Enterasys Networks is betting the business on its new "Secure

Networks" strategy as it attempts to put a troubled past behind

it and move back into growth.

The data networking company supplies Global 2000 companies

with multilayer switches, core routers, WAN routers, wireless

LANs, network management, and intrusion defence systems (IDS).

It was born out of Cabletron Systems in March 2000, but has spent

the last few years dealing with a US Securities and Exchange

Commission probe into accounting irregularities. It has also

sacked managers and staff and embarked on cost-cutting

programmes (see box).

Even so, sales are dwindling and the company has reported losses

three years in a row. However, it recently indicated that it should

become profitable by the second half of this year. Given its track

record, why should Enterasys succeed in pulling itself around?

Challenging timesMark Aslett, Enterasys's president, who joined in April 2003, says

the answer lies in its Secure Networks initiative, which kicked off

at the start of this year. "The company has gone through some

challenging times over the last few

years, but [chief executive

William] O'Brien and myself

have made tremendous progress

in turning it around using a

business strategy to identify

and clarify opportunities," he

says.

Enterasys may have regrouped

around its new scheme, but the

move came too late to affect the

firm's first quarter financial

results.

Aslett claims "The Secure Networks strategy gives us the ability

to differentiate ourselves and grow, moving forward. We're really in

a phase now where we have a definite strategy and are in execution

mode, so it should start impacting on our financials."

Aslett says the firm is on track to achieve its goals of

profitability and a break-even cash flow by the second half of this

year. "And if the economy starts to recover, and it appears to be

doing so, our Secure Networks strategy will lead to growth."

Bloated costsWilliam Schaff, chief investment officer at Bay Isle Financial, a

California asset management firm, is not so sure. In a recent

column for Information Week, he wrote that, despite its attempts

at cutting costs, Enterasys still has a bloated cost structure and

needs to reduce costs further. He also believes that it could take a

while for product sales to start growing again. Bottom line? He

advises against investing in the vendor for the time being.

But Aslett reckons they've done the required pruning. "We've

shown as a management team that we're very focused and will take

costs out where appropriate, as we did due to the shortfall in Q1.

With our Secure Networks strategy, we've realigned the business

entirely to generate pretty significant savings and efficiencies, and

we don't foresee the need for further cost reductions."

So what is this new Secure Networks initiative all about and why

should it make a difference?

Convergence rules"The two industries of data networking and security are rapidly

converging because, over the last three years, various threats such

as viruses and worms have forced companies to look at the

network as a whole and at the way in which networks have become

the weakest link in the IT chain," Aslett says.

This security problem has been compounded because in the past

organisations tended to see it as "an after-thought and bolted on".

Enterasys' strategy and ongoing focus is to embed security

technology in the data networking infrastructure. "We think we're

Mark Aslett: turning tosecurity

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Locked, cocked and ready to rockCath Everett

Enterasys, the data networking company that emerged from Cabletron three years ago, is betting embeddedsecurity will rescue its fortunes.

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in a leading position to do that. Analysts are saying that we're

probably 18 to 24 months ahead of other data networking

companies and 12 to 18 months ahead of Cisco in technology

terms," Aslett says.

Cisco's lateJon Collins, a senior analyst at Quocirca, a UK-based business

analysis firm, agrees that Cisco, with 2003 profits of $3.6 billion

from sales of $18.8 billion versus Enterasys's losses of $113 million

on sales of $414 million, "has come late to the party". "Enterasys,

in an older guise, has had the idea of policy-based management for

a long time, about five years," he says.

But while he believes that choosing to differentiate the

company on this concept "is not a bad idea", he is not convinced

that the market will latch on to it. "Policy-based security

management is a cracking concept and is where people should be

going, but it's not necessarily where they want to go now. They're

too busy solving tactical problems. Enterasys is presenting a

strategic view, where they have to think in advance about what

they want. Most companies are just not there yet," Collins

explains.

"Whether Enterasys will gain traction and actually convince the

buying masses to funnel security budgets into its pockets is really

the question," he adds. This is because the firm has offered

products based on Secure Network technology for some time, even

if they were not always identified as such.

Aslett has no doubts that the company is on the right track. "If

you look at the next wave of purchasing criteria, it's clear that

simply selling on the basis of cost-effective, high capability

connectivity, as in the past, is no longer viable," he says.

He adds customers now want to ensure business continuity and

always-on access to their applications. This means that embedding

security into the network infrastructure "is going to be the critical

element going forward".

Aslett reckons the fact that Enterasys's strategy has been based

on embedded security since 1995 is a positive aspect for the

company. This is because it has provided the firm with "a head

start over the rest of the market".

Head start"We were ahead of the market's requirements before, but now we

think the capabilities in our products and solutions are aligned

very nicely with its needs. Rather than be seen as just another data

networking player, it's crucial to differentiate ourselves in terms of

security. Hence the focus on the relaunch because security is the

future of networking," he says.

Moreover, Aslett says that because Enterasys is one of the few

companies capable of delivering real embedded network security

offerings now "rather than on slideware", it can charge a premium

for its Secure Network products.

But his ambitions don't stop at simply selling into his existing

installed base. "As the industry moves from connectivity to secure

connectivity, we see our opportunity being to take market share

from rivals that don't have the capability to embed security in their

products," he says.

