Net.com: Back to the Enterprise

VOIP infrastructure provider Network Equipment Technologies Inc. (net.com) (NYSE: NWK) spooked investors Wednesday when it announced restructuring charges and said it's refocusing its business on VOIP, enterprise, and government networking.

After falling short of expectations in announcing its quarterly results, the stock took a lashing, closing off 12 percent ($1.02) to $7.41.

The company has fallen back into the red as a result of restructuring costs associated with a corporate realignment, in which net.com is pulling back from the carrier market and looking to refocus on VOIP, enterprise networking, and government networking.

“Enterprise is our heritage and the core strength of our organization,” said net.com CEO Bert Whyte. "We believe that the North American enterprise market is set to increase spending on VOIP and we intend to be part of that resurgence.”

The Fremont, Calif.-based company reported a loss of $2.9 million, or 12 cents per share, for the quarter ended December 24, 2004, compared with net income of $909,000, or four cents per share, in the year earlier period. The company reported a net profit of $1.4 million, or six cents per share, in the previous quarter ended September 24, 2004.

The poor results can be at least partially explained by a restructuring charge of $2.8 million taken during the quarter for “streamlining the company's engineering efforts, as the company increases its focus on the enterprise voice over IP (VOIP) and government sectors,” it said in a release. Net.com’s foray into the carrier market has yielded less than dazzling results over the past year.

Total revenue for the quarter decreased 12 percent from the year earlier quarter to $29.7 million. The company had predicted between $25 million and $30 million, but analysts’ consensus expectation, according to Thomson FirstCall, had been $31 million.

The restructuring charge was no surprise to analysts. "They [net.com] had prepared the Street for a restructuring charge of two to three million, and it came in at $2.8 million,” says analyst Larry Petrone of DE Investment Research. “They were very open about the fact that they were realigning internally; I think that without the restructuring charge, they would have essentially broken even for the quarter,” Petrone says.

The wider picture is one of a company with business heavily weighted toward its government accounts, and making painful adjustments to move into private enterprise and carrier markets. During the last quarter, net.com’s revenue from government accounts was $23.1 million, or 77 percent of its total revenue. The company expects the government revenue to remain in the $25 million to $30 million range in the coming quarters. Analysts say revenue contribution from these accounts is “lumpy,” and tough to predict quarter to quarter.

Despite the negative third quarter results, net.com still touts growth in its future. CFO John McGrath confirmed revenue forecasts in the range of $28 million and $32 million for next quarter.

Perhaps driving this optimism is the company’s high-profile deal signed last year with Microsoft Corp. (Nasdaq: MSFT), which it began implementing last quarter. The software giant will purchase net.com’s Shout IP/PSTN gateway product for roughly 400 sites in 70 to 90 countries at a cost of $30,000 to $50,000 per site, according to McGrath. He expects the revenue to begin contributing to the company’s top line in the next few quarters and the company expects more enterprise business to follow.

Accordingly, Whyte said, net.com will assign more development resources to its Shout product, and less to its Scream DSL product, which was developed for the carrier market. DE Investment Research’s Petrone says net.com has already let go some development people in October as a result of that decision.

— Mark Sullivan, Reporter, Light Reading

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