CNT Earnings Surprise

The fourth-quarter earnings report for Computer Network Technology Corp. (CNT) (Nasdaq: CMNT) was upbeat last night (see CNT Reports Q4 Results). And execs slipped a couple of surprises into their presentation, including a five-year, $15 million managed services deal with IBM Corp. (NYSE: IBM), hitherto unannounced.

For the last quarter of its fiscal year, ended January 31, 2004, CNT posted $112.2 million in revenue, up 13 percent sequentially, and net profit of $3.4 million, or 12 cents per share, up from $237,000, or 1 cent per share, last quarter (see CNT Posts Q3 Results). Pro forma operating profit was $6 million, up from $3.9 million last quarter.

CEO Tom Hudson told investors on a conference call that revenues were up primarily due to the company's acquisition of Inrange Technologies, a maker of Fibre Channel directors and associated software, for $190 million last May (see CNT Walks Off With Inrange). "From a profitability perspective, we are continuing to see the rewards of the combination of Inrange and CNT," Hudson said. "We have delivered over $20 million in annual cost savings from our integration of the two companies."

But Hudson's guidance of $95 million to $100 million (2 to 5 cents per share pro forma profit) seemed to disappoint analysts. Why, some asked, was it at least a penny lower than they previously expected, especially given CNT's good results and ongoing prospects with the Inrange line -- not to mention an improved overall outlook in IT spending?

Execs claimed they'd never given higher guidance, but they conceded that some product sales are tied up in managed services, which are accounted for over a longer term than outright product sales. And managed services, while still a small part of CNT's business, is viewed by management as a growth area that will pay off later.Two new managed services contracts, for example, one with an insurance carrier worth $2.8 million and another with a bank worth about $1.6 million, will contribute to coming first-quarter revenues, according to Hudson.

Further, IBM has contracted to buy $15 million worth of products and services from CNT in a binding agreement that spans five years. CNT never announced this agreement, and a spokesperson there was unable to furnish further details. IBM, contacted today, didn't respond to questions about it. But Hudson says it spans several divisions within IBM, including Global Services and Business Continuity and Recovery Services. IBM apparently plans to call on CNT as a partner to offer services and products to large customers that have contracted with IBM.

The agreement is a natural outgrowth of CNT's longstanding relationship with IBM. And it hints that large companies are showing more interest in extending storage networks longer distances.

But asked whether other kinds of deals like the IBM one were in the works, Hudson waffled a bit. "The pipeline for these kinds of opportunities... we do see it as very sizeable. We see an increasing effort on customers' parts, and we see it big enough that IBM has jumped on it. And they see it as a large opportunity, and we are glad to be a part of it with them."

Mary Jander, Site Editor, Byte and Switch0