Critical Path's Struggles ContinueCritical Path's Struggles Continue

The messaging market may be one of the few booming areas of the economy, but once-high-flying dot-com Critical Path Inc., best known as a provider of hosted messaging services for businesses, continues to have a tough time finding its niche. The company, which at its peak traded at $150 a share before spiraling in the wake of an accounting scandal, has significantly cut costs, but year-end earnings indicate that revenue is falling faster than those cuts. The company also is forecasting that revenue will remain flat, and now it's having to switch CFOs.

During a conference call with analysts on Wednesday, outgoing CFO Laureen DeBuono said the company would continue to reduce its staff, with more than 150 jobs to be cut in the first half of 2003, resulting in a workforce of 420. But while the collapse of WorldCom, a key customer, was a big part of the revenue drop-off, DeBuono expects a partnership with Hewlett-Packard to develop a new carrier-grade E-mail offering to fuel revenue growth in the coming years. The company, whose stock price has been hovering around the 50-cent mark, also is working with Nasdaq to ensure that it's not delisted, either by getting shareholder approval for a reverse stock split, or by getting an extension to meet listing requirements.

Amid all of this uncertainty, DeBuono is stepping down 18 months after she first expressed a desire to pursue other opportunities. She's being replaced by Paul Bartlett, former president of Hall Kinion and Associates. Bartlett's first order of business is to attempt to lead the company to profitability, but there's a long way to go. "Our challenge has been to get the basics working in this company," says CEO William McGlashan.

Messaging analyst Michael Osterman, principal of Osterman Research, says the hosted messaging model is still a valid one, but that Critical Path has its work cut out trying to overcome customer concerns about security, the cost of hosted services, and the vendor's financial viability. "As an IT manager, the last thing you want is to wake up on a Monday morning to find out that your messaging vendor has gone belly up and that you can't get your E-mail," Osterman says. That's why things like the partnership with HP are especially important to Critical Path's future, he adds, noting that "any partnership you can have with a stable, well-trusted company is going to help."

For the year ended Dec. 31, Critical Path reported a loss of $131.8 million, or $1.69 a share, on revenue of $87.1 million. That compares with a loss of $79.8 million, or $1.08 per share, on revenue of $104.2 million a year ago. One encouraging sign: Licensing revenue for software that helps companies do things such as extend messaging outside their firewalls or handle identity management was up 14% over 2001, to $35.2 million.