Net.com Reports Soft Quarter

Network Equipment Technologies Inc. (net.com)'s (NYSE: NWK) loss widened 19 percent in the March quarter due to what it called “lack of immediacy” in government network deployments.

The switching and B-RAS vendor reported a loss of $4.1 million, or 16 cents a share, on revenues of $23.8 million, compared with a net loss of $3.5 million, or 14 cents per share, on revenues of $27.1 million during the year-ago quarter.

Net.com's numbers were in line with analysts' expectations; they predicted the 16 cents a share loss, while expecting slightly lower revenues of $23.65 million, according to Thomson First Call.

But the analysts had been forewarned (see Net.com Gives Q4 Prelims). On March 29, net.com scaled back its guidance in anticipation of today’s disappointing results, and its stock price fell sharply.

The Fremont, Calif.-based company derives much of its revenue from sales of its Promina TDM switch into the secure networks of U.S. government and military entities such as NATO and the U.S. Marine Corps. And the March quarter was no exception -- Promina sales accounted for roughly 80 percent of net.com’s quarterly revenue.

But over the last year, net.com officials complain, government and government agency customers have lost some of their vigor for enhancing their networks.

“We are seeing a lacking in the sense of urgency that we saw two years ago,” net.com CFO John McGrath says.

“There’s a slowness that we’re seeing,” says CEO Bert Whyte. “Although we’re still in those projects, we just have to wait until they come through, and it’s very frustrating for us.”

So the company is making some adjustments (see Net.com: Back to the Enterprise). McGrath says it will invest more in its enterprise sales channel beginning in late April. Whyte says there is still much opportunity in the networks of the IOCs, which he says are moving more quickly than larger service providers toward VOIP.

Whyte says his company’s SCREAM B-RAS and SHOUT gateway/session controller both have roles in the IOCs’ efforts in IPTV and VOIP. “We have an achievable goal of closing three to five IOCs in each of the next few quarters,” Whyte told analysts during a Wednesday conference call.

Today the company’s revenues from sales to IOCs remain a very small percentage of its top line, and the company declines to say how big a deal IOCs are to its buisness.

“You look at these IOCs, but rather than talking about a ten, twenty, thirty million dollar opportunity, we are talking about a few million dollars each, because these are small telcos,” says analyst Larry Patrone of Decision Economics Investment Research.

But McGrath and Whyte had some good news to share with investors, too. The company says it recently won a contract for “follow-on development” of NATO’s 26-nation network. The value of the deal was not disclosed.

The company also saw its first revenue from a contract to supply Microsoft Corp. (Nasdaq: MSFT) with SHOUT gateway/session controllers (see Net.com Reports Happy Q2 (Sort of)). Analysts say the deal should be worth $15 million to $16 million. Microsoft is using the devices to connect 400 of its branch offices to the PBX at its headquarters in Washington.

In spite of those developments, net.com is stepping very lightly in the way of forecasts. McGrath and Whyte declined to give hard revenue or earnings per share guidance for the June quarter, saying only that revenues will be “flat, give or take 15 percent or so.”

“We expect quarterly revenue to remain flat for the next two quarters,” McGrath says. “Depending on the major government programs, we anticipate that we will return to positive growth in the ensuing quarters.”

Net.com also says it intends to buy back as much as $10 million of its stock over the next two years, based on the company's increased cash levels and a belief that the company’s prospects are underappreciated by Wall Street.

Net.com stock rose $0.08 (1.44%) to $5.65 in trading on Wednesday.

— Mark Sullivan, Reporter, Light Reading