Crossroads Systems

Like many other companies that came of age during the Internet boom, Crossroads Systems Inc. (Nasdaq: CRDS) is now trying to work off its operational hangovers as it races to stay in front of the storage-router marketplace.

With a planned demonstration later this month of iSCSI-based technology, the Austin, Texas-based Crossroads should add to a recent string of good-news events, which include a reconciliation with major OEM customer Compaq Computer Corp. (NYSE: CPQ).

Crossroads, which manufacturers routers that connect servers to storage-area networks (SANs), is still at least a year away from profitability, and its timeline will be challenged by technical, competitive and market-condition hurdles. This is no doubt the reason for Wall Street's lukewarm opinion of its stock, which has languished below $4 per share since earlier this summer.

Yet even after Crossroads announced a loss of 26 cents per share, on $8.4 million in revenue, for its fiscal third quarter of 2001 (ending July 31), analyst Glenn Hanus of Needham & Co. upgraded the company's stock to a Buy, albeit with a modest 6-12 month target price of $5 per share. Currently, Crossroads has been trading right in the range of its book value, around $2.50 per share.

Hanus and other Wall Street types are likely pleased by the company's growing string of positive announcements, the biggest of which was the renewal of a major OEM deal with Compaq. Compaq, which once accounted for 33 percent of Crossroads' business, decided last year to build its own router equipment, and by the most recent quarter had accounted for just 2 percent of Crossroads' business, according to Crossroads' latest financial statements. Hewlett-Packard Co. (NYSE: HWP) and StorageTek (NYSE: STK) are also Crossroads OEMs.By late August, Crossroads had renewed the Compaq relationship (see Crossroads Ends Q3, Adds CEO). Perhaps not coincidentally, the company announced the return of Compaq simultaneously with a decision to make Larry Sanders, Crossroads' current president and COO, the CEO of the company effective Nov. 1.

Sanders, a storage industry veteran who joined Crossroads in March of 2000 after leading the American hard disk drive business of Fujitsu Ltd.'s (KLS: FUJI.KL), has the kind of operational experience that entrepreneurs like Crossroads founder (and outgoing CEO) Brian Smith often lack.

"Brian is really more entrepreneurial at heart, really more of a stage-one kind of guy," says Sanders, who is confident that he can lead Crossroads to the land of profitability.

But to get there, Crossroads must continue to correct some of the business excesses born of late 1999 and early 2000, when the company's red-hot IPO and stratospheric stock price fueled some decisions that are hampering Crossroads now.

"There was an exuberance then [in 2000], and the company put a lot of infrastructure in place in anticipation of hyper growth," Sanders says, talking of a time when Crossroads' stock price hit an all-time high of almost $179 per share, on Feb. 22, 2000.Then the NASDAQ crashed, taking unprofitable companies like Crossroads with it. By July 28 of last year, Crossroads' stock was worth $5 per share, and between then and now the per-share price hasn't topped the low teens.

"With the downturn, the company has found itself with more infrastructure and a bigger facility than we need," says Sanders. Those realizations forced a 10 percent layoff earlier this summer, as Crossroads began trying to reduce its operational expenses.

Still, the positives continue: Crossroads has a new product line (see God Goes Down to the Crossroads), its 8000 series of storage routers, designed to eventually support newer connectivity protocols, including iSCSI and Infiniband. Sanders, who says Crossroads will demonstrate working iSCSI technology at the upcoming Storage Networking World event in Orlando, Fla., says the multiprotocol router product is proof that Crossroads is moving beyond its traditional SCSI-to-Fibre Channel niche.

Of course, the term "multiprotocol router" conjures up an image of Cisco Systems Inc. (Nasdaq: CSCO) looming as a possible competitor, if iSCSI grows in acceptance. But Sanders says iSCSI won't take over the market anytime soon.

"Fibre Channel will still have pretty long legs, especially in the higher end of the market," Sanders says. "And the longer the [technical] confusion goes on, the better business opportunity there is for a router company."- Paul Kapustka, Editor at Large, Byte and Switch http://www.byteandswitch.com