CNT Waits for SAN Tide to Rise

Knocked down by the recent equipment purchasing slowdown, Computer Network Technology Corp. (CNT) (Nasdaq: CMNT) is like a lot of other boats in the storage networking basin: It's waiting for the tide to rise.

Though longtime shareholders may not be thrilled by CNT's current stock price -- which has bobbed close to the $10 per-share mark since April, down from a high near $40 last November -- most analysts say the company's fundamentals make it a low-risk consideration for new investors to jump on board.

CNT, among the leaders in the nascent storage-over-IP market segment, has a decent product mix, a good stash of cash, and an impressive list of sales partners, including heavyweights EMC Corp. (NYSE: EMC) and IBM Corp. (NYSE: IBM), which resell CNT's hardware in remote-mirroring and SAN-consolidation implementations. An accelerating focus on SAN services could also lift CNT's ship higher than others, if and when the market for SAN products gets moving again.

Like many of its peers in the networking hardware market, CNT had a terrible first quarter this year, recording revenues of $29.4 million, a dropoff of 24 percent from the same quarter a year ago, and a decrease of 37 percent from the fourth quarter of 2000. Though the company has issued no guidance, news from the current quarter (which closes at the end of July) is expected to be more of the same.

Still, most of the Wall Street analysts following CNT have a Buy recommendation on the stock, citing the company's strong cash and product positions. "We think the current stock price undervalues the operating business," says a report on CNT from analysts Glen Ingalls and Gary Helmig on the Wit Soundview Website. While noting that "upside will likely be limited" due to the current market slowdown, the Wit analysts (who rate the stock a Buy) also note that CNT is currently trading just a few dollars above its cash-per-share figure, limiting investor downside.Last fall, CNT was able to raise $110 million through a follow-on sale of its stock, a war chest that is helping the company through the current market downturn. Jim Morin, CNT's vice president for strategic planning, says the company isn't sitting on its hoard, citing CNT's $12 million purchase of storage-management service provider Articulent in April.

"The Articulent acquisition brought us 59 more people in the advanced services arena," says Morin, who also says CNT gained a sizeable customer presence in the Northeast from taking over the Hopkinton, Mass.-based company.

Though CNT hopes to increase its professional-services business (Morin says that segment accounted for only $8 million of the company's total $176 million revenues in fiscal 2000), its bread and butter is its storage networking products division, which accounted for $88 million in sales last year, according to Morin.

The SAN line includes switches, gateways, and management software to help build remote mirroring and other SAN-over-WAN implementations. Competitors in the SAN-over-IP arena include SAN Valley Systems Inc. (see SAN Valley Does the Cisco Two-Step ), Nishan Systems Inc. (see Top Ten Private Storage Networking Companies), Entrada Networks (Nasdaq: ESAN) (see Kanwar J.S. Chadha, Entrada Networks), and Cisco Systems Inc. (Nasdaq: CSCO) (see All Eyes on Cisco).

CNT's latest offering in the SAN field is its UltraNet Edge Storage Router family, which supports Fibre Channel communications over IP networks (see CNT Shipping Storage Router). Scheduled to be generally available by September, the new routers will have configurations supporting FC-to-Fast-Ethernet and FC-to-Gigabit-Ethernet connections. Future plans for the routers include support for Fibre Channel over ATM/Sonet links, as well as software upgrades to support iSCSI (SCSI over IP).On the partner side, CNT dances with a wide range of storage hardware vendors, including IBM, Compaq Computer Corp. (NYSE: CPQ), and Hewlett-Packard Co. (NYSE: HWP). But in May CNT announced an expanded relationship with EMC, which Morin says is a natural, given EMC's presence in the market.

"We consider ourselves vendor-neutral, but the level of the relationship is somewhat based on the market share [of the partner]," Morin says. The latest EMC deal focuses on providing support for data mirroring over IP links, a market segment that Morin says is poised to grow rapidly.

"All the analyst firms say that Fibre Channel will still be strong for two or three years, but that SAN over IP is going to take off by 2005. I think it's only natural that if [users] want to go across the enterprise, or across the wide area, they're going to want to connect over IP."

Going forward, CNT is going to focus primarily on storage networking, which Morin calls "the engine of growth" for CNT. Though the company also has a separate division, called Propelis, that sells and supports enterprise business-integration software, Morin says CNT will most likely sell the division off sometime soon, instead of preparing it for an IPO as originally planned.

- Paul Kapustka, Editor at Large, Light Reading
http://www.lightreading.com