DMC Stratex Networks Q2 FY01 Conference Call - Part III, Perspective & Future
Tuesday 17 October 2000
Chuck Kissner, Chairman of the Board of Directors
Outline:
1. Progress of the company.
2. The markets we serve.
3. Strategy going forward.
1. Progress of the company.
Carl & Sam have covered the current results pretty well. It was a great quarter, a
lot of records were broken… I think Sam and his team made very significant progress.
And that’s actually been over a number of quarters… they deserve a pat on the back
for that. But if you step back and look at the perspective of a number of quarters,
this quarter in relation to what’s happened before, there’s been pretty steady
progress here. Last quarter there were some concerns, because of supply issues…
obviously the company was concerned and focused about it… but, in my opinion, the
market had a complete over-reaction in a negative way to what was expressed last
quarter. I think it was not deserved. I’m a little bit biased about that, but I
still feel very strongly about it. I think there’s been a continuing record here of
top line growth and steadily increasing profitability, good balance sheet management…
and if you look back over the last 6 quarters average revenue growth annualized is
40%, order growth is 64% annualized, growth rate on new products is 150% annualized,
our services business (which is important to us as we make the transition to a
solutions company) has grown by 142%, and profitability has grown from about
break-even to a record here in the last quarter and we expect profits to grow
sequentially going forward. Now inventory turns aren’t at the highest level they’ve
ever been but they are at historical levels which is pretty good when you consider
how tight the supply chain has been and our need to acquire a lot of material. And
there are a stream of new products in development that are coming and will extend
the competitive lead we already have. We’re adding a lot of new accounts and our
customer-retention rate is extremely solid. So this is not a one-quarter wonder. And
I believe what you’re seeing right now is the company’s leadership is creating the
resultant financial benefits that come from that.
2. The markets we serve.
We talk about this occasionally because we are global, we are in a lot of countries,
we have a global sales force, we have a lot of customer contact, and there’s been a
great deal of interest about what this perspective is. You’re probably aware that we
have 3 major markets:
+ the mobile wireless market,
+ the wireless fixed access market,
+ and private networks.
The growth rate that we expect in these areas is:
+ 25% for mobile,
+ 40% for fixed access, and
+ 25% for private networks.
A bit more on our top two markets:
+ In mobile, this is being driven by new networks that are continuing to roll out.
Also, additional geographic penetration - there are new network operators coming on
line. And something that sometimes gets missed is that existing and new networks
have higher capacity requirements than in the past. And this is being driven by
higher penetration but also data applications being routed to these networks. So
higher capacity network infrastructure is required for both existing and new
networks. This appears to be a global push, we can see this from all directions.
And it does appear in general that these network operators will fund it.
+ In fixed wireless access, which tends to generate a little more discussion
(especially here in the U.S.), if we took what our clients are telling us in terms
of expected growth… the annual growth rate would be over 100% for the next couple of
years. Our planning has discounted this to less than half this level for a number of
reasons - but I still think that’s a pretty robust number. We have no doubt this is
going to continue to be a strong market for us… the reason why is because we
understand the business case for the market: if our products are used for last mile
access, for high capacity, the business case works and there’s simply no way for
fiber to directly address all the needs that are out there. And even better, the
higher the capacity requirement, the better our products look… because that’s what
they’re targeted for. Now over the past year or so as these networks have gotten
more mature and rolled out, there’s a more realistic view of what they look like. It
turns out our products have a great fit - if that isn’t already apparent from the
orders that have been coming in. We see a shared P-P and P-MP application - at lower
capacities, P-MP can be a good fit; at higher capacities we have three configurations
that we offer… we offer single P-P (which is what most people know that we offer)
but we also offer multiple P-P star configurations and our 155 Mbps multi- access
ring configuration is becoming more-and-more popular. Again the trend toward higher
and higher capacity needs means that DMC Stratex Networks gets more market share
because of the fit of the products. And that’s generally what’s happening with these
networks. We discounted that very high growth rate that I talked about, that we’ve
been told by our clients, for a couple of other reasons too… one is that we like to
inject some realism into the raising of capital to build these networks out, and
secondly we do expect (because this is a relatively new industry) changes and
consolidations in the customer base over time just as a natural evolution of the
business that’s developing. This is currently largely a U.S. and European business
but, if we look at the installations that we’re doing right now, we can see that
Latin America especially and Asia are coming up to speed as well. So there’s
increased geographic diversity; that’s what gives us some confidence. So if we look
at the market condition and what we’re facing right now, one of the reasons we feel
so confident about where the company is going is that these markets have every
evidence to be strong despite whatever nervousness that’s out there. We’ve adjusted
it for uncertainties, we have a leading market share position, and we believe that
its growing right now.
