Generating earnings growth has been a challenge for small technology companies in the aftermath of the industry downturn of four years ago.
But Ixia, a maker of network testing equipment based in Calabasas, is proof that companies with growth prospects and solid finances are capable of staging a rebound.
Though Ixia shares slumped for most of the year, investors took notice when the company beat third quarter earnings estimates and raised its earnings outlook for 2004.
Since it reported a 96 percent increase in third quarter net income on Oct. 21, Ixia’s shares have risen by 43 percent, to close at $13.17 on Nov. 3.
Analysts say Ixia’s sales to government agencies and commercial customers nearly doubled in the third quarter, as it diversified from its primary reliance on network equipment manufacturers, which use its gear to test their products.
Cisco Systems Inc. accounts for 30 percent of sales; add in Alcatel, Hewlett-Packard Co., Nortel Networks Corp. and NTT Docomo and the total is 49 percent.
“They’re diversifying from just supplying test and measurement tools to Cisco,” said Ryan Hutchison, an analyst at WR Hambrecht & Co. He said larger capital expenditure budgets among phone-carrier customers such as Comcast Corp., SBC Communications Inc., Verizon Corp. and NTT Docomo have helped.
“Ixia can be a great company, but it is much better to serve a potential market of $1 billion than a market of just $300 million a year,” agreed Samuel Wilson, an analyst at JMP Securities LLC in San Francisco.
Company officials boast that they poached several sales engineers from competitor Spirent Communications Inc., a unit of U.K.-based Netcom Systems Inc., which has offices just down the street from Ixia. The new sales team has aggressively sought out federal contracts, said Tom Miller, Ixia’s chief financial officer.
(Ixia’s other main competitor is Agilent Technologies Inc., the Hewlett-Packard Co. spin-off that has a strong relationship with Cisco rival Juniper Networks Inc.)
Miller said the company’s sales force gained traction in the third quarter, after a second quarter in which Ixia had trouble getting a read on its sales outlook.
“We release earnings three weeks into the next quarter and typically we talk to our sales staff to get an outlook of what the next quarter looks like,” Miller said. “There was more visibility of deals that our sales team was working on, so the environment (for the fourth quarter) definitely is looking better.”
Ixia reported third-quarter net income of $4.7 million, compared with $2.4 million for the like period a year earlier. Sales rose 39 percent to $30.1 million, the highest level in the company’s history.
Ixia raised its fourth-quarter earnings projection to between 9 cents and 10 cents a share on revenue of between $32 million to $38 million. The median Thomson First Call estimate for the fourth quarter had been for net income of 8 cents a share.
Ixia designs interface cards that transmit and analyze signals over complex computer networks. Large financial organizations such as the Nasdaq, the New York Stock Exchange and Morgan Stanley are using Ixia to test traffic as they explore a transition to less-expensive voice-over-IP technology. (These networks transmit voice traffic using the Internet’s digital format.)
To serve the market, Ixia acquired privately held G3 Nova Technology Inc. of Westlake Village in February for $9 million in stock and cash.
“Ixia’s products were originally developed to test the performance of servers and routers but the same products can be used to test networks and the maximum amount of traffic and performance changes they can handle,” said John Harmon, an analyst at Needham & Co., who has downgraded Ixia’s stock to a “buy” from “strong buy” based on the recent stock run-up.
Errol Ginsberg, Ixia’s president and chief executive, launched the company in 1997 and took it public in 2000, just as the technology sector entered the dot-com crash.
He drew $1.6 million in seed capital from his former boss, Tekelec Chairman Jean-Claude Asscher, and named the company for a popular flower in South Africa, his home country.
Prior to the company’s IPO, Asscher sold 25 million shares to Stephane Ratel, principal of Luxembourg-based Technology Capital Group, which now owns 42 percent of the company. Ginsberg owns 11 percent.
Staff reporter Kate Berry can be reached at (323) 549-5225, ext. 228, or at
[email protected]
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