Enterasys plans to do this with the help of a new branding and

marketing campaign. In January it not only came up with new

corporate colours, but also introduced a new corporate logo and

the tag line Networks that Know.

The vendor set up a new Secure Networks unit comprising "tens

of people" in engineering, sales and marketing and appointed

Cynthia Gallant, a veteran of Digital Equipment, Vmark Software

Enterasys' troubled pastEnterasys started life in its present form four years ago when itemerged from Cabletron Systems, a data networking companythat was going through difficulties. In February 2000, Cabletronspun its assets into four operating subsidiaries, including Enterasys,but by August 2001, Cabletron had reversed itself into Enterasysand changed its name.

Only six months later Enterasys found itself subject to anaccounting probe by the US Securities and Exchange Commission.By April 2002 its chief executive, chief operating officer andexecutive vice president f marketing were fired. This led to BillO'Brien, a former PricewaterhouseCoopers' managing partner,stepping in as CEO. At the same time, the firm axed 30% of itsworkforce to bring costs into line with declining revenues.

Although the SEC investigation and inevitable class action lawsuitshave now been settled, Enterasys has so far failed to bounce backfinancially. For its first fiscal quarter, which ended on 3 April,2004, the supplier saw revenues fall by 16.5% to $87.2 milliondue to "a decline in service revenue, deal-specific pricing pressure,delays in various government budget cycles and sales executionissues that led us to make leadership changes in the salesorganisation," according to O'Brien.

After only six months in the job, Cosmo Santullo, executive VP ofworldwide sales and service, was replaced by Michael Rivers.Enterasys has since added three more sales VPs to its managementto boost the team.

But the vendor's net loss widened during the quarter to $35.7million or $0.16 per share from $8.9 million or $0.04 per share inthe year ago period. The increased loss came after charges of$19.7 million, including a $4.5 million restructuring charge relatedto closing offices and making 200 staff, 14% per cent of its totalheadcount, redundant. This came on top of job cuts of 405 infiscal 2003, which cost $14.7 million.

Mark Aslett, Enterasys' president, says the moves are part of acompany-wide cost reduction programme. The goal is to slashannual costs by an aggregate of $28 million to bring them moreinto line with sales, and to achieve profitability and a breakevencash flow by the second half of this year.

"Security is the future ofnetworking."

and EMC, to head it. After redundancies, the supplier employs

about 1,000 or so staff, down from 1,400 at the end of 2003.

EvangelistsSecure Networks team members are to be "evangelists to people

internally and externally" about the initiative and to execute the

strategy, "plotting the course and ensuring that we get traction for

our new products". Aslett says with respect to the new team

"There's a seamless end-to-end process to bring about consistency

of approach and improve time to market."

That's not all, he says. Management is to invest 20% to 25% of

each quarter's revenues in research and development. This is

"significantly higher than some of our peers". This is because it

"sees a significant opportunity to innovate and take market share

with our unique solutions".

The extra spending is already having an effect. Enterasys

launched more new products in fiscal 2003 than in the previous

three years combined, and by the middle of this year expects to

have "refreshed our end-to-end product portfolio to make it the

most up-to-date on the market".

The supplier is also investing heavily in sales and marketing "to

take advantage of a recovering economy and to bring our new

Secure Networks products to market". The target markets are

verticals such as financial services, government and healthcare that

"will generate a significant return in the longer term".

Nevertheless, Quocirca's Collins remains unconvinced. "It's

more about how the company does things than what it does. It's all

about partnerships and doing proper responsive marketing to

understand what is causing customers' problems, so that the

company can work with partners to solve them," he says.

Partnerships paramountWhile he acknowledges that Enterasys has already put several

partnerships in place, it has not gone far enough, in his opinion.

He feels it has also concentrated its efforts at the technical

infrastructure level rather than broadening out to address

troublesome areas such as application security.

"Enterasys needs to get itself into a position where customers

don't have to decide whether they want to work with it or not, they

just do it because its products are part of an overall solution," he

says. "With partnerships, the whole is greater than the sum of the

parts in providing a service."

Aslett is aware of the issue. He notes that partnerships with

players such as IBM, Siemens and EDS currently account for

between only 10% and 15% of revenues, but deals "with systems

integrators will become increasingly important", although he

declines to quantify targets.

Collins believes that Enterasys faces "a huge challenge" but says

it has a window of opportunity in which to achieve its goals. This

will last just as long as the compliance bandwagon and its related

security issues continue to remain top of the corporate agenda.

"Enterasys is trying to go in the right direction and it's making

the first steps towards doing that, but whether it'll end up in the

right place is unclear at this point," he concludes.

Cath Everett is an IT and business journalist who writes for titles

that include: Computing, Computer Weekly, MIS, Financial

Director, Red Herring, and IT Consultant.

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Enterasys: what, where, who,and how much?

What it does designs routers and switches for corporate networks, supplies network management and security software, and intrusion defence systems

HQ Andover, Massachusetts

CEO Bill O’Brien

Sales 2003 $414.5m

Profit or (loss) 2003 ($112.7m)

Market capitalization,5 September 2004 $419m

Number of employees 1,400in 2003

Top competitor Cisco Systems

… and Cisco’s sales, 2004 $22bn

"It's more about how thecompany does things thanwhat it does."

Winding into theenterpise