'Fallen Angel' Netrix Corp. Tries to Regain Its Wings

'Fallen Angel' Netrix Corp. Tries to Regain Its Wings

By Bob Starzynski
Staff Writer

Netrix Corp. management expects the company to become profitable later this year, ending a downward spiral that began four years ago.

"We are past the low-water mark and are moving in the right direction," said Lynn Chapman, who took charge of the struggling Herndon, Va., company 15 months ago.

Netrix, a developer of voice and data network switches, has suffered from declining revenue and widening losses each of the past four years.

Netrix had been a hot company in a hot market. In 1992, the company was listed by Inc. magazine as one of the fastest-growing companies in the United States. But after several missteps with new product ideas, a year later Inc. rated the company as the worst performer from the previous year's list.

"This is a fallen angel," said Bonnie Wachtel, a Washington stock broker with Wachtel and Co. But Wachtel, who follows Netrix closely, also believes the company is on the rebound.

"They have wiped the slate clean," she said. "They have new shareholders, new management and new products. I expect positive results from here."

The stock price reflects the company's turnaround in progress. From a high of more than $10 a share in June 1996, Netrix's stock steadily fell to 63 cents this past December. Since then, the price has more than quadrupled to close at $2.56 April 2.

Chapman, president and chief executive officer, refers to Netrix's bounce back as a three-pronged process.

Netrix Corp.
Year 1993 1994 1995 1996 1997
Revenue $23.4M $53M $48.9M $43.6M $33.1M
Net loss $7.8M $579,000 $3.8M $6M $8.6M
Source: Netrix Corp.
First, the company had to develop new product lines. That included paring down its offerings from 12 product lines to two, and cutting the staff from 230 to 160.

One remaining product line is the traditional switching equipment the company has long manufactured. The other product line, just developed last fall, provides voice, data and fax transmission capabilities over Internet equipment.

"We had to get down to fighting weight," Chapman said.

Now that this part of the process is complete, Chapman is turning his attention to the second step: finding new customers.

Netrix began shipping its new "voice over" product line March 31. To maximize sales channels, the company is negotiating new distribution and manufacturing partnerships, Chapman said. He would not specify any new partners.

But Chapman did say that government agencies, which account for less than 10 percent of Netrix's sales, will be served exclusively through integration partners and not by Netrix directly.

"We have traditionally sold directly to the user," Chapman said. "Now our products are not as sophisticated, and can be sold by third parties."

In the past, Netrix has had a problem with maintaining an even flow of product sales. The products were expensive and intricate. Even with the less-sophisticated line, prices range from $8,000 to $100,000 per node, or communications hub. Most of the companies to which Netrix sells have needs for at least four nodes. Multinational companies may need several hundred nodes.

Because of the cost of the equipment, purchasers need time to plan and approve such expenses, making for a longer sales cycle.

Lynn Chapman,
head of Netrix Corp.

But Netrix is now selling peripheral products as well as backbone equipment. That means cheaper and quicker sales.

Chapman estimates the "voice over" industry will grow at 50 percent to 100 percent a year. Other players, ranging from industry giants like Cisco Systems of San Jose, Calif., Northern Telecom of Toronto and Motorola of Schaumburg, Ill., to small, hungry up-and-comers like e-Net Inc. in Germantown, Md., are all vying for a piece of the action.

While Chapman doesn't expect Netrix to sustain triple-digit growth, he is still optimistic that his company can at least garner a handsome stake in the market.

"From a marketing point of view, we have moved out of a stodgy market and into markets that expect triple-digit growth," Chapman said. "We should start seeing double-digit growth soon."

That is the third prong: achieving upward financial momentum. If all goes as planned, Netrix will return to profitability in the third or fourth quarter this year, Chapman said.

"Unfortunately, our last profitable year was 1992," he said. "We have been living on cash reserves for too long."

Once Netrix's financial situation matures, the financial community should take note, he said. "Investors are skeptical of us and are taking a wait-and-see attitude."

Wachtel agreed. "[The company] has always been out of favor, but it has also had some strengths," she said. "If this company didn't have a tainted past and was starting from scratch with what it has now, it would have a much higher stock price."

But the past may still haunt other investors.

The company went public on the Nasdaq National Market in 1992 and almost immediately disappointed investors with poor earning and sales figures. In 1996, Charles Stein, then chief executive officer, tried to break out of the rut by entering the remote server market. Chapman refers to that effort as a financial failure, despite the development of "good new technology."

At the end of 1996, the company pulled out of the remote server market and Stein stepped aside, turning over the reins to Chapman. Chapman, who had managed the switching business for Netrix, wanted to focus on fewer products but invest more heavily in those products.

Stein remained on as chairman of the company for another two months, then left altogether.


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