CNT Can't Smooth It Out

Storage networking hardware and services firm CNT (Nasdaq: CMNT) yesterday posted record revenues for its fourth quarter 2002, edging slightly above Wall Street's expectations, but the company provided cautious guidance and said the current quarter's sales will be down 10 to 15 percent sequentially.

On its lowered outlook, CNT shares today fell 16 percent, closing at $6.09, amid a mixed broader market.

CNT's total revenue for the quarter ended January 31, 2003, was $61.5 million, up 10 percent from $55.9 million the previous quarter. It reported a net loss of $21.7 million, or 81 cents per share, which included a $1.7 million charge related to its layoffs last month and a $19.7 million tax adjustment. For the year 2002, CNT posted $211.5 million in sales, 13 percent over the $187.0 million in 2001 (see CNT Posts Q4 Results).

In late January, CNT said it would lay off 10 percent of its work force, about 80 employees, leaving it with a headcount of 692. The Minneapolis company says it expects to start realizing savings from those layoffs in the second quarter (see CNT Lays Off 10% of Workforce).

For the first quarter of 2003, CNT said it anticipates revenue between $52 million and $55 million, or down about 10 to 15 percent sequentially. The company blamed this on "normal first quarter seasonality," as well as uncertainty on IT capital spending.First Albany Corp. today downgraded CNT from Strong Buy to Buy because of the lack of visibility on revenue. CNT -- which sells devices that extend storage traffic over wide-area networks, including IP -- has been trying to diversify its revenue by expanding its storage services business via the acquisitions of services firms Bi-Tech and Articulent (see CNT Acquires BI-Tech and CNT Waits for SAN Tide to Rise).

But these additions haven't been enough to smooth out its quarter-over-quarter revenue, says First Albany analyst Mark Kelleher. "Unfortunately, despite a sharp uptick in deferred revenue attributable to these service opportunities, the company appears to be unable to dampen the sharp seasonal down-tick in its April quarter," Kelleher wrote in a note to investors. Kelleher lowered his revenue estimate for calendar year 2003 to $240 million from $280.6 million previously, and his earnings estimate to $0.14 per share from $0.19 per share.

On the plus side, however, he says in spite of the short-term revenue instability the company's prospects look somewhat promising for 2003 -- based on strong results from CNT's UltraNet storage router and gateway products in the quarter, improving gross margins, and recent cost-cutting moves.

CNT said it ended the quarter with a backlogged $13.7 million, and it expects $8.7 million of that will be accounted for as revenue in the next year. The company said its spike in deferred revenue was primarily due to maintenance contracts, which are signed one year in advance. "The majority of our customers -- 47 percent -- had their contracts on January 31 renewal," said Greg Barnum, CNT's CFO, on a conference call.

Tom Hudson, CNT's chairman, president, and CEO, said the company has several new product initiatives underway that are expected to start generating revenues in 2003. One is related to "large-fabric environments," and another is geared around storage resource management (SRM) software.When he was asked whether these will be OEM versions of other vendors' products, he replied: "We don't want to reinvent the wheel... I think they'll all be CNT-labeled products, but we'll actually have embedded some other technologies inside our products."

One project CNT reportedly has in the works is integrating technology provided by Sanera Systems Inc., which is developing high-scale switches for interconnecting Fibre Channel SAN islands into its edge router. Sources close to Sanera say CNT will use Sanera-supplied chips in an upcoming product (see Sanera Tightens Its Belt).

Another question was how EMC Corp.'s (NYSE: EMC) forthcoming IP-based connectivity option for the Symmetrix would affect CNT. EMC is said to be developing an "eBlade" in conjunction with Cisco Systems Inc. (Nasdaq: CSCO) that will extend EMC's Symmetrix Remote Data Facility (SRDF) replication software over IP (see EMC Sets Symm 6 Debut).

EMC is "doing some IP blade work, but we aren't seeing any of that affect us yet," Hudson said. He added that "that's more of a local implementation, so compared to ours... they don't have as much distance or performance." Moreover, CNT is able to mirror between heterogeneous disk subsystems -- for example, mirroring Symmetrix data to a Clariion system. An EMC spokesman declined to comment.

On another front, CNT said it signed up 20 customers for its network management service, which provides ongoing monitoring of customers' CNT equipment; the service generated $400,000 in revenue in the fourth quarter.Todd Spangler, US Editor, Byte and Switch