A Message from GVIL's President and CEO: As you all know, I hold a considerable amount of GVIL shares (now at 25K shares -- and growing) and I am concerned as the rest about lack of response from GVIL IR, GVIL's future, product development, cable/adsl modem challenges, and management's attitude to the industry. So I emailed Neil Selvin this week to make him aware of my concerns. Not only did he respond, but he did so on a Saturday -- and at great length. I am very pleased and satisfied with his response to my specific questions, and will be adding to my position next week. Attached is the text of his message.
Regards,
Richard
_______________________________________
Mr. Jurek,
First of all, thank you for your support, both as a shareholder and a
customer. We appreciate the loyalty and support of people such as yourself.
I apologize for the lack of reply of our IR department. As you can probably
tell from our reduced expense structure, our IR function is pretty thinly
staffed; in fact, the person doing the first-line IR function also has two
other jobs, and probably doesn't spend as much time with individual
investor questions as I would like. We are closed for the holidays, but
when we reopen, I'll look into this.
That said, I'll be happy to respond to your questions. I must, however,
bound this reply with two constraints:
1. We are in an SEC mandated quiet period. Therefore, I cannot comment in
any way on the December quarter's results until our earnings announcement,
scheduled for the afternoon of January 22.
2. I cannot comment on unannounced products or specific projects currently
underway in R&D. We have a strict policy that we do not discuss future
products until they are publicly announced.
With those out of the way, let me give you some insight into what we are
trying to do inside Global Village to effect a turnaround, and by
extension, improve the stock price.
In January of 1997, after a disastrous December 1996 quarter, we decided to
bet heavily on 56K, and in fact turned virtually our entire R&D
organization on its ear to develop a complete line of 56K products for both
Mac and Windows. You may recall that this was shortly after US Robotics
announced its x2 line, and Rockwell responded with vaporware announcements
about its K56flex line. We responded quickly, with a complete line of
desktop products, including both x2 and K56flex products (the first company
to do so), and shortly thereafter, a line of 56K PC Cards, including the
first 56K modem/ethernet card in the industry. In making the decision to
bet heavily on 56K, we based this on three market factors we (and most
others in the industry) believed would prevail:
1. Adoption of the 56K technology would follow the trend in previous
transitions, such as 14.4, 28.8, and 33.6, and be fairly rapidly adopted by
consumers.
2. Pricing for 56K modems would be reasonably stable, allowing the entire
industry to regain a more profitable structure.
3. ISP's would be quick to jump on the 56K deployment curve, given the
attractive deals being offered by Ascend, US Robotics and others.
Our own product development has turned out an impressive array of products,
and as you have seen, we have been able to win awards on both platforms,
including PC World's recent best 56K desktop modem choice. However, 1997
was a poor year for all manufacturers of 56K, specifically because none of
the market conditions we expected to see prevailed. Adoption of 56K has
been poor, with trade magazines aggressively telling consumers NOT to buy,
confusion around two differing protocols, claims and counterclaims of
performance, etc. With overcapacity, especially in the Windows market,
prices have fallen rapidly. When we introduced our products at $179, we
were $20-40 below industry average pricing. Today, 56K modems are readily
available at prices from $69-99. While we have effectively managed our
channel inventory so as not to be swamped with price protection and high
return rates, others have not been so fortunate. I'm sure you have examined
the gross margins in recent quarters of our major Windows competitors, such
as Zoom, Boca Research, Xircom and others. And even US Robotics (now 3Com)
has had to finally admit that their channel stuffing did not pay off,
causing a $500 million reduction in sales for the most recent quarter.
Finally, ISP's were slow to deploy 56K, with technical difficulties from
Ascend and uncertainty in their own pricing structures.
In short, 1997 was a poor year for the modem industry as a whole, and
certainly for Global Village. Every one of our competitors has suffered the
same problems and issues we have. So where do we go from here? Rest
assured, we are far from sitting still.
As you noted, we decided to get very aggressive on 56K pricing in the
Windows market. We believed that achieving shelf space and awareness would
only be possible during a busy Christmas selling season by standing out
with aggressive prices. As I stated before, I can't comment on how well
this has worked in the recent weeks, but the strategy was clearly to gain
market awareness and share during the busiest buying season of the year.
Within our R&D group, there are a number of new product efforts underway. I
can't comment on specific initiatives, but you will see the results of
these continuing efforts in the months to come. As with most of our product
development, they are based on adding value to communications products
through software and by integrating hardware and software together to
create a better user experience and value.
As you noted, 1997 has also been a year of cost control. We elected to
dramatically reduce our infrastructure cost, and our ongoing sales and
marketing expenses, and return to our roots of creating a cost structure in
line with conservative business expectations. While we haven't returned to
profitability, we have implemented difficult and dramatic reductions across
our entire cost structure in an effort to lower our breakeven costs. At the
same time, we have continued to maintain our R&D spending, because the new
products currently in development are the key to our future, and we cannot
starve new product development to attain short term profitability. We will
continue to be very aggressive on cost control, examining every effort to
reduce spending on both expenses and inventory, in order to carefully
manage our cash and other assets. This includes far lower spending on
discretionary marketing spend such as advertising. As much as I would like
to increase our public advertising exposure, it is an expensive way to gain
awareness and sales, and we are very careful about spending marketing
dollars, pointing them where they will have a clear, measurable impact.
We are quite aware of developments in both ADSL and cable modems. I believe
ADSL has a brighter future and a better fit for Global Village than cable
modems, for several reasons. I am not a big proponent of cable modems (for
numerous reasons, perhaps to be addressed some other time), and I think
that industry has already gone the way of traditional set-top boxes, with
little value to be added by companies like us. I believe ADSL, in the long
term, offers more opportunity to add value through software/hardware
integration. However, we believe that xDSL is a long-term play, and will
not be a significant factor within the next 6-12 months. Be assured,
however, we are definitely not ignoring it.
I hope this gives you a little more of a picture about our recent decisions
and our future. Believe me, no one is more disappointed in the decline in
our share price and the need to see it improve than I am. As a significant
Global Village shareholder myself, I am dedicated to examining every
possible avenue for improvement, and am fully committed to the company and
its prospects. Both I and my management team are not sitting back singing
the "woe is me" blues. We are working hard, every day, to create new
opportunities for growth, and at the same time, navigating these difficult
market conditions to husband our cash and be sure that Global Village can
survive into the future.
Again, I thank you for your past support, and I sincerely hope we can
reward your patience in 1998.
Best regards,
Neil Selvin
President and CEO
Global Village Communication, Inc. |
