I also think that CRDS should say something about the current state of its business. Let's hope that CRDS management is up to it.
The bundling of CRDS with ZOOX because of this downgrade by the MOR analyst is doing more damage to CRDS stock than anything else. Both companies are in the SAN market, but they address different markets and do so in different distribution channels.
Here is an article from Motley Fool about ZOOX's problems. Seems to be a different story from CRDS altogether:
FOOL PLATE SPECIAL
An Investment Opinion
Gadzoox Nuked
By Brian Graney (TMF Panic)
June 20, 2000
Fibre Channel switch and hub company Gadzoox's warning of a quarterly revenue shortfall shakes the storage area networking (SAN) market. As SAN switching continues to evolve along the same lines as the 1990s' local area network (LAN) switching, signs are starting to appear regarding who may end up being the ultimate winners and losers.
More company-specific turmoil hit the storage area networks (SAN) market today when Fibre Channel hub and switch maker Gadzoox Networks (Nasdaq: ZOOX) warned that its fiscal first-quarter revenues would come in as much as one-third below the $15.1 million reported in Q4. Mimicking what came to pass when Fibre Channel switch peer Vixel (Nasdaq: VIXL) announced a similar quarterly revenue slowdown late last year, the market was quick to react with the fury of a woman scorned and lopped off roughly 30% of Gadzoox's market value in early trading.
Gadzoox blamed the revenue jolt on slower-than-expected movement of inventory through the distribution channel to end users, which is an interesting development from at least two vantage points.
First of all, Gadzoox is in the midst of a product transition and has been leaning on its recently introduced Capellix family of switches to provide its near-term topline growth. Capellix represents the company's first foray into the high-demand Fibre Channel switching market, and the product has ramped to 45% of total company revenues from 0% in just the past two quarters alone. If the company is already experiencing sell-through problems for Capellix as it butts up against rival products --especially those from 90% switching market share leader Brocade Communications (Nasdaq: BRCD) -- that's very bad news for Gadzoox investors. Two quarters of new product market penetration is just not going to cut it if Gadzoox expects to grow at the same rate as the SAN market, whose size is currently on a pace to at least double annually over the next few years.
However, this quarter's problems are more likely tied to Gadzoox's company-specific strategy of targeting what it refers to as the "open market" channel for its product distribution, relying on independent distributors and integrators and bucking the more traditional route of selling its hubs and switches through the large server-storage OEMs. Last year, the open market channel accounted for 30% of Gadzoox's revenues; the next closest SAN rival got only 10% of its revenues that way. That choice has made for comparative differences on the company's balance sheet versus those of its rivals.
For example, Gadzoox's days sales outstanding (DSO) on a quarterly basis was 72 and its days in inventories was 77 in the most recent quarter. Those results are far less preferable from an investment standpoint when stacked up against Brocade's DSO of 43 and its inventory days of a mere 9 days in its most recent quarter. Viewed through this framework, it becomes easier to build a case supporting the notion that Gadzoox's balance sheet disadvantages may have finally come home to roost.
Just as in the early evolution of the LAN switching market last decade, the hypergrowth nature of today's Fibre Channel switch marketplace is placing a tremendous amount of execution risk squarely on the heads of the many players scrambling for share. Reflecting back on the late-1990s' experience of onetime LAN switch firms such as Madge Networks and FORE Systems, investors need to accept the fact that not every SAN switch maker is going to be around in its present form a few years from now. As in every market, there will be winners and there will be losers, with the winners being the firms that can consistently make passing grades in execution. |
