CNT Digests Inrange

Turns in solid Q2, claiming it integrated Inrange in record time. Can CNT keep up with the pack?

August 28, 2003

4 Min Read
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CNT (Nasdaq: CMNT) yesterday reported its first combined earnings with Inrange Technologies, exceeding Wall Street estimates and claiming it assimilated Inrange in record time.

The Minneapolis-based storage networking equipment and services vendor said it had revenues of $96.7 million and a net loss of $25.8 million, or $0.96 per share, for the quarter that ended July 31, 2003. Excluding charges related to the acquisition of Inrange, CNT reported a pro-forma profit of $574,000 (see CNT Reports Q2 Loss).

For its third quarter, which ends Oct. 31, CNT said it expects revenue to be in the range of $100 million to $110 million, with profit between 3 and 7 cents per share, excluding amortization and acquisition charges.

The positive results and upbeat forecast pushed CNT's stock up 17.5 percent in afternoon trading, to $7.73, amid an upswing in the broader market for technology shares.

Tom Hudson, CNT's chairman, president, and CEO, said on a conference call with investors yesterday that all of Inrange's operations -- excluding manufacturing -- have been integrated into the rest of the company since CNT closed the acquisition on May 5. He claimed the company has already achieved annual cost savings of $20 million, in large part by laying off 150 Inrange employees (see CNT Completes Inrange Acquisition and CNT Walks Off With Inrange).For example, Hudson said, it took just 53 days to switch Inrange over to the CNT information technology systems, including its enterprise resource planning (ERP), customer relationship management (CRM), voice and email systems. "I think that's a record in anyone's book," he crowed.

Nevertheless, some analysts expressed concerns about the increasing competitive pressure on CNT from players including Brocade Communications Systems Inc. (Nasdaq: BRCD), Cisco Systems Inc. (Nasdaq: CSCO), and McData Corp. (Nasdaq: MCDTA).

"While the [Inrange] acquisition integration appears to be going better than feared and has further cost/expense reduction potential, we maintain our Peer Perform rating owing to intensifying competition and a weaker balance sheet," writes Bear Stearns & Co. Inc. analyst Andy Neff in a research note.

According to Hudson, CNT's deal to buy Inrange -- bringing it the highest-port-count Fibre Channel director currently on the market -- put it in front of the industry curve. Though he didn't mention any competitors by name, he alluded to McData's announced plans this week to buy Nishan Systems Inc. and Sanera Systems Inc.; Ciena Corp.'s (Nasdaq: CIEN) acquisition last week of storage-over-Sonet vendor Akara Corp.; and LightSand Communications Corp.'s merger with SANcastle Technologies Inc. (see McData Sweeps Up Nishan, Sanera, Ciena Plunks Down $45M for Akara, and LightSand Buys SANcastle).

"If imitation is the sincerest form of flattery, then CNT should feel flattered by others' attempts to catch up to our breadth of products and services," he said.CNT executives also touted forthcoming MAN and WAN connectivity options for the FC/9000. Due out in the current quarter, the options will allow customers to extend Fibre Channel traffic over IP, ATM, Sonet, or CWDM -- an assortment of protocols unmatched in the industry, the company claims. However, there's some question about how "integrated" these features actually are: An ex-Inrange employee told Byte and Switch the SAN extension modules don't actually transmit data across the backplane of the FC/9000 (see CNT Flings FC Far & Wide).

As part of integrating Inrange, CNT said it had consolidated both companies' channel extension and storage networking product lines. In addition, CNT discontinued or divested about six "non-core product lines" from Inrange, each of which generated less than $1 million in revenue, said Greg Barnum, CNT's CFO. "We looked at customer requirements, and we believe we can fulfill those with additions to UltraNet family," he said. "We would not expect to see any revenue reduction from our product plans." Hudson also noted that CNT has terminated Inrange's reseller deals with Nishan and Akara.

CNT's revenue from proprietary products (as opposed to third-party products) was $51 million for the second quarter. Included in that was $12 million in FC/9000 revenues; CNT said about $8 million of the FC/9000 sales came through IBM Corp. (NYSE: IBM). That's well below the $20.3 million in Fibre Channel director sales Inrange reported for its fourth quarter of 2002 (see Inrange Boosts Q4 FC Sales).

In the second quarter, CNT said its UltraNet Edge storage router line generated $4.3 million in sales, and its IP storage networking products accounted for $6 million. Channel extension product sales were $5.5 million. Third-party products generated $12.5 million for the quarter, down from $16 million in the first quarter.

Meanwhile, professional services revenues were $11.2 million, up from 7.1 million in the first quarter. However, gross margins for its services group in the quarter were 20 percent, compared with 36 percent in the first quarter. "The professional services unit of Inrange had a lower utilization rate than the pre-acquisition CNT," Barnum said.Todd Spangler, US Editor, Byte and Switch

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