Enterasys Revenues Slide in Q1Enterasys Revenues Slide in Q1

ANDOVER, Mass. -- Enterasys Networks Inc. (NYSE: ETS), a leading provider of Secure Networks(TM) for enterprise customers, today announced financial results for its first fiscal quarter ended April 3, 2004.

Net revenue for the first quarter of 2004 was $87.2 million, compared with net revenue of $103.3 million for the fourth quarter of 2003. Net loss for the first quarter of 2004 was $35.7 million, or $0.16 per share, compared with a net loss of $8.9 million, or $0.04 per share, in the fourth quarter of 2003.

The net loss for the first quarter of 2004 included primarily non-cash charges of $15.2 million, consisting of $8.7 million due to the impairment of certain intangible technology assets, $3.4 million to lower the carrying value of certain legacy minority investments, and $3.1 million for excess and obsolete second- and third-generation inventory. The Company also recorded a $4.5 million restructuring charge. These charges, totaling $19.7 million, accounted for $0.09 per share of the loss for the quarter.

Enterasys ended the first quarter of 2004 with $201.9 million in cash and marketable securities, including $10.8 million of restricted cash. This compares with $221.1 million of cash and marketable securities at year-end 2003, including $18.7 million of restricted cash.

Comments on the Quarter

"The Company's first-quarter revenue was within the range we provided in mid-March," said William K. O'Brien, chief executive officer of Enterasys. "As we previously indicated, a number of factors affected our results. These included a decline in service revenue, deal-specific pricing pressure, delays in various government budget cycles, and sales execution issues that led us to make leadership changes in the sales organization."

Product Highlights

"New products reached 45 percent of product revenue in the first quarter, an increase of 10 percentage points from the fourth quarter of 2003," said Enterasys President Mark Aslett. The Company's high-end Layer 3 switching platform, the Matrix N-Series, increased to approximately one-third of product shipments in the first quarter, compared with 25 percent in the fourth quarter of 2003.

"With each new product launch, our Secure Networks solutions are resonating more forcefully with the Company's customers, prospects and channel partners," Aslett said. "In the first quarter, response to these offerings was strongest in the transportation, healthcare, education, and state and local government verticals."

Restructuring

Enterasys also announced today a restructuring of its operations around its Secure Networks strategy as part of a company-wide cost-reduction plan. This includes a reduction of approximately 200 employees, or 14 percent of the Company's workforce, as well as an organizational realignment involving several functional areas.

The Company expects the restructuring to reduce expenses by approximately $28 million on an annual basis, which will reduce the breakeven level and bring costs more in line with revenue. In addition to reducing expenses, Enterasys expects these actions, in combination with recent sales management changes, will strengthen its competitiveness and accelerate growth.

Outlook

"In identifying expense reductions and opportunities for performance improvement," said O'Brien, "we have been careful to protect our corporate strengths and maintain our ability to invest in Enterasys' future. We have strong product momentum and new sales leadership, and we anticipate second-quarter revenue will be modestly higher on a sequential basis. We remain committed to our goal of returning to profitability and positive cash flow in the second half of 2004."

Enterasys Networks Inc.