CrossKeys tumbles after sales stumble
Loss of key contract with Siemens
takes shine off of network software firm
Thursday, March 4, 1999
SIMON TUCK
Technology Reporter
Ottawa -- The mystery that surrounded CrossKeys Systems Corp. shares for the last eight months or so has
ended.
Since the stock began to tumble last summer, analysts and shareholders have been baffled by the networking
software company's sluggish share price that seemed to defy the company's impressive résumé: a strong
reputation, a first-class pedigree, hefty contracts with telecommunications powerhouses Newbridge Networks Corp.
and Siemens AG, a technology deal with Ascend Communications Inc., the title of Canada's fastest-growing
company and, perhaps most significantly of all, soaring revenue figures.
The puzzle no longer needed to be pieced together after the Kanata, Ont.-based company surprised analysts by
announcing last week that its third-quarter numbers were below expectations and weren't expected to show much
improvement for at least two more quarters. The disappointing numbers, at least for now, override the company's
many attributes.
Investors reacted sharply, sending the share price to a 52-week low. The stock fell 28.4 per cent or $2.50 to $6.30
on the Toronto Stock Exchange Friday, the first day of trading after the announcement. CrossKeys shares fell 5
cents to $5.65 Tuesday.
"I'm disappointed that the response of the marketplace was quite so swift and so harsh," said John Selwyn,
CrossKeys president and chief executive officer.
With the dramatic turn south, CrossKeys joined JetForm Corp., Data Mirror Corp., and Geac Computer Corp. in the
newly formed line of struggling Canadian software companies looking to find a way to get back on the growth path.
Unlike its neighbours in the misery ward, however, the company's problems have nothing to do with the looming
millennium bug that is diverting corporate spending away from many large software investments. CrossKeys' woes
were blamed on the premature loss of a major customer, the demise of another and weaker market conditions in
Asia and Latin America.
But like the other software companies, analysts say, woes can't be pinned on faulty technology or strictly internal
problems.
"A lot of good things are going on there," said Barry Richards, an analyst with Sprott Securities Ltd. in Toronto.
The company's primary problem is that sales to Siemens are expected to fall as much as 75 per cent to $1-million
to $2-million a quarter from $4-million because the German giant has decided to develop its own network software
instead of buying it from CrossKeys. Although the Siemens relationship was expected to end at some point over
the next two or three quarters anyway, its early demise came as a blow to CrossKeys.
That news comes only weeks after the Canadian company had to take a $1-million writedown because another
customer, West End Systems Corp., a fellow Newbridge Networks Corp. affiliate, went out of business.
But those were only the most recent items in a string of misfortunes at CrossKeys. Last year, Digital Equipment
Corp., another key customer, slashed its orders after it was purchased by Compaq Computer Corp. and the
Ascend deal was also jeopardized when that company was bought by Lucent Technologies Inc.
The recent stumble has taken some of the shine off a company that had shown great potential. At least two
analysts have now released reduced earnings estimates.
"The short-term outlook is not a pretty one," said Mr. Richards, who lowered his share earnings estimate for the
fiscal year to 35 cents from 41 cents. "It's rather unfortunate that a bunch of things have all gone wrong [at once]."
Michael Urlocker, of Credit Suisse First Boston Corp. in Toronto, also cut his earnings estimates, dropping his
forecast to 36 cents from 44 cents. "Management warned that a tough spot lies ahead for at least two quarters," he
told clients.
Some analysts also say Siemens' action spells bad news for Newbridge and its rocky relationship with the German
giant. "I believe and have believed that Newbridge and Siemens have been parting ways," said Mr. Urlocker. "It's a
one-product alliance. It doesn't have joint development and it doesn't have other products."
But Duncan Stewart, a portfolio manager with Tera Capital Corp. in Toronto, said that it would be wrong to presume
that Newbridge and Siemens are about to end their association just because Siemens and CrossKeys are winding
down their relationship. He said that it is "perfectly legitimate" for Siemens to develop software that serves the
same niche as that of CrossKeys.
The Siemens move may also rekindle talk that CrossKeys would be better off if it weren't under Newbridge's wing.
CrossKeys said that Newbridge owns 25 per cent of its stock and that Newbridge chairman and chief executive
officer Terence Matthews has an additional 18 per cent through a holding company.
But Mr. Selwyn said CrossKeys gains more from the affiliation than it loses, although he acknowledged that the
relationship with Newbridge does occasionally close some doors.
Analysts say the remedy is simple: Find new customers, sign new contracts, improve the numbers.
Mr. Selwyn said that's exactly what the company plans to do. "I want to use this as a kick in the pants to increase
the hustle."
But Mr. Richards said it won't be easy to turn things around in the short term after losing the Siemens business.
"It'll take a couple of quarters. They're going to have a tough time replacing $3-million to $4-million."
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