Enterasys' Woes

During the past two months, partners have seen the ouster of Enterasys' top executives amid revenue shortfalls, layoffs, accounting problems and a Securities and Exchange Commission investigation.

"It's scary from a partner perspective to see so much happen so quickly to one of your key vendors," said Frank Sette, COO of Desktop Products, Emeryville, Calif. "I'm most concerned that with the management change there will be a change in strategy away from the channel."

Enterasys last week laid off 30 percent of its staff after projecting a 30 percent sequential revenue drop in its first quarter. The revenue shortfall prompted the removal of Chairman, President and CEO Henry Fiallo, as well as the company's vice chairman, J.E. Riddle, and Jerry Shanahan, the COO. William O'Brien was named interim CEO, and Yuda Doron was named president.

Enterasys said it would provide an update of the SEC probe launched in February as soon as possible. The company also is conducting an internal investigation of its accounting practices after discovering irregularities in its Asia-Pacific unit. That investigation has been expanded to Enterasys' remaining geographical units.

Meanwhile, because of the internal review, the company has yet to report fourth-quarter earnings.

The company said it expects revenue for the first quarter ended March 30 to come in between $110 million and $120 million, down dramatically from an estimated $145 million to $155 million for the fourth quarter ended Dec. 29. The company lowered its estimate due to revenue recognition issues in the Asia-Pacific region and an analysis of revenue recognition in its remaining regions. Economic conditions and the SEC investigation also contributed to the revenue decline, according to the company.

Marie Graziano, president of Computer Consulting Services, Carrollton, Texas, said her company recently signed on as an Enterasys partner and now she is worried. "I'm concerned about this, but hopeful," Graziano said. "They claim they will remain channel-focused. I hope that's true."

Newly appointed president Doron said Enterasys will remain a channel-focused company.

Solution providers also are facing worried clients, especially after IT adviser Gartner last week urged enterprise buyers to delay any Enterasys purchases until the company's financial problems are resolved.

"I think what Gartner did was irresponsible," said Robert Amirian, president of Spanning Tree Technologies, Glendale, Calif. "All of our major accounts have called us, and we have reassured them. With Enterasys, we are talking about world-class engineering and products. The worst thing that could happen is that the company could be sold. But the technology will remain."

Amir Sohrabi, executive vice president of MSPX, an Arlington, Va.-based solution provider, said the new management needs to let people know what's next

for the company. "We need to find out what they are going to do," he said. "It's very important that they continue to invest in new product development."

Enterasys late last week also closed its router R and D facility in Salt Lake City as part of its cost-cutting program, a spokesman confirmed. The cuts will not slow development, as the company plans to consolidate its router development team in its Toronto facility, he said.