Retix moves into hot new niche: network for computer networks.

Linking computer networks together has become one of today's hottest niche markets for developers of computer products -- not to mention impressing Wall Street. And that has prompted network developer Retix to schedule a new-product launch this fall to compete with an industry leader's high-end product line in that niche.

Santa Monica-based Retix has vowed to begin shipping in the fourth quarter a new high-performance "router" that ties together dissimilar, global networks for a big corporation's far-flung offices.

That amounts to a shot across the bows of industry leader Cisco Systems Inc. That Menlo Park corporation controls about 50 percent of the $500 million-a-year market for routers, and Cisco especially dominates the market's high end.

Routers are devices that select the best travel path to relay a message from one computer terminal to another. Router software and hardware allow different types of networks, such as Token Ring or LocalTalk, to function as one by bridging those networks' different communication rules, called "protocols."

At a price of $9,000 to $25,000 each, Retix's black box with sophisticated software inside may seem exciting only to company computer executives who want instant communication among all personnel.

But Wall Street too is wacky over "networking networks," with investors propelling certain router-makers' stocks 200 to 500 percent annually. Investors who bought into Cisco and have held on are prospering mightily. The router maker went public at $18 a share in February 1990 and was trading in the $50 range last week. That appreciation becomes even more dramatic when considering the stock has undergone two 2-for-1 stock splits, which means initial investors have enjoyed nearly a 1,200-percent gain.

Retix, with $61 million in revenues last year, already competes with $340 million-in-revenues Cisco in selling low- and mid-range routers. Sales of routers and a related device called a "bridge" comprise about 55 percent of Retix's total revenues.

Most Retix clients are small companies or departments of larger outfits with five to 50 locations, requiring dozens of routers. Local customers include mobile-phone wholesaler PacTel Cellular and First Interstate Bank.

Now Retix will be chasing Fortune 1000 multinationals looking to interconnect their global computer networks. These sprawling enterprises have several hundred or thousand locations festooned with computers, from desktops to minicomputers to giant mainframes.

"This is a significant milestone for Retix," said securities analyst Steven Levy, of Hambrecht & Quist in New York, underwriter of Retix's public stock offering last December.

"It's a natural evolution for us," said Retix Chief Financial Officer Ron Rudolph. "We see the high-end router market as a way to get to the corporate backbone."

Some security analysts doubt Retix will make a good dent in Cisco's high-end business.

"This is not plug and play," said Smith Barney, Harris Upham & Co. analyst Therese Murphy. "This is serious."

Because Cisco was first out the door with many of America's biggest network operators, chief information officers "will be very reluctant to introduce more complexity into their system with products from another vendor (Retix)," opined Murphy.

Of course, Cisco has had meteoric success. Profits of $84 million on revenues of $340 million were reported for its fiscal year ended July 26, an enviable 25 percent net margin. That per-share profit of $1.33 was up from 68 cents the prior year, and Murphy predicts $2.25 a share for 1993 and $3 for 1994.

"The router market is incredibly robust," explained Murphy.

Cisco officials, nevertheless, said they wonder if Retix may trip up.

"If you've never built big network before, and Retix hasn't, you don't know what's coming," said Cisco Corporate Marketing Manager Jeff Paine.

Still, there may be adequate room for Retix, said Murphy, because the router market is growing at roughly 50 percent annually. That tops the 30 percent annual growth rate of another networking product -- operating systems -- and far outpaces the much smaller 10 to 12 percent growth of desktop computer hardware.

"There's a lot of room in this market," said Murphy. "It's not an either/or situation."

Wall Street has turned hot and cold on computer stocks. Both Cisco and Retix have been volatile.

Retix went public in 1991 at $9 a share and soon shot above $18. It fell as low as $6.375 earlier this year but began climbing after May 8.

On that day many of the original corporate and venture-capital investors began to sell big blocks of stock, as the prohibition of Securities and Exchange Commission rule 144 against insider trading of brand new issues was lifted.

"Some of that original stock is finally getting into new investors' hands," said Retix CFO Rudolph.

The heavy sellers, including Aug. 28 sellers who pushed Retix daily trading volume up 14-fold from its average, don't include true "insiders" like corporate executives or directors, said Rudolph, to whom insiders must disclose sales.

"There has been some 144 selling, and that has provoked the institutional buyers to buy," said securities analyst George Kelly at New York-based Morgan Stanley & Co., which makes a market in Retix stock, which traded in the $11 range last week.

Rudolph wouldn't disclose how many orders Retix has received for its new router, called the RX 7000. But he said, "Interest has been high."

The RX 7000 has 12 ports to accept data from up to 12 different kinds of networks, compared to three ports on Retix's most-sophisticated current model. Also, industry sources confirmed it is the first router to support the "asynchronous transfer mode," a method of moving data that is roughly 10 times faster than garden-variety Ethernet communications and is necessary for moving full-motion video pictures between computers.