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NAI wrestles with change, channel stuffing

NAI wrestles with change, channel stuffing

Network Associates is maintaining a stiff upper lip in Australia despite its recent US management shakeup and continued Wall Street woes.

The Asia-Pacific subsidiary recently issued a statement reporting it has relocated its regional headquarters from St Leonards to larger premises in North Sydney equipped with training and testing facilities.

However, Network Associates now claims its Asia-Pacific business is the fastest-growing region for the company in terms of revenue and staff numbers. Headcount is up from 19 to more than 300 during the past three years, the company claims.

The assertions follow news the company expects to lose between $US130 million and $140 million for the fourth quarter on revenue that is 25 per cent lower than once predicted, according to preliminary financial results.

For the year, the company expects to report a loss of between $84 million and $94 million. The company saw the biggest shortfall in Sniffer analysis tool sales, with anti-virus software sales meeting expectations.

The revenue shortfall was followed by an executive overhaul at the company's US headquarters which then saw the appointment of George Samenuk as CEO and president last week. Samenuk was most recently CEO and president of Tradeout, a privately held global online exchange for business surplus.

NAI had announced previously that CEO Bill Larson, president Peter Watkins, and CFO Prabhat Goyal were stepping down.

Precipitating the executive exodus was an announcement of a significant revenue shortfall for the fourth quarter. The company attributed its woes to decisions by distributors to dramatically reduce their inventory of NAI products and weak user demand in the fourth quarter.

The company's poor financial results were directly related to internal management problems and do not reflect a softening of the IT security market, industry analysts said.

Chris Christiansen, an analyst at IDC, said Network Associates' recent problems involved its US business partners. "It looks like the channel got stuffed, and the channel couldn't move product," he said. "As a result, the channel sent the product back. It's a channel management issue."

To tackle problems with its distributors, NAI plans to transition its revenue recognition from a sell-in to a sell-through model. The company has elected not to replenish distributor sales made during the fourth quarter and to take inventory returns as requested by distributors. But these moves may have come too late to stave off a lawsuit filed last week on behalf of shareholders that accuses Network Associates of inflating its stock price by improperly booking its revenue.

Network Associates' channel management problems are not new, said Eric Hemmendinger, research director for information security at Aberdeen Group.

The company had similar "channel-stuffing" problems in the first quarter of 2000, he said. Although the company now is not struggling to bring products to market, employee turnover could potentially cause problems that would affect enterprise users, he said. "[Problems with employee retention] can impact their ability to deliver new products and support customers," Hemmendinger said.

The first goals to getting the company back on track will be to focus on "blue chip" customers and to expand market share by honing a "maniacal focus" on customers, expanding growth in Europe and Asia, and closing sales on its products, Samenuk said.

"The No. 1 priority here is rebuilding our credibility," Samenuk said.


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