An Ancor Encore and More Excuses at CKE Restaurants

For more Herb, see today's first installment of Herb on TheStreet.

Ancor's away, cont'd (the Hostile React-O-Meter spins outta control): That hootin' and hollerin' you heard Friday was shareholders of fiber-channel switch maker Ancor Communications (ANCR) responding to an item here that suggested its big snare of a customer, Sun Microsystems (SUNW), won't be announcing a product with Ancor's switch this quarter, as expected. Instead, Sun said the announcement is likely to come in the first quarter, so what's the big deal?

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The big deal is what Ancor itself disclosed in a 10-Q last July: As part of the Sun deal, Sun has received warrants to purchase Ancor stock. What investors either have forgotten or are ignoring is that the conversion of those warrants into Ancor stock, which begins after sales to Sun top $10 million, will be viewed for accounting purposes as a discount to Sun. The higher Ancor's stock, the bigger the discount. And, according to Ancor itself, "Depending on the company's stock price, this sales discount could cause the company to report a negative gross margin on sales to Sun."

Put another way: If Ancor's stock remains high, Ancor could actually lose money on its Sun biz.

Maybe that's what Brocade Communications (BRCD) CEO Greg Reyes (an Ancor competitor) was talking about when he was quoted here back in August: "No healthy company with competitive products would agree to a set of terms like those."

P.S.: Ancor enthusiasts are trying to say that the lack of income from Sun this quarter isn't really a change from expectations because Sun is receiving test or "beta" units. However, any revenue generated by a beta unit shouldn't be counted as real revenue, for forecasting purposes, because if the tests don't go as well as planned the products will generate no more revenue from a given customer -- in this case Sun.

Indeed, in discussions with a Sun spokeswoman, my assistant, Mark Martinez, mentioned that he knew Sun was a stickler for making sure that nothing goes out the door until Sun knows it works. The spokeswoman wholeheartedly agreed, which is why, she said, the product was still in beta.

In other words, don't count your income until your shipments have hatched.

Chopped beef: An item here last June questioned whether CKE Restaurants (CKR), which had a history of blaming everything but fundamentals for its problems, would soon run out of excuses. Apparently not. On Thursday the company blamed everything from the weather to the millennium for its latest round of problems. The stock's a shell of what it was when it first became a regular in this column, back when one concern was that CEO Bill Foley was CEO of (and taking big salaries from) two distinctly different companies: CKE and Fidelity National Financial (FNF), a mortgage title insurance company. (The message was that running a fast-food company is more than a full-time job; beware of anybody who treats it as a part-time job.)

Moral, beyond the management morass: Don't trust a company that blames everything and everybody but itself for its troubles.

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