When Proteon Inc projected losses for the fourth quarter to December 31 just before Christmas, not a few shareholders must have wondered when they were going to hear good news from the Westborough, Massachusetts headquartered company, and the news that IBM Corp has ridden to the rescue with a joint development agreement for remote internetworking products must have been very welcome (CI No 2,333). It’s unlikely that 1993 will be fondly remembered at Proteon. April saw the company post first quarter losses of $2.7m (including a $1.7m restructuring charge), and the sacking of 15% of the workforce – a result of increasing the sub-contracting of its manufacturing operations, according to general manager Alan Swan. The company was then split into two divisions, one for adaptor boards and wiring centres, one for intelligent hub systems, in a move to streamline operations and improve marketing capabilities. Next was the exit of then president and chief executive Patrick Courtin in July, who was replaced by Elliot Honan as acting chief executive until a replacement was found. Patrick was fundamentally an engineer through and through, said Swan, who continued that he did not have 100% of the skill set for running the business as a marketing and sales organisation. The rest of the year saw a second quarter loss of $1.2m, and third quarter net loss of $1.8m, the latter against profits last time of $1.9m. To end a perfect year, newly appointed chief executive Bruce Bergman, who joined the company from Xylogics Inc in early December, warned there would be a significant loss for the fourth quarter – probably in the range of 55 to 70 cents per share. This prompted New York-based Montgomery Securities analyst Richard Kimball to revise 1993 estimates to a loss of $1.04 per share, down from a loss of $0.55. The dilemma facing Proteon is that it seems unable to break free of its troubles, despite having no obvious flaws in its product line or strategy: its multiprotocol routers are technically equivalent to those from rivals Cisco Systems Inc and Wellfleet Communications Corp, and its Token Ring adaptors are competitive in price and specifications. Tactically, fourth quarter losses can be explained by write-downs of recently outdated adaptor board inventories, and a resultant decision to reduce end-of-year sell-in to its distributors, but strategically the problem still seems to lie with sales and marketing, Proteon’s moves to address this failing notwithstanding.
Selling the company
Bergman admitted as much in December, when he said that recent discussions with Proteon’s sales management and channel partners indicated that revenue was showing weakness in major product lines: Clearly this sales weakness must be effectively addressed, he added. Analyst Kimball agrees, acknowledging that Proteon has good technology, but observing that it is having trouble generating top-line business and that its visibility is not too clear. Possible marketing errors include too great a reliance on distributors for its router products, allowing Cisco’s direct sales staff to build up face-to-face relationships with customers and corner the upgrade market; and a failure in the adaptor board market to foresee the shift to direct sales of personal computers with in-built network boards, enabling vendors like IBM and Madge NV to take market share. The company has now hired Lazard Freres as financial advisor to review plans to return Proteon to profitability, a move welcomed by Kimball. According to Bergman, Lazard will explore alternatives to increase shareholder value, but whether or not this is a coded reference to selling the company remains to be seen. Arguably, it would make sense for Proteon to sell off to a stronger company with the resources to support a comprehensive recovery plan. But for now the company says that it cannot yet provide exact timing or details of what steps may be taken. It expects to report and discuss its fourth quarter results in mid-February.
