After a tremendous run, shares of Calabasas technology innovator Ixia came crashing back to earth last week in a broad sell-off precipitated by gloomy financial reports from its most important customers.
Despite the substantial downtick Ixia shares plunged from $35 a share on Feb. 8 to $25.31 a share on Feb. 14, a drop of nearly 30 percent technology analysts remain bullish on a company they say is uncommonly well positioned to weather a financial downturn.
"Ixia has been insulated from slowdowns and inventory problems that many of its customers are facing because the company is focused on testing next-generation technologies," said Tom Coler, an analyst with Dain Rauscher Inc. "That means that Ixia is dependent on its customers' R & D; spending, which hasn't slowed down."
The most significant of those customers are Cisco Systems Inc. and Juniper Networks, both of which recently posted dismal earnings and warnings of revenue shortfalls.
Shareholders may be feeling skittish, but the loss of value is not a true reflection of the Ixia's prospects in a slowing economy but rather the result of investors out to make a quick buck, Coler and others said.
"They've had a great run. The weakness of the stock is profit taking," Coler said.
In fact, despite its recent woes, Ixia's stock as of last week was still selling at nearly twice its $13 initial offering price.
The company, which makes equipment that tests and analyzes high-speed networking technology, went public in one of the tech sector's darkest months, October 2000. Nevertheless, it has posted profits for 10 consecutive quarters, reporting net income of $4.1 million (7 cents per share) for the fourth quarter ended Dec. 31, compared to net income of $1.6 million (3 cents a share) in the like year-earlier quarter.
"The company provides excellent simulation equipment and modeling for how networks will work on the outside," said Rohit Shukla, CEO of the L.A. Regional Technology Alliance. "It's a must-have product."
The product is actually an array of systems that generate and analyze data traffic. The networks that Ixia's systems analyze include optical networks and Ethernet network cabling and signaling networks, which carry data traffic over optical fiber as well as electrical cable.
Ixia has proven itself as a testing ground for these hot, new communications technologies, and some of the Net's biggest players are lining up at Ixia's door, slowdown or not. Besides Cisco and Juniper, the company's customers include network equipment manufacturers Extreme Networks and Nortel Networks; network service providers like AT & T; Corp.; chip manufacturer Broadcom Corp.; and network users like Bank of America Corp. and Lockheed Martin Corp.
Consider Cisco, which accounts for 30 percent of Ixia's sales. While the maker of routers, switches, hubs and other equipment that powers the Internet posted disappointing earnings on Feb. 9 and is sitting on months of inventory, it still has to spend on R & D; to stay ahead of competitors like Juniper and Nortel.
"Companies like Cisco need to spend money on new products, because new products are their lifeblood," said Credit Suisse First Boston Corp. analyst Lissa Bogaty. "Ixia is not leveraged to unit volumes, so if unit volumes go down for switches and routers, Ixia will be somewhat buffered."
Still, if this downturn persists and revenues continue to stagnate at companies like Cisco, then Ixia will eventually be affected like everyone else, acknowledged Ixia CEO Errol Ginsberg. For now, though, "Cisco is still spending," Ginsberg said.
And analysts don't foresee a slowdown on spending for data communications equipment and network testing anytime soon.
"They're playing in the right market," Coler said. "As long as companies continue to try to build faster Ethernet switches, cable modems and optical networks, Ixia should be immune to any downturn."
Testing new technologies
Not surprisingly, Ginsberg shares that view and believes that Ixia will grow as the demand among the masses for faster connections to the Internet grows.
"Once we have universal availability of DSL and cable modems, you're going to see a whole new range of applications that will clog the Internet backbone," he said. "That backbone will have to be upgraded, and that's what the Junipers and the Ciscos are working on. They see what's down the road."
Prior to starting Ixia, which launched in 1997, Ginsberg was on the other side of the networking business as a vice president of engineering at neighboring Tekelec, which develops telecommunications equipment.
While at Tekelec, Ginsberg worked closely with Tekelec founder and Chairman Jean Claude Asscher, who provided the seed capital to start Ixia. Asscher remains chairman of both companies.
Ginsberg said he saw "a serious need" for companies to test new networking products. It's a space that is still being filled by only a few other players, including Agilent Technologies and Spirent PLC.
Ginsberg has high hopes for Calabasas and the tech hub developing there and along the Ventura (101) Freeway.
"It has always been my ideal that this area starts to look more like Silicon Valley, and it's starting to happen," he said. "Every couple of weeks, there's a new startup and more talent coming."
Indeed, Ixia is joined by nearby Troika Networks Inc., Internet Machines Corp., Malibu Networks and others.
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