Shiva's Hired a New President, but the Pain of Destruction Lingers

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By Kevin Petrie
Staff Reporter

You never get a second chance to make a first impression.

So it is with

Shiva

(SHVA)

, a supplier of network hardware that misses the glory days of yesteryear. From its market debut in November 1994 until June 1996, Shiva's stock swelled more than 400%. Quarterly earnings tripled. Investors couldn't get enough of this cleverly named company that provided hardware connecting office computers with executives on the go.

But Shiva ran smack into a networking revolution last year. The company found its core products getting crushed by bigger, more nimble foes that offered similar network hook-ups at a fraction of the cost. Competition from

U.S. Robotics

(USRX)

began to bite -- its larger, simpler products sold for lower prices, and Shiva's sales dwindled as a result in late 1996 and early this year. What had been a dominating position in 1995 had become a noose by 1997.

The damage from the networking snafu is severe. After a 74% skid this year, Shiva's shares look terrible even next to its battered brethren in the networking community. Earnings turned sharply south in the last two quarters, and a

First Call

survey predicts that earnings this calendar year will drop 80% from 1996.

Shiva executives, while cautious publicly, want another chance to shine. Thursday evening a brand new president and chief operating officer, James Zucco, jetted to the company's Bedford, Mass., headquarters and spoke to employees there. Zucco (no relation to Danny) made his name as chief of network software at

Lucent

(LU)

. In one year Zucco will replace Frank Ingari as CEO. Ingari expects to remain chairman.

But the "turnaround" concept has not exactly gained attention on Wall Street. Shiva's crushing decline bruised many portfolios, and managers are not quick to forgive the destruction. Queries to numerous mutual funds, which according to

CDA/Spectrum

owned the stock as recently as December, went unanswered. Among the growth portfolios scarred by Shiva:

T. Rowe Price Science and Technology

(PRSCX) - Get Report

and

Putnam New Opportunities

(PNOPX) - Get Report

. (Neither company will comment on individual equities.) One trader says the story "is not getting any better. We wouldn't touch it with a 10-foot pole."

"It just seemed like things were going from bad to worse, in terms of competition," adds Jack Granahan, a principal at

Granahan Investment Management

. He confirmed his company sold its entire Shiva stake, and said he has ignored the company since.

Shiva's customers are migrating to higher-end equipment that larger vendors build more cheaply. For nine months the company has struggled to pierce that market, which is largely dominated by U.S. Robotics and

Ascend

(ASND) - Get Report

. But with its old business failing fast, Shiva has swiftly moved from highflier to essentially a start-up gamble for investors.

In its favor are a respected brand name, a strong technology and a tight relationship with giant supplier

Northern Telecom

(NT)

. But the stock trades at 75 times trailing earnings, and investors seem little inclined to bet big on a name that's given them such grief.

"We are starting from zero" with the new product push, says Larry Whitman, Shiva's vice president and corporate controller. "We are very conservative with analysts right now, based on what's happened in the last six months."

The old business shrank while the new one stalled. In the first quarter ended March 29, distributors and resellers had troubles moving Shiva's products. Shiva had to cut prices to retain market share, then pay the distributors for the products piling up in its warehouses. That's the challenge of being a small shop --

Intel

(INTC) - Get Report

, a consummate price-slasher, has not encountered such inventory bottlenecks, according to officials there.

To ease the pressure of shrinking profits, Shiva has recoiled somewhat from manufacturing. Its partner Nortel now builds Shiva's products itself, and pays Shiva a handsome royalty -- essentially, a 100% profit margin. Nortel also bankrolls part of Shiva's research and development effort. Nortel is a big deal -- before their alliance was expanded in March, it generated a full 10% of the smaller partner's revenue.

Whitman says investors should "stay tuned." Shiva expects to make product announcements at the

NetWorld Interop

trade show in Las Vegas next week. But most investors seem to have shut the door, and luring them back won't be easy.