CNT Takes a Hit

Earnings are down and 220 employees are out

August 18, 2004

3 Min Read
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As expected, Computer Network Technology Corp. (CNT) (Nasdaq: CMNT) yesterday confirmed grim quarterly numbers on all fronts -- for revenues, earnings, and employees (see CNT Loses $5.5M, Reduces Staff).

Revenues for CNT's second quarter ending July 31 came in at $77.2 million, compared with $96.2 million in the previous quarter. The sequential drop amounts to almost 20 percent. CNT posted a second-quarter net loss of $12.1 million, or $0.44 per share, compared with net losses of $4.5 million, or $0.16 per share, a quarter ago.

The company's pro forma loss in the second quarter was $5.5 million, or $0.20 per share, compared with $1.5 million and $0.05 per share in the first quarter.

CNT's reaction to the poor showing also came as little surprise. The company admitted that 220 employees were shown the door last week, bringing its headcount down to around 1,000 -- a reduction of roughly 18 percent (see CNT Cuts Anticipated).

The cuts affect sales, support, and engineering staff, which the company hinted came mostly from its weak-selling SAN extension product line. CNT CEO Tom Hudson said the cuts were not across the board.The company will "consolidate" the SAN extension product team with ones handling the new UltraNet Multi-service Director (UMD) and the older FC/9000 director, to create a single business unit. The UMD stems from CNT's 2003 acquisition of Inrange Technologies, whose products included the FC/9000 (see CNT Stakes Claim on New Director and CNT Walks Off With Inrange).

The moves met most of last week's anticipated figures and fallout (see CNT Cuts Anticipated and CNT Warns of Deeper Losses). But the company has still not addressed plans for additional future layoffs that were also rumored last week.

With the reorganization and cuts, which also include facility closures, the company should reduce quarterly expenses by $7.5 million, said Greg Barnum, CNT VP of finance and CFO. A restructuring charge of $3.5 million to $4.5 million will be taken in the third quarter, primarily related to severance pay and shuttered facilities, he added.

"We're very disappointed with the quarter [results]," said CEO Tom Hudson on the company's Tuesday earnings call, "but we have taken very quick action to balance the revenue and expense outlooks."

"The layoffs were a necessary reaction to the changing market," he said.Hudson blamed soft SAN extension sales on a slowdown in IT spending, which he said has involved more complicated and lengthier buying decisions. This continuing trend should lead to "lumpiness in demand," he said -- an issue he elaborated on in May (see CNT Smacked for Its Tweak).

With its reductions, the company hopes to break even in the third quarter and reach profitability by the fourth quarter.

CNT has high hopes for the UMD business, a fact apparent in the company's shifting focus of extension product development to the UMD line. For the near term, the company cited IBM's imminent plans to resell UMD, starting on September 1, as cause for cheer. Future reselling arrangements are in the works, though CNT declined to provide the names of those partners.

Brett Mendel, Senior Analyst, Byte and Switch Insider

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