CNBC interview transcript...
C - Cube Microsystems CEO - Interview
Ann Sundius
07/30/98
CNBC/Dow Jones Business Video
(c) Copyright Federal Document Clearing House. All Rights Reserved.
ANN SUNDIUS, CNBC/DOW JONES BUSINESS VIDEO: Welcome back to CNBC/DOW JONES BUSINESS VIDEO. We are back in San Francisco at the Robertson Stephens Semiconductor Conference. Up next with us is C - Cube Microsystems. Their ticker symbol is CUBE, C-U-B-E. This is a company that's a leader in a rapidly growing market for ICs. They make the MP standards for compression and decompression of digital images and video. This is big business. Robertson Stephens is bullish on them, saying that they are a buy at this time, and we're going to be speaking with their president and CEO, Alex Balkanski at this time. Thanks so much for being here with us.
ALEXANDRE BALKANSKI, CHIEF EXECUTIVE OFFICER, C - CUBE MICROSYSTEMS: Pleasure, thank you. SUNDIUS: Excuse me. As I said, Robertson Stephens thinks that this is a big market now and more to come. What's your take on that?
BALKANSKI: It's undoubtedly a big market, big transition, technologically, from analog to digital video. Two of the markets have taken off, satellite delivery, like Direct TV and Video CD, which is a younger version of the digital video disc. Many more markets are forecasted to take off in years to come.
SUNDIUS: Where are you in your R&D situation? Are you still -- do you feel that there's still a lot for you to -- to research and develop to be a player in this market, or do you feel you're already there and you're just waiting for this to become more of an industry standard?
BALKANSKI: I think it's a balance. We have a great deal of work to do, a great deal of integration, added functionality, particularly on the set-top, also on the encoders, which haven't reached market in consumer volumes yet. On the other hands, there's a lot of products that are being designed in. There are a lot of products in the pipe that will allow for new digital video applications, based on what we have today.
SUNDIUS: Now Robertson Stephens has an analysis out at the conference saying you are a market leader with the MPEG-1 decoders and MPEG-2 encoders. Where is your market capability then, do you feel, with this title?
BALKANSKI: It puts us as the broadly spoken market leader in digital video ICs. Our nearest competitor is STMicroelectronics (STM). And between our two companies, we are dominating the first two applications. We are strong in Video CD. They are strong in satellite set-top decoders.
SUNDIUS: Will you -- do you feel you will become even stronger then in the satellite arena?
BALKANSKI: We, of course, hope so. And we are investing heavily in the communications segment, so we are heavily -- investing heavily on set- top. We are also investing heavily on codex.
We think that the future belongs to a digital VCR, replacement of VCR capable of recording and playing back, and it will be tape-based, but also optical-storage based. So we are monitoring progress in read-write optical storage, and working with large consumer electronic companies to bring to market read-write consumer grade optical storage, as quickly as possible.
SUNDIUS: What type of financial influx, then, would you need to put in to become a true player in these new markets, whether it's in the R&D as well, then, your marketing to get this market share?
BALKANSKI: We're spending a great deal of money on any one development. The financial investment in the coding development is in the tens and tens of millions of dollars. On the set-top, ongoing similarly. And I think that because our singular focus is digital video, we're spending more R&D dollars than anybody else in the industry pursuing this digital video application. Our research and development budget last year alone was north of $60 million, and it's increasing this year.
SUNDIUS: Where do you see, geographically, your sales opportunities?
BALKANSKI: Our sales opportunities, the future opportunities are worldwide. Digital video disc, as a playback format, is a worldwide format. The set-top satellite, cable is worldwide. We are seeing a lot of growth in Europe. We are seeing a big opportunity in the North American market. Interestingly, Latin America, because this is all entertainment-based. Latin America is a desirable place for us to be, as well as Asia Pacific and in Mainland China, where we saw our first volume opportunities.
SUNDIUS: Now interestingly enough, a statistic I have for 1997, the company had about 55 percent of sales that were really hurt by the Asian crisis, however, here at the conference, Robertson Stephens are saying that there's a great market over in Asia for you in the digital video. How does that work, where currently there's a great deal to be at risk because of the Asian crisis, yet you're looking at potential opportunity in the future?
