Net.com Hits Rough Road

Network Equipment Technologies Inc. (net.com) (NYSE: NWK) reported disappointing news on Wednesday when it released earnings for the second quarter of fiscal 2004 (see Net.com Reports on 2Q04).

After eight consecutive quarters of sequentially increasing revenues, the company posted a sequential decline. What’s more, it also confirmed that it has lost an initial bid for business at an incumbent carrier in the United States.

Net.com CEO Bert Whyte remained positive about the company’s prospects.

“While we are disappointed that we were not selected for the next phase, we are encouraged by the response to the product,” he said, during the company's conference call. “We understand our proposal was the only one to offer a single product solution. In the long term, this will become an increasingly important factor.”

Even though Whyte made a point of not naming the carrier that had stopped evaluating the Scream platform, most people believe he was referring to SBC Communications Inc. (NYSE: SBC).

Whyte confirmed the company had submitted a proposal to the carrier’s RFP that specified requirements for a multiservice gateway capable of delivering quality of service in a DSL network. He said the company had been one of six vendors chosen to be evaluated. But during the quarter, the company was informed that it had not made the next round of cuts.

The carrier is currently evaluating two or three vendors in lab trials. It’s expected to make a final decision by the end of November, said Whyte.

“We believe our product stacked up well technologically,” he said. “Although we have not yet been told the specific reasons we were not included in the next stage, we surmised the carrier was driven to move forward more quickly and tactically.”

Whyte said Net.com is still in talks with the unnamed provider, and he hopes to get formal feedback from the carrier at a later time.

Total revenue for the second quarter of fiscal 2004 was $31.9 million, compared to $34.1 million in the first quarter, a decrease of 6.3 percent (see Net.com Triples Profits). The company reported net income of $0.4 million, or $0.02 per share, compared to net income of $1.6 million, or $0.07 per share, in the first quarter.

The company blamed the revenue shortfall on weak international sales. It also struggled to make headway in North American enterprise and carrier accounts. Problems were exacerbated by fallout from Hurricane Isabel, which touched down in the Washington, D.C. area in mid-September. As a result of the storm, some orders to the U.S. government were delayed, said company officials. But chief operating officer John Batty said some of these orders have already been filled in the third quarter.

Overall, government business accounted for the bulk of Net.com's revenues. The company said it gained significant momentum in this sector with its Scream broadband platform and ShoutIP voice-over-IP products. Together these products accounted for 15 percent of all product revenues.

Going forward, the company expects sales into government agencies to remain strong, especially shipments into NATO. For the third quarter of fiscal 2004, the company predicts revenues of $33.5 million.

While the carrier landscape continues to look bleak, Whyte told investors that the company is not giving up on the market.

“We want you to understand that we remain persistent in our goal to succeed in the incumbent carrier environment,” he said. “We stated three and half years ago that this market would emerge, and it has, but clearly it’s still in its infancy.”

— Marguerite Reardon, Senior Editor, Light Reading

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