- The Washington Times - Monday, October 30, 2000

Visual Networks Inc. is now rebuilding after poor execution of an acquisition set it back more than a year in terms of financials, analysts say.

The Rockville software company designs, makes and sells technology that measures the performance of data networks and services like the Internet. The software also helps businesses with troubleshooting.

Founded in 1993, the company went public in February 1998, and has since made a handful of acquisitions that complement its product. Last year, it reached profitability, making $3.55 million compared to a net loss of $6.46 million the year before.

In February, the company announced it was acquiring Avesta Technologies Inc., for $328.5 million in stock. That sent its stock skyrocketing, reaching a 52-week high of $87.50 in late March.

The deal was complete in May, but things were not going smoothly.

The stock, which most analysts rate as neutral or hold, closed at $3.38 Friday.

“Within six or seven weeks it started to become clear that we were not going about things in the best way and that we were not going to meet [quarterly earnings] expectations,” said Scott Stouffer, president and chief executive officer.

But the result, he added, is that now “we take a new view of what is realistic in terms of revenue generations. And I kind of look at it as if from this point forward we are growing again.”

Visual Networks has now shed some of the business it gained through Avesta. It also is cutting its staff by 140 workers almost a third of the total as it closes two research and development centers in Ottawa and California.

The company is also strengthening its management team. It recently hired a new head of sales and marketing, and it plans to find a new president to run daily operations.

“Finally a clearly articulated management plan to focus product portfolio and consolidate operations,” wrote Mark Fernandes, an analyst with Merryll Lynch Global Securities in San Francisco, in a recent report.

Mr. Fernandes estimates that it will take Visual Networks two or three quarters to rebuild.

Another analyst, Richard Sherman from Janney Montgomery Scott LLC in Philadelphia, also is optimistic.

“This is just a bad acquisition by a good company, and now they have to piece it back together,” he said. “But it’s all about management, and I believe these guys are going to make it.”

Visual Networks’ core product is Visual UpTime, which tells businesses how efficient their telephone networks are. It gained its second product, Visual IP InSight, by acquiring Inverse Network Technologies for $177 million a year ago.

Through Avesta, Visual Networks gained two troubleshooting products. But Avesta was selling its services directly to businesses, while Visual Networks works with phone companies, Internet providers and large corporations.

Dealing with the two different markets was difficult for Visual Network’s management. Today the company is concentrating on its original clients, including AT&T, MCI WorldCom and Sprint.

For its third quarter ended Sept. 30 Visual Networks reported revenues fell 46 percent to $14.6 million from $27 million for the like quarter last year. During the same time net loss more than doubled by to $11.2 million (35 cents per diluted share) from $5 million (18 cents).

Diluted earnings per share reflect options, warrants and other securities convertible into common stock.

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