The rise and fall of a high-tech star
Last year's sensation, Montreal-based NHC, had its wings burned in the telecom
bust
Matthew McClearn
SPECIAL TO THE STAR
From the current issue of Canadian Business
Greek mythology tells us of poor Sisyphus, a mortal condemned to push a huge
stone up a mountain only to have it repeatedly roll down again. As punishment for
his earthly transgressions, it was his fate to continue this fruitless labour for
eternity in Hades.
Perhaps president and CEO Sylvain Abitbol can identify with him. Little more than
a year ago, at the height of the telecommunications boom, his Montreal-based
equipment maker NHC Communications Inc. boasted the grandest growth of any
company on the Canadian capital markets.
One year later, NHC's stock has clearly returned to the plains - and if the
company doesn't start moving some product, it could have an empty wallet by
year's end.
The source of Abitbol's torment is the telecom bust - hardly surprising, since
NHC's main product, ControlPoint, is aimed exclusively at solving problems for
the phone companies.
When a new customer signs up for phone or Internet service, providers typically
dispatch a technician to do the grunt work (the industry calls this a ``truck roll'').
There, he'll find a panel called a main distribution frame (MDF), where he can
patch cables to connect the customer with the new service.
If line noise or other problems develop, another truck roll may be required. And if
the customer isn't happy and cancels service after two months, yet another visit
may be required. That game can get expensive.
``This is one of the few areas in a telco that hasn't been automated,'' says Marvin
Garellek, marketing director for NHC. (Abitbol was unavailable for comment.) ``It
makes perfect sense to automate it.''
ControlPoint does just that. Instead of sending technicians, phone companies tell
ControlPoint which connections to make via the Internet. A robotic arm inside the
unit does the rest. That allows service providers to connect or disconnect lines
and diagnose service problems without leaving the office.
``It impacts quality of service and speed of time to market, and reduces
operational costs,'' Garellek explains.
At the height of telecom madness - in early 2000, when the industry more
resembled a happy asylum of exuberant soothsayers - NHC anticipated that
ControlPoint would be a hit among the competitive local exchange carriers
(CLECs), the unruly group of upstart carriers that challenged old incumbents
(ILECs) after telecom markets were deregulated during the 1990s.
Particularly promising were providers of DSL (digital subscriber line), the method
by which phone companies offer high-speed Internet service over old copper
lines. So sure was Abitbol of ControlPoint's potential that he abandoned all other
switching technologies that NHC had developed since he founded it in 1985.
Making similar assumptions, investors heaved the company's shares from penny
stock to the $20 range in the first quarter of 2000. That spike earned NHC the
Number 1 spot in last year's Canadian Business Investor 500 ranking, with an
eye-popping one-year return of 2,088 per cent. It seemed that the company was
destined for greatness worthy of Mount Olympus.
NHC planned to earn income from CLECs while negotiating more lucrative
agreements with the ILECs. Not a bad idea - the old-world carriers are both
bureaucratic and cautious in adopting new technologies, so it takes a lot longer to
get them to fill out an order form. But suddenly, NHC's boulder got a lot heavier.
By mid-2000, service providers realized that they had overbuilt their network.
For example, worldwide IT research and consultant firm IDC estimates that of
the 9 million DSLAM lines (Digital Subscriber Line Access Multiplexer, the device
at a central office that accepts all the DSL lines) sold in the United States in 1999
and 2000, only 2.3 million are actually in service.
``Service providers have purchased far more equipment than is taking revenue,''
says Brad Baldwin, director of broadband technologies at IDC. ``Everyone has
way overspent on capital expenditures.''
Those capital expenditures have now been curtailed. Not that service providers
could have done otherwise: The capital markets also collapsed as investors fled in
panic.
The resulting slaughter is worthy of Homer's Iliad. In Canada, Axxent Inc.,
Cannect Communications Inc. and C1 Communications Inc. are just some of the
CLECs claimed by the cataclysm. Confronted by the sobering facts, industry
giant Nortel Networks Corp. left the DSL equipment market entirely.
In the United States, the carnage was even worse. The toll on NHC was palpable:
``More than 60 per cent of our customer base dried up,'' says Garellek.
For example, NewSouth Communications Corp., a CLEC offering service in the
southeastern United States, cancelled its orders for more ControlPoint units (it
currently has 100 in service). NewSouth owed NHC $3.9 million, of which only
$2.7 million is covered by insurance.
