive said the acquisition had proved "more challenging" than other deals.

The acquisition of privately held Avesta, which makes software that monitors errors in computer network operations and identifies their causes, expanded Visual Network's work force, to 400 from 250.

"We attribute our quarterly shortfall to management's focus on the Avesta transaction and integration and the resulting diversion of our attention from day-to-day operations," Stouffer said.

Sales of its core products, Visual UpTime and IP Insight, which manage and analyze corporate Internet operations, were also hurt by the diversion, Stouffer said.

"We were pursuing a number of significant software opportunities until the last day of the quarter, which, if realized, would have resulted in us meeting analysts' expectations," Stouffer said. He said that he thought the "base market" for the company's products remains "strong."

Richard Sherman, an analyst with Janney Montgomery Scott in Philadelphia, was among those who cut their ratings on the stock yesterday.

"The complexity and challenge of the [Avesta] purchase was underestimated," he said.

In the long term, said Sherman, he believes that the Avesta acquisition will prove a smart move for Visual Networks.

"Going forward, Avesta really broadens the market for Visual. Bottom line, it's a good company with very good management. It's going to take them three or four quarters to integrate. It's a significant hurdle," he said.

In April, the company reported record first-quarter revenue of $30.5 million, beating analysts' estimates.

But, as many technology companies are finding, in three months the landscape can change in a big way. Yesterday, Visual Networks said that it expects lower earnings for the rest of the year and the first half of 2001.

For the third quarter, the company said it expects revenue to decline to $30 million - its first quarter-to-quarter revenue decline - and to post a loss of 3 pennies per share.

Analysts polled by First Call had expected a profit of 8 cents a share.

For the fourth quarter, the company anticipates revenue of $32.5 million and expects to break even on a per-share basis.

The company anticipates $165 million in revenue and per-share earnings of 37 cents next year.

That is well below the First Call analysts' estimate of $1.02 per share.

Visual Networks joins a growing list of software technology companies whose shares have been pummeled after pessimistic earnings warnings this week.

They include Computer Associates, Entrust Technologies and BMC Software.

Bloomberg News contributed to this article.

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