Cabletron inks resale deal with Compaq

The struggling networking firm seals a key resale deal with Compaq that is expected to generate at least $300 million a year in revenue.

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Struggling networking firm Cabletron Systems today sealed a key resale deal with Compaq that is expected to generate at least $300 million a year in revenue.

Analysts said the new agreement is vital to Cabletron's financial health as the revenue expectations represent more than 20 percent of the firm's $1.4 billion in annual sales.

"This is very important for Cabletron, given that right now they lost credibility with a lot of investors and some customers with their management turmoil and disappointing financial results," said Dave Passmore, of consulting firm NetReference. "Compaq is obviously one of the best channels to have."

Shares in Cabletron have fallen after the company warned second-quarter revenue would be flat with the previous quarter. Takeover rumors as well as increased competition from Cisco Systems and Lucent Technologies has also affected Cabletron's stock price.

And earlier this month, Piyush Patel was elected as Cabletron's new chief executive following the resignation of cofounder Craig Benson.

Today's pact is actually a revised agreement that stems from a contract Cabletron signed with Digital Equipment in 1997. Digital sold its networking equipment unit to Cabletron in late 1997 with the requirement that Digital would sell more than $1 billion worth of Cabletron technology over the next three years.

Compaq inherited the deal last year when it purchased Digital. Compaq and Cabletron had worked under an interim deal until today's revised agreement, which executives say has no end date unless one of the companies wants to end the partnership.

Compaq will resell Cabletron's products under the Compaq brand name, executives said. "This dramatically expands our exposure to the Global 1000 companies," said Trent Waterhouse, Cabletron's senior architect. "It gives us a much stronger reach internationally, brand awareness, and helps us sell more products."

Under the deal, Compaq has access to Cabletron's family of broadband access, wireless, and Spectrum network management software in addition to switches and routers, Waterhouse said.

To better predict revenue from the partnership, the companies reworked the agreement to best take advantage of closing deals, Waterhouse said.

"In the past, at the end of our quarter, we would come to Compaq and ask for a big deal [yet] it was the beginning of Compaq's quarter when they had the least demand," he said. "Now we're shifting it to the end of Compaq's quarter and the beginning of our quarter. It's a lot more predictable."

Such a restructuring will allow for a more regular payment stream, said analyst Mike Wolf, of Cahners In-Stat Group.

Cabletron does not have an exclusive deal with Compaq, which has partnerships with Nortel Networks, Cisco Systems, and 3Com. But Compaq executives said today that Cabletron is its "preferred" networking vendor.