CNT Smacked for Its Tweak

A downward outlook adjustment prompts a collective Wall Street raspberry

May 6, 2004

3 Min Read
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Computer Network Technology Corp. (CNT) (Nasdaq: CMNT) has adjusted its earnings outlook down, drawing negative attention from investors and analysts.

The company announced yesterday that instead of a pro forma profit of 2 to 5 cents per share, the company anticipates a pro forma loss between 3 and 5 cents per share when it announces earnings on May 17 (see CNT Warns of Loss). Revenues will still match predictions of $95 million to $100 million.

By midafternoon today, CNT shares were trading at $5.90, down $1.24 (17.37%). Bear Stearns & Co. Inc. downgraded CNT's stock from Peer Perform to Underperform. Analysts Andrew J. Neff and colleagues cite "intensifying competitive conditions in the Fibre Channel SAN market... and a weak balance sheet."

The firm, which in another capacity acted as financial advisor to CNT during its purchase of Inrange last year (see CNT Walks Off With Inrange), notes this is the second time in roughly two months it's had to lower its rating on CNT.

Bear Stearns also lowered its EPS estimates, saying CNT is likely now to show a profit of 18 cents, not 32 cents, for 2004, and 35 cents, not 45 cents, for 2005.CNT explains the shortfall as a witches' brew of customer dawdling, product unavailability, and long inventory lead times, plus a reliance on managed services contracts, which take longer to produce revenue than outright product sales.

"We saw some continued lumpiness in demand, driven by complex customer decision-making," said CEO Tom Hudson in a prepared statement. "In addition, we received orders for products with new features that weren't certified by quarter end and orders late in the quarter that could not be fulfilled. These orders will be fulfilled and recognized as revenue in the second and third quarters. Third party sales were stronger than expected."

Hudson says the problem isn't with CNT's director product, the FC/9000, which it obtained with the purchase of Inrange last year (see CNT Walks Off With Inrange). Instead, the trouble lies in sales of the vendor's SAN extension gear, including its UltraNet Edge Storage Router.

Those sales aren't good enough for analysts Christian Schwab and Rob Martin of Craig-Hallum Capital Group LLC, who write in a note today: "We continue to lack conviction in the company's ability to demonstrate the meaningful operating leverage it has talked about... given its inability to consistently grow sales of its higher margin CNT product." The analysts also cite concern over whether the new UltraNet Edge Router will take off in the lower-end of the SAN market, or face damaging competition from Cisco Systems Inc. (Nasdaq: CSCO).

There are some plusses: Bear Stearns notes that CNT is on track to ship a new director product by summer, which the firm says is being qualified now by IBM Corp. (NYSE: IBM). Big Blue also has a $15 million managed services contract with CNT, which could help sales a bit in future quarters.CNT is also pleased with the Inrange buy. Hudson boasted in last night's statement of 70 percent growth in the port and unit shipments of director products resulting from the acquisition. And in CNT's latest proxy statement, three executives received "Inrange integration bonuses" in 2003 for successfully integrating the new products into the company's roster. CEO Hudson received $400,000; group VP of worldwide product operations Mark Knittel got $120,000; and CFO Greg Barnum got $126,000.

Other employees not listed in the filing also received bonuses related to Inrange: "Successfully integrating two multi-million dollar companies in 53 days requires a great deal of hard work. The integration of the two companies has resulted in over $20 million in annual cost savings alone," writes CNT spokeswoman Jennifer Weidauer in an email. "In addition to recognizing key executive contributors, other individuals in key departments and focus areas were also given bonuses for their work on the Inrange integration."

Bottom line? CNT's critics say it's got to get the lumpiness not only out of its sales cycle but out of its own product line revenues in order to shore up enough strength to face competition and win.

Mary Jander, Site Editor, Byte and Switch

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