So as we strengthen this position as a market leader, there’s other things that we
need to do and I’d like to touch upon our strategy.
3. Strategy going forward.
Its a 3-fold strategy.
The first is execution, execution, execution. We’re going to continue to do the best
possible execution in this industry in terms of product innovation, operation,
sales, and marketing and in customer support… to drive the top line growth of the
company. The second part of execution is in the financial results and we’re focused
(as we have been for awhile) on delivering superior financial results both in terms
of the income statement and balance sheet. With the supply chain now in better shape
I do expect to see nice improvements in both of these areas.
The second part of the strategy is a solutions-orientation which we’ve talked about
before… what does this mean? One is it means we’ve been developing broader product
capabilities… millenium has been mentioned several times… this is
ultra-high-capacity products that contain more intelligence and its all developed
under a common network management umbrella. Second part of the solutions-orientation
is an integrated service capability… this is to complement the product solutions
that we have so we can secure more customers and secure more of our customers
buying-power. The second impact of the way we’ve structured it by adding more value
we believe we’ll improve the margins for the hardware business. The third part of
our solutions push is a network of partners that we deliver to the marketplace.
These are other companies that have a complementary capability so we have an
even broader solution set and in some cases we’re sharing in our partner’s
financial success. Many of you are aware that we have a number of partners
in which we have a financial interest: areas include millimeter-wave P-MP,
low-cost unlicensed radio, unlicensed wireless data, and recently an investment
in a 3.5 GHz access radio capability. We are continuing to expand this activity
into a couple of other new areas as well.
The third part of our strategy is to leverage the relatively gorilla-size
manufacturing capability we have and the supply-chain that we’ve developed
and to use it as a competitive edge. This means that we’re developed very
strong alliances with certain manufacturing partners to create a seamless
supply system. In some cases, this can mean that we take a minority
investment in a particular supplier with the goal of insuring that we’re
aligned with the supplier and will share in the financial return of
their success. There are two main goals to this manufacturing and supply
initiative: one is the obvious, it will allow us to continue to grow quickly,
by ensuring we have a very well-developed supply-chain... the other is
that, because of the state of the supply of products in this industry,
this allows us to avoid the need for DMC to vertically-integrate
manufacturing and instead foster the development of a good manufacturing
capability in the industry through our influence and through our size.
To wrap up... right now I think we’re on a roll with high growth and strong
profitability. You might ask: How long can this go on? We feel its sustainable,
at least in the medium-term, because (1) its fueled by new products and new
emerging applications, (2) there is not a credible alternative technology
on the horizon - except for what we’re working on - and (3) we’ve hedged
our bets on customer-demand in our planning. Then you might ask: Sure,
but what about long-term? How far can you go? ...That’s a tough question
for anyone taking it seriously and we’ve spent a lot of time working on it
and thinking about it... Here’s how I’d answer: Right now, we’re leading
but we’re not sitting still. We know what we have to do to be a valuable
long-term partner to our customers and we are moving quickly. As I discussed,
we’re re-defining DMC Stratex Networks so we can graduate to become the
clear number-one global solutions provider. We think the company is just
getting started and we’re glad that you could share this conference call
with us and to share the experience.
[That’s about 41.5 minutes into the 1 hour 15 minute call. Chuck now turns
the call over to questions.] |
