Gadzoox Beats Earnings Estimate

Gadzoox Networks Inc.(Nasdaq: ZOOX) yesterday offered a glimmer of hope for a storage networkingrecovery by beating the consensus of Wall Street analysts for its firstquarter fiscal 2002, which ended June 30 (see Gadzoox Reports on Q1).

The maker of switches and hubs lost $9.4 million, or 30 cents a share,compared with Wall Streets projection of a $12 million loss, or 38 cents ashare. Revenues came in at $6.6 million, versus the consensus estimate of $6.4million.

The bad news is that revenues are still down considerably from thequarter a year ago when Gadzoox had $9 million in sales. During thatquarter, Gadzoox lost $14 million, or 30 cents a share. (Last year’sper-share loss, however, should not be compared with the latest quarterlyloss. A year ago, there were fewer outstanding shares because the companyhad not yet gone public).

Gadzoox has also been in a tenuous cash position, slumping to $11 millionat the end of the March quarter. Thanks to a $15 million private equityplacement in May, the company closed the June quarter with $17 million incash (but diluted shareholder equity, with 5.6 million new shares). Atits recent burn rate, Gadzoox has only about two quarters of cash before itneeds to raise more money -- not an easy or pleasant task in the currentmarket environs.

On a more positive note, the latest quarter looks better than the previous quarter, when the company lost $40 million, or $1.42 a share, on$6.4 million revenues. Although revenues are up slightly, the loss is not anapples-to-apples comparison because the March quarter included severalone-time charges, including asset write-downs, restructuring expenses, andgoodwill amortization.The future is more bullish, to judge from the outlook of companyexecutives in a Tuesday afternoon conference call. Although they expectsecond-quarter sales to remain flat, they are anticipating them to grow 40 percent sequentially in the third and fourth quarters as they rampup sales of their Slingshot 4218, a 2-Gbit/s Fibre Channel switch (see Gadzoox Slings Shot).Furthermore, they expect fourth-quarter profit margins to reach 45 percentto 50 percent and plan to be cash-flow positive by the first quarter of fiscal 2003.

Whether this disclosure will be sufficient to turn Wall Street bullish onGadzoox remains to be seen. Through Tuesday, a consensus of four analystsranked the stock a Hold, which inWall Street parlance usually means Sell.

“It’s clear they need to raise more later in the year,” says Bill Lewis,an analyst with J.P. Morgan &Co. (Nasdaq: JPM), who wasn’t persuaded by the earnings report to change his neutral Market Performstance. But Lewis doesn’t rule out Gadzoox’sability to become cash-flow positive within a year. “It hinges on theirSlingshot product,” he said. “If they meet their sales goals, then it’slikely.”

He said low- to mid-range switches like Slingshot could have strongpotential, as SAN adoption moves down to smaller businesses and departmentaluse. But Gadzoox will have to work hard to establish a presence. In 2000,the company had only 1.8 percent of the SAN switch market, according to

Gartner/Dataquest.

Vixel Corp. (Nasdaq: VIXL), another contender for the same portion of that market, which also had a1.8 percent market share last year, also reported mixed financial resultsTuesday. Vixel lost $4.7 million, or 20 cents a share, compared with a $5.1million loss, or 23 cents a share, a year ago. Revenues were $6.5 millionvs. $7.8 million a year ago.QLogic Corp. (Nasdaq:QLGC), which has a broader product line, matched analysts' estimates Tuesdaywith $19 million in second-quarter earnings, or 20 cents a share, down from $20million, or 21 cents, a year ago. Sales came in at $92 million, comparedwith $77 million a year ago.

In after-market trading on Island, Gadzoox was at $2.35 a share, down from aTuesday close of $2.62. Vixel dropped to $2.65 from a $2.80 close. AndQlogic dipped to $39.50 from $40.74.

— Tom Davey, special to Byte and Switch, http://www.byteandswitch.com

Movers and shakers from more than 100 companies – including Gadzoox Networks – will be speaking at StorageNet, Byte and Switch’s annual conference, being held in New York City, October 2-5, 2001. Check it out at StorageNet2001