Reports Happy Q2 (Sort of) reports Q2 profit and Microsoft win, but trims R&D staff due to slow carrier spending UPDATED 10/14

October 13, 2004

3 Min Read Reports Happy Q2 (Sort of)

In an earnings season that's already been glum for telecom, Network Equipment Technologies Inc. ( (NYSE: NWK) is having some fun, as the company today blew away analyst estimates and announced Microsoft Corp. (Nasdaq: MSFT) as a customer.

But the company isn't immune to the telecom blues, as it's also cut some R&D staff in response to carriers' slow spending habits.

For its second quarter ended September 24, reported profits of $1.4 million, or 6 cents per diluted share, on revenues of $31.6 million (see Reports Q2 Profits). Analysts had expected revenues of $29.3 million, a loss of 2 cents per share, according to Reuters Research.

For its first quarter ended in June, reported losses of $829,000, 3 cents per share, on revenues of $29.1 million. For the September quarter last year, the company reported profits of $400,000, 2 cents per share, on revenues of $31.9 million.

The company also announced that its ShoutIP platform has been selected as the gateway piece for Microsoft's own VOIP network. The dollar value of the deal wasn't disclosed in the press release, but says its Shout2500 will be deployed in Microsoft's Redmond, Wash.-based brain center, with the Shout900 going into Microsoft's smaller offices. Officials say revenues from this contract won't show up until's fourth quarter, which ends in March, and the contract should take less than a year to complete.

But also dropped some bombshells during its conference call with analysts today. Despite a quarter of what CEO Bert Whyte called the best new-product revenue ever, the company plans to trim expenses by 6 percent to 9 percent while it waits for carriers to start up their next-generation network plans.

To get there, the company has cut "10 to 20 heads" from the R&D area, Whyte says. ( employed 410 as of March, according to SEC documents.) It's also shifting some R&D people to different products -- away from the Scream broadband remote aggregation server (B-RAS), specifically.

The company still has faith in Scream, but with carriers unwilling to spend, "it is logical for us to slow our investment," Whyte explains. "What we're doing is slowing down [Scream development], sort of in parallel with the carriers as they slow down their decision [process], and we're moving people onto Shout and some other areas that we think in the short- and medium-term will give us the biggest impact."

Moreover, expects revenues to dip next quarter, to between $25 million and $30 million. "It's the same guidance we gave last quarter; We want to make sure we make the number," Whyte says. "There are major projects we're involved in, and it's very difficult to predict when they'll come in."

Should some large government projects come through, that figure might reach the $31 million of the second quarter, says CFO John McGrath.

Finally, announced that chief operating officer John Batty has decided to step down. Batty has been with the company since 1999. Reasons for his decision were not given.

Elsewhere in the telecom industry it's shaping up to be a gloomy earnings season, as several other companies have already lowered forecasts for the quarter (see Down Day for Cable Guys, Earnings Warning Turns Redback Blue, Avici Target out of Reach , UTStar Cuts Estimates, Board Member Resigns, and Nortel Sees Light Revenues, Slow Growth).

— Craig Matsumoto, Senior Editor, Light Reading

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