Crossroads at the Crossroads

The fate of Crossroads Systems Inc. (Nasdaq: CRDS) took a sharp turn south last quarter, as the storage router companys losses tripled from the previous quarter. Now the company hopes a trip down the iSCSI path will turn things around.

Crossroads posted its quarterly report today, in the wake of CFO Andrea Wenholz's resignation last week (see Crossroads CFO Resigns). Revenue totaled $4.9 million for the most recent quarter, down from $7.4 million the previous quarter. The company posted a net loss of $2.1 million or $0.08 per share, compared with a loss of $732,000 or $0.03 in the previous quarter.

Crossroads had forecast revenue in the $6 million range and a loss of from $0.05 to $0.06.

Crossroads has lost money every quarter since 1996, but the vendor had made progress since Rob Sims became CEO last September (see Crossroads Conscripts CEO). Losses narrowed from $1.7 million in the third quarter of 2003 to $732,000 in the second quarter of this year, and revenue crept from $5.6 million to $7.4 million over that span. Last quarter, however, revenue tumbled and losses tripled.

In a conference call with analysts today, Sims said the revenue drop was much worse than expected, even for what is traditionally a slow quarter. "Our visibility going into the third quarter indicated seasonal weakness. However, it was disappointing that actual sales were unable to meet even these lowered expectations," Sims said.In part he blamed revenue reductions from major OEMs, including Hewlett-Packard Co. (NYSE: HPQ), which accounted for about half of Crossroads' revenue in the previous quarter. HP stumbled badly in its last report (see HP Storage Slammed). EMC Corp. (NYSE: EMC) and Storage Technology Corp. (StorageTek) (NYSE: STK) didn't help matters in the OEM department this quarter, either.

Next quarter, Sims said he expects revenue to rise from HP, but not from the products it sells to EMC and StorageTek. He also expects a positive impact from intellectual property licensing as the result of a recent settlement of a lawsuit with FalconStor Software Inc. (Nasdaq: FALC). (See FalconStor, Crossroads Settle.) FalconStor agreed to resell Crossroads products as part of the settlement. The settlement also granted Crossroads a perpetual license to certain FalconStor technology.

As to outlook, Sims hopes iSCSI will pump life into the vendor's interconnect business, which is suffering too from the advent of competing router products from the likes of Brocade Communications Systems Inc. (Nasdaq: BRCD). (See Brocade Ships Multiprotocol Router.)

Crossroads’ current routers transfer data from SCSI to Fibre Channel devices, but new routers in development will bridge iSCSI to Fibre Channel (see ISCSI Passes Its Midterm). “Market adoption of iSCSI is not a matter of 'if' but 'when,' ” Sims said.

It’s also a question of if Crossroads will be in position to cash in by time it takes off. The company expects slightly improved revenue this quarter, giving revenue guidance in the low to mid $6 million range for storage products. The company did not give guidance for products it's developing in conjunction with NexQL Corp. as part of a deal struck last December (see Crossroads Trades Cash for Tech).— Dave Raffo, Senior Editor, Byte and Switch