Commentary: Enterasys' many challenges

A management shake-up, likely disappointing financial results and restructuring decisions make the stability of Enterasys Networks uncertain.

2 min read
By Lawrence Orans, Mark Fabbi and Neil Rickard, Gartner Analysts

A management shake-up, likely disappointing financial results and restructuring decisions make the stability of Enterasys Networks uncertain.

See news story:
Enterasys to cut jobs in comeback bid
Although the Securities and Exchange Commission investigation will likely continue to cloud the future of Enterasys for some time, the company's viability will become more clear when financial details are released, giving audited financial results for fiscal 2001, final results for first-quarter 2002 as well as guidance for its ongoing business.

The exit of high-profile executives sparked concern about the depth and breadth of Enterasys' problems. Previous management had been credited with Enterasys' success through difficult financial times. Those results, however, must now be seriously questioned. Enterasys says that its new chief executive, William K. O'Brien, is strictly an interim CEO. The company says it will seek a long-term leader once the interim management team has stabilized the company's situation.

Enterasys' financial issues are equally challenging. The company expects a sequential drop in quarterly revenue from 22 percent to 24 percent, representing a more than 50 percent drop from calendar-year third-quarter revenue. That steep decline has caused a cash decrease in the first quarter of 2002 of $70 million, a drop that represents 27 percent of its current cash position of $260 million (as of March 30, 2002). To keep its cash level constant, Enterasys transferred $70 million from its Aprisma Management Technologies unit, which it continues to report as discontinued operations.

Gartner considers the cash burn rate to be alarming. Enterasys' action to trim its work force and restructure is essential to conserve cash. Initially, the cuts won't affect major product areas, but the impact of cuts on operations will likely be significant--especially if revenue continues to fall.

Gartner believes that enterprises considering a strategic commitment to Enterasys should delay major product purchases until Enterasys is able to make firm statements about past and ongoing financial results, and has stabilized revenue. At that time, the viability of Enterasys will be more clear.

Customers should seek immediate clarification on the products and services to be affected by Enterasys' restructuring actions. If assured, they can continue to make tactical purchases. However, customers should prepare contingency exit plans to prepare for the possibility of a worst-case outcome from these events.

(For related commentary on Enterasys, see gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.