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Isilon sours the taste

ISLN which like BBND is a recent IPO in the data storage arena pre announced and it was not pretty. Here is the press release: Isilon® Systems the leader (don't you love that- "leader") in clustered storage, today announced preliminary results for the third quarter of 2007 ended September 30, 2007. Based on preliminary estimates, total revenue is expected to be in the range of $23.2 million to $23.7 million, down approximately 6 percent to 8 percent sequentially ..... the company stated it expected total revenue in the range of $25 million to $27.5 million for the third quarter.

Company blamed one of its largest customer EK (17% of revenues last quarter went to 0% this quarter---ZILCH) amongst weakness in Europe for the short-fall. This goes back to my point regarding young companies relying on few customers to make or break there quarters, similar to BBND miss earlier. Company did indicate strength in Government vertical which is to be expected in this fiscal year end for government, which is what is carrying NTAP quarter from what I gather. It's funny because just last quarter ISLN was touting its backlog or pipeline as being at all time highs, and this quarter CEO said "we are not going to talk about pipeline.." WOW! did you hear that, he does not want to talk about his all time high pipeline!! and you expect me to believe all is dandy again after this miss?

What are the lessons in all this: understand your investments well and by that I mean who are large customers, lurking competitors and management background/talent. Cool technology does not make for great investment most of the time and competition in techonology is very fierce which makes any technical lead meaningless fast.

There are bunch of companies that have high customer concentration in the tech world and it would be suffice to say those companies might be high fliers like CAVM or NETL but sooner or later they all need to branch out and expand customer base or they end up like BBND or ISLN.

A Big BANG(band) miss with few lessons for us all

WOW! Was all I could say once the headlines scrolled across the newswire. This was a monumental miss, or a Big Bang kinda miss by BigBand Networks (BBND). It does not get uglier then this. BBND expects revenues to be in the range of $35-$39m vs. expectations of $56m. Company gave a list of excuses for the miss (obviously you can enjoy reading the list in the release). The lessons to learn from this miss is that one-trick ponies that compete in this vigorously competitive market are not for faint-hearted, customer concentration issues are rarely a one-quarter issue and at the end of the day customers could care less for their vendors stock performance. BBND had weak results last quarter as well even though they blamed it on lawsuit expenses last time. But with 5 customers accounting for 73% of revenues last quarter, and two accounting for most of that 73% its a precarious situation. BBND has the technology lead at one time but as development of market/deployments has been slower than expected and as competitors catch up the realities of running a business overrule any technological advantage and as always economics wins over "neat"-technology.

I do feel sorry for John Anthony over at Cowen & Co on of Wall Street's Finest as Jeff Matthews likes to call them- three of his most favorite names include BBND (the other two haven't done much for investors either- PLCM and OPTM).

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Adtran's woes probably signals deeper issues in telecom

ADTN officially announced on Friday at 5pm (pacific time that is!- yea I was in the office) that it will fall short of expectations for the September quarter. Nothing wrong with pre-annoucing 4 hours the market closed on a Friday I suppose. Company blamed their legacy business for the shortfall and basically blamed absence of spending typical for Q3 for the shortfall. ADTN is notorious for having "book and ship" business where they typically have very little booked business going into any quarter and that usually means the company has no idea how the quarter will shape up usually. The other notorious company with such luck in telecom is TLAB.

So what do we think this means for telecom, probably nothing more than that T is acting like any large telecom and it really wants to improve its inventory levels. Probably a good thing since with such a large debt balance and with traditional wireline business going no where but down T must start managing its cash flow better. With GOOG upcoming wireless phone service its going to be tough for telecoms to make money in the one area they have protected so far- wireless. As you might have seen in ads for T, the focus is totally on wireless business. You could not imagine T would have offered naked DSL few years back with wireless service but to protect the wireless subscriber base T is pulling all the stops. The question now is not if wireless will be able to save the franchise the question is how long can wireless support legacy before offerings from GOOG or other ad-supported models take over wireless cash flow. The trouble T and VZ have fighting the MSOs only complicates this situation. This probably spells trouble for many suppliers down stream over time as well hence the consolidation in telecom equipment space will continue. I believe investing in the "arms dealers" makes sense to some extent but remember you can only survive arms to the survivors - fewer survivors does no one good.

