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Gadzoox Beats Earnings Estimate: Page 2 of 3

The future is more bullish, to judge from the outlook of company
executives in a Tuesday afternoon conference call. Although they expect
second-quarter sales to remain flat, they are anticipating them to
grow 40 percent sequentially in the third and fourth quarters as they ramp
up 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 percent
to 50 percent and plan to be cash-flow positive by the first quarter of fiscal

Whether this disclosure will be sufficient to turn Wall Street bullish on
Gadzoox remains to be seen. Through Tuesday, a consensus of four analysts
ranked the stock a Hold, which in
Wall 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 &
(Nasdaq: JPM), who wasn’t persuaded by the earnings report to change his neutral Market Perform
stance. But Lewis doesn’t rule out Gadzoox’s
ability to become cash-flow positive within a year. “It hinges on their
Slingshot product,” he said. “If they meet their sales goals, then it’s

He said low- to mid-range switches like Slingshot could have strong
potential, as SAN adoption moves down to smaller businesses and departmental
use. 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


Vixel Corp. (Nasdaq: VIXL), another contender for the same portion of that market, which also had a
1.8 percent market share last year, also reported mixed financial results
Tuesday. Vixel lost $4.7 million, or 20 cents a share, compared with a $5.1
million loss, or 23 cents a share, a year ago. Revenues were $6.5 million
vs. $7.8 million a year ago.