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Network Engines revs hopes on new Sierra server

Times are tough for the maker of super-thin servers, but the company is banking on a new model to spur a recovery.

Times are tough for Network Engines, a maker of super-thin servers, but the company is banking on a new model to spur a recovery.

Network Engines, which pioneered the now-hot market of two-processor servers just 1.75 inches thick, is introducing on Wednesday its second-generation product, the WebEngine Sierra. The product comes with advanced cooling and management features that CEO Larry Genovesi asserts will put Network Engines ahead of competitors.

And the company, whose products are used chiefly to deliver Web pages and handle other Internet tasks, could use some help.

For one, sales have slowed. Customers have been delaying orders amid the economic slowdown, Genovesi said. The Canton, Mass.-based company had to write off $15 million worth of servers that it was unable to sell in the last quarter of 2000, partly because customers were awaiting the new Sierra machine, the company said in a Securities and Exchange Commission filing.

Worse, an expected recovery of the high-tech economy in the second half of 2001 doesn't look likely, Genovesi said.

Perhaps most serious, Network Engines faces competition from major server companies with thin, rack-mountable servers. IBM and VA Linux Systems, which sold Network Engines' servers under their own labels, now have comparable products of their own. Hewlett-Packard, Dell Computer and Compaq Computer all have their own products as well.

"2000 was the year of the rack. Everyone jumped in at some point," IDC analyst John Humphreys said. "It's going to remain competitive."

The stock has been hit by these changes. In Network Engines' initial public offering in July, the company raised $117 million with the stock selling at $17. In the months afterward, it rose as high as $48.50 but has sunk to $1.81 as of Tuesday's market close.

WebEngine Sierra
server Genovesi acknowledged that letting IBM and others use his company's technology caused problems. "We taught them how to do 1U servers," he said, referring to the 1.75-inch thickness used when measuring servers bolted into racks by the dozen.

Network Engines is also suffering from its competitors' tolerance for low-profit margins, he added. "Some of them are hell-bent on destroying the margins in the server business," he said. "They're destroying the ability for the entire market to innovate."

Although Compaq has resisted price cuts, IBM and Dell have not, Genovesi said. A deep price cut by IBM last week forced Network Engines to revise the pricing for the new Sierra at the last minute.

But the company has high hopes for Sierra, which Network Engines said has big improvements for those stacking up servers in data centers. The new system is designed to match the company's marketing shift from early adopters buying the latest thing to more conservative corporate clients.

The Sierra features a novel "heat pipe" that transfers heat from the chips to cooling fins. Because each fin is cooled by three fans, the failure of one fan won't cripple the system.

The cooling system allows the use of two Pentium III CPUs running at 1GHz, said marketing director Rick Friedman. It is also designed to accommodate faster Pentiums of the current generation and upcoming Intel models code-named Tualatin, he said.

"I think Network Engines has done a really good job of identifying the needs of the data center, in particular the need to remove heat from the rack-dense server," IDC's Humphreys said. The heat pipe technology is "unique," he added.

Another Sierra feature is the "CM bus," a system that lets administrators control the servers remotely. With it, administrators can restart servers, monitor their performance, and even wipe the hard disk and reinstall software.

And using supporting chips from ServerWorks, Sierra has two 64-bit, 66MHz PCI slots--the fastest speeds available.

Pricing for WebEngine Sierra begins at $3,495 for a single 800MHz Intel Pentium III processor, 9GB hard drive and 128MB RAM; and goes up to $6,735 for dual Pentuim III 1GHz processors, two 18GB hard drives and 1GB RAM.

The features are good, but getting the attention of big businesses could be tough for the smaller Network Engines, Humphreys said. The corporate customer is "risk-averse. It needs to be convinced why it's going to move away from the traditional server vendors."