Also, the bad miss by ADTN probably means other T suppliers will feel some pain also- list includes - TLAB, ADCT, ALU, CIEN, CTV. But doesn't necessarily mean they will miss like ADTN, since ADTN accounted T for 24% of revenues in June quarter. The only other vendor with such large exposure is CIEN with 26% of revenues coming from T in most recent quarter, but CIEN supplies different set of tools for different part of the network for T.

Netlogic satisfies

NETL reported revs and EPS ahead of expectations and guidance was better than expected also. What was a big positive for me was the ability of NETL of to deliver a solid 10% revenue growth without any growth driven from its largest customer- CSCO. There has been plenty of naysayers out there blabbering about how a majority of NETL revenues are dervied from CSCO and how that is a bad thing. I agree there are risks when you have a large portion of revenue from one customer- like PLAY. What I disagree with is the premise that NETL lives or dies with CSCO. NETL delivered a staggering 50% growth sequentially from customers other than CSCO. NETL was also able to deliver strong gross margins even after giving CSCO some price discounts. The reason CSCO sticks with NETL is not because there is a inside connection; CSCO is as entrepreneurial as they come and the reason CSCO is sticking with NETL is because NETL has superior products at price points that make them the only choice. Yea one day IDTI will be able to get few more sockets with its IBM-bought products but that day NETL will be on the next chapter- like the partnership with AMD or BRCM. And we know CSCO keeps trying to make these chips in-house so there is always risk.

CSCO revenues for NETL were down 5% sequentially and it does not mean CSCO is having a bad quarter. CSCO quarter is having some issues at the end but they will pull it out just fine. NETL is not for a faint of heart but if you want a superior technology name with strong IP and customer roster most semis companies would die for then NETL is for you. Yea you have to pay up to own quality name just like QCOM and I am willing to bet NETL continues to perform.

Fasten your seat belt NT shareholders

Mike Zafirovski had a coming out party at CTIA-sort of. The CEO of NT made a rare public appreance at the CTIA conference making some bold statements. Mike wants NT employees to be "boy scouts" who would do the right things. I guess the Finance department is going to be outsourced going forward, since they have not been able to do the right thing for a while now.

Mike wants NT to exit every business where it holds less than 20% market share. In telecom that is a tough task, which most likely will lead to NT exiting bunch of businesses. By some estimates 65% of NT revenues come from businesses where NT has less than 20% market share . I am not a current NT share holder but losing 65% of revenue stream is going to be a one really bumpy ride. Surely, all the investment bankers are drooling over what this means to their bottom lines. The bankers can line their pockets by marrying NT with others so the combined entites can hold greater than 20% market share. Now you know why there are so many sell-siders covering NT- it's the banking fees and we all thought sell side research was "born-again".

I guess NT shareholders are hoping that Mike can do what Jack Welch (Mike was previously employed at GE prior to MOT) accomplished at GE. But GE is a congolomerate in everything from jet engines to electric turbines, NT is a telecom equipment provider. Maybe Mike wants to make the Canadian treasure into a congolomerate? Mike believes he can turn around NT in 3 to 5 years. Sorry but it's a very fast changing industry where customers are gaining more bargaining power with consolidation and competition is heating up with vendors marrying each other. A 3 to 5 year transition plans might work well in McKinsey consulting slides. But given Mike's resolve to turn NT around, it's worth a shot and value players can own the stock it's not what I can park my money in.

Chalk one up on the Win column

EXTR pre-announced a miss today after the close. Company blamed weakness in U.S and Japan for the miss. Like I said few days back, I would stay away from EXTR. The company has been in internal ups and downs and from what I can gather it is not smooth sailing yet. I believe the weakness in U.S. and Japan was due to these internal issues not due to any broad market weakness. FDRY I believe is having a blast in the U.S but Japan remains a issue and also I hear government was tough in opening up the purse as well. Hopefully it works out well for FDRY (meaning U.S. is strong enough to overcome the other issues) given the strong run up the stocks' had otherwise its time to book some profits there also.

The 8K EXTR filed on February 13th with details of severance plan for the executives and certain VPs upon change in control of EXTR still makes me think that the company might just get taken out, yea there are some seriously desperate people looking out there.

Seems like PKTR made the quarter but the issue remains that its in tougher market with old technology so I am still staying away from that one.