Friday September 03, 1999
CrossKeys keeps focus
First loss in three years no cause for alarm,
executives say
Karyn Standen
The Ottawa Citizen
CrossKeys Systems Corp. says now is not
the time to tighten the corporate screws,
despite losing more than one million dollars
last year and closing the books on 12
consecutive quarters of growth.
That was the message senior CrossKeys
executives gave yesterday to about 75
shareholders at the Chateau Laurier for the
Kanata networking company's annual general
meeting.
"We expected better growth," in fiscal 1999,
said chief financial officer Steve Spooner.
After restructuring and one-time charges, the
company lost about $1.45 million, or 8 cents
a share, for the year.
"But we choose not to take extreme
cost-cutting (measures)" going forward.
Instead, said CrossKeys chief executive Ian
McLaren, the Kanata software company will
invest about $15 million to boost its R&D,
sales and marketing efforts, and channel development in order to "take
advantage of the momentum" it sees in the network management software
market.
According to the U.S. research firm, International Data Corp. (IDC), service
providers are expected to spend about $1.25 billion U.S. on performance
management software by 2002, up from $733 million this year.
To position itself for increased opportunity, CrossKeys has adopted what it
calls a multi-vendor, multi-technology business strategy, aimed at developing
network management software that is compatible with different networking
gear manufactured by a variety of vendors.
In today's high-speed communications industry, networks are increasingly
built with equipment supplied by different manufacturers, such as Newbridge
Networks Corp., Cisco Systems Inc., Nortel Networks Corp., and Lucent
Technologies Inc.
Consequently, carriers operating the networks require management software
that is compatible with multiple platforms.
CrossKeys has recently announced a number of deals as part of its
multi-vendor strategy, including agreements with Nortel, EDS and British
Telecommunications (BT).
CrossKeys' deal with BT, announced Wednesday and in which CrossKeys
will provide software to manage BT's multi-vendor networks, is worth about
$2 million to $5 million, Mr. McLaren said. He added the agreement's value
could increase as BT expands its networks.
CrossKeys also announced its latest marketing deal aimed at boosting the
number of its distribution channels. It said it has signed a marketing deal with
Logica plc., an international information technology services giant with
operations in 23 countries, in which Logica will distribute CrossKeys
products and services.
Commenting on its most recent partnership announcements, Mr. McLaren
said: "People are starting to see the momentum and believe in what we're
saying. It's recognition that our strategy is starting to pay off."
He said CrossKeys is talking to "virtually every major telecom equipment
manufacturer," and expects to have as many as seven similar deals signed
within the next nine months.
Noting that much of the company's $43.8 million in sales last fiscal year were
generated through Newbridge, Mr. McLaren said: "Our strategy is to get
multiple Newbridge-like channels set up, and our target is to have at least 10
active, revenue-generating channels by the end of this fiscal year."
Analysts have in the past criticized CrossKeys' dependence on a limited
number of channels, primarily Newbridge, Compaq Corp. and Siemens,
saying the multi-vendor nature of the communications industry means
CrossKeys must expand the number of its partners.
Yesterday however, Barry Richards, an analyst with Sprott Securities Ltd.,
said he is impressed with CrossKeys' determination to line up additional
channel partners.
"The company presented itself in the best light we've seen since it's been
public," he said of the meeting CrossKeys' senior management held with
analysts prior to its AGM. "We want to see the company moving toward an
expanded world (in terms of multiple vendors) ... and I came away
impressed."
Mr. Richards also said he supports CrossKeys' decision to invest heavily in
R&D and marketing activities. It is well-equipped to make a significant
investment in developing new technologies that can provide
performance-management software compatible with a variety of networking
equipment, he said of the company's $57-million war chest.
Investors, he said, will see an increase in spending and losses at the
company, "and that's just a reality."
Mr. Richards projects a loss of 10 cents in CrossKey's first quarter (to be
announced later this month), but he gives the company a "hold"
recommendation and has a two-year share-price target of $10 to $12.
CrossKeys shares closed up 15 cents to $7.30 on the Toronto Stock
Exchange yesterday.
Saying there is no "monumental" competitor in the network-management
software sector that CrossKeys "can't overcome," Mr. Richards contends
the company could ultimately become one of the industry's dominating
players, "and that's why we (analysts) want to see the company spend the
money it has in growing R&D, marketing, and looking at acquisitions."
Last week, Mr. McLaren said CrossKeys will likely make acquisitions to
access the technologies it needs to enhance its multi-vendor product offering.
Mr. Richards suggested CrossKeys might find such acquisitions costly.
"The companies that have some pretty sexy technologies (applicable to
CrossKeys), most of which are private, are able to get some high valuations
in the U.S., so that doesn't make acquisitions easy." Consequently,
CrossKeys "may end up paying more than one might think" in any future
acquisition deal.
CrossKeys' shareholders approved a change to the company's employee
stock option plan. The company plans to increase the number of common
shares available through the option plan by 2.7 million, raising the overall
total to about 6.03 million.
In a management proxy circular, CrossKeys said awarding stock options is
"critical" in attracting and keeping the skilled talent it needs. |
