Newbridge sinks following strategic moves

Newbridge Networks stock fell 10 percent today following news that the struggling firm is open to takeover offers and plans to slash 10 percent of its workforce and outsource some of its businesses to cut costs.

The networking equipment company yesterday said it will cut about 700 employees, shut down some sales offices and outsource its manufacturing and customer service operations.

Newbridge today fell 2.5 to 21.5 on 4.9 million shares. Stock has traded as high as 39.87 and as low as 14 in the past 52 weeks.

Industry sources said it's likely Newbridge has signed on IBM to run its customer service division. Newbridge chief financial officer Kenneth Wigglesworth in an interview with CNET News.com declined to comment, saying only that the firm has struck a deal with a "world-class organization."

Newbridge executives announced the firm's new direction yesterday following months of financial problems and strategic questions. The one-time leader in networking and telecommunications equipment has struggled in recent years to compete against Cisco Systems, Nortel Networks, Lucent Technologies and others.

The company also released earnings for the second quarter. Profit from operations for the quarter ended Oct. 31 dropped to C$21.5 million ($14.7 million), or 8 cents a share, from C$48.2 million ($33 million), or 18 cents, a year earlier. The company warned two weeks ago that profit would be 8 cents to 10 cents a share, half of what it had led analysts to expect. Sales rose 5.3 percent to C$480.8 million ($330 million).

Newbridge's new president Pearse Flynn said the changes were made to help revitalize the company, yet he added that he is not opposed to selling the firm outright.

"We're working with [financial advisors] to explore all options at this point," Flynn said during a conference call with Wall Street analysts.

Dataquest analyst John Armstrong said Newbridge's moves weren't surprising.

"I figured they'd be slicing and dicing after having a lousy quarter," Armstrong said. "They had a change at the top and you can't be complacent if your company's not doing well."

In the past two weeks, Newbridge's stock has risen as published reports said European telephone equipment makers Ericsson or Alcatel could buy the company.

Ericsson executives fueled speculation earlier this week by saying the company was not opposed to making large acquisitions, such as a possible takeover of Newbridge. A Bloomberg report, however, said Alcatel executives have no interest in purchasing Newbridge.

Newbridge is still a leader in asynchronous transfer mode (ATM) technology, which sends voice and data signals over networks at high speeds. The company sells ATM-based high-speed routers and is developing products in the emerging high-speed Internet access market, such as Internet Protocol switches, broadband wireless and digital subscriber line (DSL) technology.

Executives said the new products will improve revenue numbers within the next few quarters. "It will more than propel the company," Flynn said.

Wigglesworth said the plan to outsource customer service and manufacturing allows the company to focus on the new markets.

"We felt we needed to focus on the high-growth areas. We were considered spread too thin and trying to be all things to all people," he said.

Outsourcing customer service and manufacturing operations is common in the technology industry and is a good way for Newbridge to cut costs, Armstrong said.

"They obviously need to rein in expenses. [Outsourcing] manufacturing and customer service are efficient ways to do that."

Yet the company continues to deal with shocks on a daily basis. Rival Lucent Technologies yesterday won a multimillion-dollar patent lawsuit against Newbridge.

Additionally, the company lost another top executive. Giulio Gianturco, executive vice president of the North and South America region, resigned yesterday and has been replaced by Edward Minshull, an executive who ran the channels and alliances group for Newbridge's Europe, Middle East and Africa region, a company spokeswoman said.

President Alan Lutz left the company two weeks ago after Newbridge's seventh profit warning in the last 11 quarters.

Sources close to the company said Gianturco's departure was no surprise, as U.S. sales have been weak.

"Obviously, North American sales were most disappointing. It had flat growth the last several quarters," a source close to the company said. "If Newbridge wants to turn it around, you've got to win in the U.S. to win around the world."

Last week, Newbridge had to revise its agreement to purchase Stanford Telecom. The two firms changed the deal from a stock swap to an all-cash deal after Newbridge's stock price plummeted in the last few months.