Net.com Shows Upside Surprise
Granted, the growth was modest: Revenues of $27.2 million were up 1.9 percent sequentially. Also, net loss rose to $0.40 per share, as opposed to $0.09 per share last quarter, thanks to charges of $9.6 million related in part to changes in accounting and to a goodwill writedown from the company's purchase of Ethernet switch company Flowwise in 2000.
Still, net.com has plenty of cash -- $95.3 million to be exact. And with product revenue of $22 million -- representing an increase of 34.7 percent from the same time last year -- the company can put a better spin on things than most others can."We had a stunning quarter in what are extremely difficult times for our industry," said CEO Bert Whyte on last night's conference call with analysts.
What's the secret? The company has a firm toehold in the federal government market for frame relay and ATM gear. This appears to be yielding sufficient rewards in the prolonged telecom slump.
Net.com says more than 50 percent of its revenues (about $14 million to $15 million per quarter) come from ongoing sales of Promina multiservice gear -- the latest iteration of the company's high-end WAN CPE switching equipment it's been selling for nearly a decade.
"They got these contracts as the installed vendor in many government agencies for T1 multiplexers years ago," says Erin Dunne, director of research at Vertical Systems Group. "That led to a natural progression to ATM and frame relay platform sales. And the federal government hasn't slowed its spending the way enterprise customers and carriers have."
The key question is, Can the company keep it up? And there's no pat answer. Whyte and other execs expect growth to be flat for the next few quarters, with improvement starting to show in the overall industry by the first or second quarter of calendar 2003. Meanwhile, the company is setting its sights not on the legacy market but on what it sees as demand for service creation gear, boxes that help carriers create new services they can resell as VPNs (virtual private networks).
Net.com's Scream and Shout service creation platforms are in trials worldwide, execs say, and revenues from them are still less than 10 percent of sales.
"Service creation is a tough market. It requires capital expenditure by carriers on marketing, technical support, and new equipment," says Dunne. And right now, no one's buying.
Still, if Whyte is right and the market starts to return soon, net.com may find it has been able to hold out long enough to gain some momentum in its new market. It spent big on publicizing service creation at June's Supercomm tradeshow in Atlanta and establishing a forum with other vendors there (see Vendors Hold Service Creation Love-In).
Meanwhile, the competition is struggling, which may also gain net.com some time: CoSine Communications Inc. (Nasdaq: COSN) is trading for pennies (although its shares were up more than 5 percent today); Nortel Networks Corp. (NYSE/Toronto: NT) and Redback Networks Inc. (Nasdaq: RBAK) are struggling; and Unisphere Networks Inc. is facing a major integration with Juniper Networks Inc. (Nasdaq: JNPR) (see What to Expect From 'Junisphere').
Financial analysts see hope in the big picture. "In my view, net.com is a stable government play with an option," says Joanna Makris of Adams Harkness & Hill. "While Redback and CoSine hang on, hoping to eventually see their market take shape, this company's got cash and a great balance sheet. It's a great position to be in."
— Mary Jander, Senior Editor, Light Reading