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Netpliance quits Web appliance business, slashes jobs

Reporting lower-than-expected earnings, the company cuts 93 jobs, or 38 percent of its work force, and morphs into an infrastructure and managed-services company.

Netpliance, which sold inexpensive appliances for Web surfing, is slashing jobs and changing its business model in the face of greater-than-expected quarterly losses.

Under the changes, the company will effectively stop selling its I-opener appliance. Instead, Netpliance said Friday, it will license the product design to AT&T and others and then assist in providing service.

The Netpliance saga will likely serve as a cautionary tale of the post-PC era. The start-up has been one of the most visible proponents of cheap, stripped-down devices for hooking to the Web. While the idea has beguiled marketing executives, profits have been elusive.

The Austin, Texas-based company said it will morph into an infrastructure and managed-services company. Along with the move, the company said it is cutting 93 jobs, or 38 percent of its work force.

"We've made a big shift in our business model, a shift we believe will bring profits more quickly," chief executive officer John McHale told CNET

McHale said the move was prompted by the investment community's unwillingness to fund or support subsidy-based models. "That was the one and only reason we changed strategies," McHale said.

Netpliance sold its I-opener for as little as $99, expecting to recoup hardware costs over time by selling monthly Internet service.

McHale added that the company had not yet been looking for additional financing but knew it would eventually need more backing under its old plan.

For the quarter that ended Sept. 30, Netpliance lost $41.9 million, or 69 cents per share, on total revenue of $3.8 million. Analysts had been expecting a loss of 46 cents per share, according to First Call/Thomson Financial.

Of the company's $3.8 million in sales, only $230,000 came from sales of new I-openers, with $3.4 million coming from subscription revenue and $195,000 from peripheral sales. Netpliance apparently sold few of its devices after hiking the price and not selling products in August.

As of Sept. 30, Netpliance provided I-opener service to 49,400 subscribers, compared with 44,000 at the close of the second quarter.

Netpliance said it will continue to support the existing I-opener owners but does not plan to take new orders itself for the I-opener after Jan. 31.

Netpliance said it is forming a venture with AT&T's WorldNet service to jointly offer a version of the I-opener, with Netpliance providing infrastructure and helping to manage the service. The $299 units, similar to the I-opener, will go on sale after Thanksgiving on QVC, the television shopping network. Monthly service for the I-opener will be priced at $21.95.

Switching directions will cost the company in the near term. The company said it has scrapped orders with Taiwan's Quanta, the manufacturer of the I-opener, which resulted in a cancellation fee of $6.3 million in the third quarter. The company also said it is "uncertain" whether it will be able to sell any of the 27,000 I-openers it has in inventory.

The company said it expects to save $5.4 million per year from the job cuts and to eliminate the heavy losses it incurred from the heavily subsidized I-opener. However, the company will take a charge of between $2.5 million and $3.5 million in the fourth quarter related to the business shift and job cuts.

On Friday, Netpliance shares closed down 25 cents, or 16 percent, at $1.31. The company has been public for less than a year. It debuted March 20 on Nasdaq, closing that day at $18. It stayed in that range for the rest of March before beginning a steady decline.

By April, it had dipped below $10 and slipped below $5 in May. June and July saw a slight recovery to the $7 to 8 range. By the end of September, however, shares were trading in the $1.50 range.

As part of its new shift, Netpliance created two new business units, and Netpliance Infrastructure Products Group (IPG). aims to host applications and provide services to high-speed Internet service providers. Netpliance IPG will develop infrastructure products for installation in data centers, points-of-presence and residential access devices, the company said.

The company said it has $76.6 million in cash and short-term investments and expects that will be enough to keep it in business for at least the next 12 months even with no revenue or additional financing.

McHale said the company is not currently in a position to project its revenue for the coming months.

Analyst Richard Doherty of Seaford, N.Y.-based Envisioneering said the shift seems to make sense, adding that the company would have been better off to partner with a larger company from the start.

"It's probably the most secure business model they have been able to come up with after all of these months, even though it's very different," Doherty said.

McHale said the Netpliance's new goal is not just to help manage services for I-openers, but also to help other companies set up and maintain high-speed Internet services for other Net appliances and PCs.

"The fact is simplicity is hard to do," McHale said. "We've created a number of key technologies."