The FORE forecast: It'll take more than ATM

Pittsburgh - Despite the fact that ATM has taken its knocks in recent years, FORE Systems, Inc. has been able to string together solid financial numbers.

The ATM pioneer has maintained a year-over-year revenue growth rate of about 70% and has been the ATM LAN market share leader for the last three years. Not too shabby.

But can the $400 million company keep it up, even as FORE faces new competition from internetwork powerhouses such as 3Com Corp. and Cisco Systems, Inc.?

Well, Wall Street does not seem to think so. The company's stock, which once traded as high as $40 a share, hit its low of $12 a share in March and has been hovering in the mid-to-upper teens for the last couple of months.

And while customers spent twice as much on ATM gear in 1996 as they did in 1995, frame-based switches last year outsold ATM switches $3.9 billion to $398 million, according to market research firm International Data Corp. (IDC). Add new Gigabit Ethernet gear and Layer 3 switches to the frame-based mix this year, and that revenue gap promises to widen.

In light of these factors, analysts said FORE must take several steps to ensure that it remains successful. These steps include pushing into new product areas such as Gigabit Ethernet as well as expanding its WAN ATM efforts.

Getting religious

"I'm banging my head against the wall wondering why FORE is not embracing Gigabit Ethernet along with ATM," said John Armstrong, principal network analyst at Dataquest, Inc. in San Jose, Calif. "If you take the religious approach like FORE does and try to proselytize technology to customers, they just don't want to hear it anymore. Customers want to make their own decisions, so why not be able to buy both technologies from FORE?"

FORE is not ruling out its eventual involvement in the Gigabit Ethernet market, and in fact, the company spent $35 million in December to buy start-up Scalable Networks, Inc., which has developed Gigabit Ethernet technology. But company officials said ATM and technologies that feed into ATM backbones will continue to be FORE's focus for the foreseeable future.

"We are not making [Gigabit Ethernet] a first priority," said Eric Cooper, FORE's CEO. "There are a lot of vendors that are trying to be a supermarket of networking, but that doesn't describe FORE. We believe ATM is the best match for solving the needs of the extended enterprise from the desktop all the way to the central office."

The Pittsburgh-based company derives the bulk of its revenue from ATM products. The remaining 35% of its revenue comes from Ethernet switches, and 90% of those feed into ATM backbones.

"Our Ethernet products are not used instead of ATM, they are used alongside ATM," Cooper said.

The company went the acquisition route in 1995 to gain a presence in the Ethernet switch market by snapping up Alantec Corp. and Applied Network Technologies, Inc.

"The acquisition of Alantec not only provided FORE a way to get into enterprise accounts that weren't ready to abandon Ethernet altogether, but it allowed FORE to maintain a revenue stream that it wouldn't have been able to sustain had it only had an ATM solution," said Esmerelda Silva, an IDC analyst.

But Gigabit Ethernet may be another story.

"[Gigabit Ethernet] may be contrary to FORE's motto - All roads lead to ATM," said Tom Bain, an associate at Alex. Brown & Sons, Inc., an investment firm in Baltimore. Rather than leading to ATM, Gigabit Ethernet may replace it as a backbone technology, he said.

Gigabit Ethernet also would allow customers to install all-Ethernet LANs and push ATM technology out into the WAN, analysts said.

That is one reason observers think that FORE needs to pursue the market aggressively. And in fact, FORE has been increasingly busy in the WAN market, growing revenue from zero to 20% of its total over the past two years.

"The big surprise is that FORE's gotten into carrier networks, with wins like MCI [Communication Corp.'s] Internet backbone," Bain said. "It will be interesting to see if FORE's focus changes from local to wide-area since there is a lot more money being spent on the WAN side for ATM."