Paradyne pays price for report

Investors punish the Largo company for missing earnings forecasts, sending its shares down 21 percent.

By ROBERT TRIGAUX

© St. Petersburg Times, published July 15, 2000

LARGO -- When top executives of Paradyne Networks Inc. announced quarterly earnings late Thursday, they bragged of record revenues and predicted a strong second-half performance this year. But when the stock market opened Friday, investors saw only a company that failed to meet earnings expectations for the quarter ended June 30.

By the market's close Friday, Paradyne stock plummeted almost 21 percent on heavy trading volume, down $8.88 to $34.25.

It's not nice to fool Mother Nature. And for public companies like Paradyne, it's not smart to surprise Wall Street with earnings that fall well below analyst expectations.

The company's stock was the Nasdaq's seventh-biggest decliner of the day.

While reporting sharply higher revenues, Paradyne's net income for the quarter was 4 cents per share (5 cents pro forma) -- well below the First Call consensus of 9 cents. Investors punished Paradyne's stock Friday, shaving $285-million off the company's market value.

But analysts who track Paradyne were less upset after listening to Paradyne chief executive Andy May and chief financial officer Pat Murphy. The Paradyne duo explained that the company had received late shipments of supplies that, in turn, delayed Paradyne's own shipments to its customers.

Some Paradyne products that should have been shipped during the second quarter were sent after June 30. That delay, plus higher marketing expenses, reduced the earnings the company could declare for the quarter.

May said Paradyne needs to spend more on marketing and sales now, but promised earnings would catch up later this year.

Paradyne is a major equipment provider of "DSL" (digital subscriber line) technology that lets voice and data speed across copper telephone lines. DSL is in fierce competition for market acceptance against fiber-optic cable and other technologies in the explosive broadband telecommunications business.

"We're in a land grab period," May told analysts. "This is a time to be aggressive, and customers have to hear our message. We expect to make up net income in the third and fourth quarters."

Paradyne should earn 13 cents or 14 cents per share in the next quarter ending Sept. 30, he said.

Paradyne investors, however, voted with their "sell" orders Friday and dragged the stock down sharply. On the Yahoo chat board devoted to Paradyne, the bulk of message posters were upset that Paradyne had blindsided investors by reporting earnings so far below expectations, or that Paradyne had failed to manage its earnings better to meet analysts' consensus.

Paradyne's woes are compounded because some companies in the broadband telecommunications market are enjoying spectacular stock appreciation. Investor expectations are high.

"PDYN MANAGEMENT DO YOUR JOBS," one poster called "nascrazy" demanded Friday afternoon on Yahoo's Paradyne board. "We want value, no more games, no more screwing us around. Get your heads out of the clouds claiming your (sic) #1. PROVE IT!"

In contrast, analysts forgave Paradyne's earnings but embraced the company's booming sales. Revenues in the second quarter jumped 43 percent to $75.6-million, year-to-year, driven by a rise in demand for broadband equipment, which represented $60-million of total sales for the quarter.

At the Robertson Stephens investment bank, technology analyst Paul Johnson raised his earnings estimates and kept a "buy" recommendation on Paradyne.

"We believe that it represents one of the best investment values of the companies we follow," he said.

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