With a sudden implosion of its potential customer base, investors had a dramatic
change of heart regarding NHC's prospects. Its stock recently closed at $2.55,
off 87 per cent from its high of $19.90 in March, 2000. Needless to say, NHC did
not make this year's Investor 500.
NHC now stands between a rock and a hard place. At the beginning of June, it
had only $7 million in the bank, which the company says will see it through to
year's end.
In a bold attempt to reinvent NHC, Abitbol has restructured his product line and
sales pitch to focus almost entirely on the ILECs. In June, he unveiled Curbside, a
remote cabinet for deploying voice and data services featuring ControlPoint. But
the ILECs have clawed back their capital spending too - more bad news for NHC.
``They're stuck in this period with no sales,'' says Chris Bonnet, an analyst at
Groome Capital.com Inc. in Montreal. ``It's very risky, because if the ILECs
delay any further they could have another quarter without any revenues. But if the
ILECs do pull the trigger, NHC could have a phenomenal quarter.''
Once a believer, Bonnet slapped a ``hold'' rating on NHC's shares earlier this year.
IDC's Baldwin is less sanguine. ``I think NHC is in serious trouble,'' he says.
Sales arrangements remain difficult to obtain. For one thing, ControlPoint is a
new technology with a limited track record. For another, potential customers are
clawing back their spending and trying to make do with the networks they
presently have.
Finally, the very orders NHC needs may be scared away by its precarious
situation - after all, who wants to buy a product that quite possibly won't be
supported or further developed?
Service providers also know that there are competing products to choose from.
Automated MDFs are made by privately held Simpler Networks Inc. of Montreal
and Turnstone Systems Inc. of Santa Clara, Calif. Moreover, ControlPoint is
based on a robotic connection component made by Oki Electric Industry Co. Ltd.
of Japan.
``All NHC did was find this product that nobody was really selling, and sign an
agreement to sell it (in North America),'' analyst Bonnet says. But now Oki's
matrix is also sold by Avaya Inc., a large unit recently spun off by Lucent
Technologies Inc. ILECs would probably rather do business with a better
established, more experienced company like Avaya.
``ILECs are notorious for wanting to get maximum longevity out of a product''
says Baldwin. They insist on dealing ``with large, name-brand vendors,'' he adds.
And name brand, NHC is not.
``I've never heard of NHC,'' Baldwin exaggerates to make the point. ``This isn't
good in itself. That means the company lacks visibility.''
Ultimately, ILECs and established CLECs will probably show little interest in
ControlPoint this year unless NHC slashes its sticker price. Right now,
ControlPoint costs about $100 (U.S.) a port, meaning that its five models range
from $80,000 to $450,000.
``I'm getting indications from potential customers that it may be something that
they're waiting for prices to come down on,'' says Bonnet. ``If they (NHC) want
to get any market share this year, they'll probably have to give the product away.
It's a cat-and-mouse game, and the telecom service providers know that.''
To give itself some breathing room, NHC could always try to raise money. ``If
there is a cash crunch,'' Garellek asserts, ``I don't think we'll have any problem
raising sufficient capital to reach our goals.''
The company did manage to raise $10 million (Canadian) earlier this year in a deal
with Yorkton Securities Inc. But a repeat performance in the absence of sales
could prove difficult: The capital markets are steering clear of most telecom plays
these days.
NHC's position is, to say the least, tenuous. It doesn't look like anybody's going to
be rushing to buy its product - or its stock - in the near future.
But Abitbol may yet escape being crushed. For one thing, Bonnet says
ControlPoint has clear advantages over competing products (NHC reports that it
is performing well in tests by ILECs). For another, automated main distribution
frames are a good idea.
``This kind of technology is absolutely mandatory,'' says IDC's Baldwin. ``From
here on in, you have to install equipment of this nature.''
After all, DSL providers know that they must cut costs and improve quality of
service. Garellek believes that NHC will weather the storm because its product
can help providers do just that.
``We expect spending to materialize by the end of 2001 and through 2002,'' he
says. ``I think 2002 will be a banner year.''
Will that be soon enough?
That's a nail-biter. But if NHC does get squashed by the telecom bust, Abitbol can
at least take solace in one cold comfort: Unlike Sisyphus, he won't have to push
the stone up the mountain a second time around.
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