BALKANSKI: I think the consistency of the two piece of data is that we do derive a fair amount of our semiconductor revenue from Asia Pacific. But is from one place, Mainland China, that we derive the bulk of that revenue. And in contrast, with economies such as Indonesia, Thailand, Korea, that have been very impacted by the macroeconomic situation in Asia, Mainland China has kept on going.
The economy is probably slowing some, but we are not seeing, to date, an impact from the Asian situation in Mainland China. And then the further consistency is the fact that beyond our early dependence on Asia, we have grown our revenue in other parts of the world. We have grown away from this singular dependency on a revenue stream that had grown very rapidly two years ago.
SUNDIUS: So what are the percentages currently?
BALKANSKI: Percentages, currently, are completely different. Currently, the Asia dependency as dropped to the 40-40 percent range, down from the 55 number you mentioned. And also, the mix of products has moved away from the consumer products that we were shipping to Asia, towards communication, broader markets, more robust market and also where, not just our IC play comes here, but also our system play, with a DataComm company.
SUNDIUS: We're still waiting for this to be an industry standard. Everybody is talking about the potential of digital, but any fears for you in that then this technology will be passe and the next one is coming along and you have to be ready for that?
BALKANSKI: No. That's not the fear. The standard MPEG, MPEG-1, MPEG-2 in particular being the worldwide industry format is a foregone conclusion. The concern for us is how quickly do the MPEG based applications reach markets. So, the fear is not to be leap frog, but the fear is to -- and the concern is to see digital video penetrate into every day life as rapidly as possible.
As I mentioned, in North America, if you're not using Direct TV or the dish network or bought a DVD already you're not yet using digital video. So, how quickly will cable companies, telcos, consumer electronic companies even the PC companies adopt digital video as part of their environment. That is what we worry about. That is what we monitor to see the progress of our opportunity.
SUNDIUS: This week in the news we're hearing about the proposed mergers with the big bells, with AT&T (T) and Northern Telecom (NT), Bell Atlantic (BEL)/GTE (GTE). What does this do for your business? Are you looking at this as maybe some big business down the road?
BALKANSKI: Yes. We are very excited, particularly very excited at the prospect of AT&T consummating its deal with TCI (TCOMA) because we have had through DataComm a strong relationship with all of the telcos and early on, three years ago, the telcos were very motivated to move into digital video to deploy the digital video networks that Datacomm deploys with them. And then it went into a lull and we're seeing renewed interest as the telcos, the GTEs and U.S. West (USW) and BellSouths (BLS) of this world know this, the very big move that AT&T has taken. The big step to acquire TCI.
As GTE gets together with Bell Atlantic we're also seeing a reconciliation of the telco interest and more financial power, more focus on being a full service provider. Full service means, of course, audio core market, data, very exciting market and intranet development, but then very soon thereafter video services. So, will the next acquisition be another cable acquisition by the telcos? Will the next investment be the deployment of digital video networks? All this we're monitoring closely, but we like to see this activity. It bodes well for our system company, DataComm, and for our set-top forays in the consumer use.
SUNDIUS: The Robertson Stevens analysis also is very confident in your management team. How do you think that they can work together or are working together to combat the pricing pressures that are out there. And the softening in the semiconductors, which is very cyclical, so it -- we're looking for the next lull as well? What do you think they're looking at in your management team to beat that, so to speak? BALKANSKI: I think the credit that Robertson Stevens is giving us is a credit of resilience. What we have shown is through tough times in the semiconductor industry we have kept on performing financially very robustly. We have kept very good gross margin performance even good net income performance. It is our top line growth that has been impacted. And in contrast with the companies we compete with we have fared materially better.
So, I think the credit goes to the company at large and the management team that has known to tough it out, that has seasoned executives that have gone through tough times in the semiconductor industry before.
SUNDIUS: You opened the conference here this morning, bright and early, 8 o'clock, what do you feel was maybe one of the highlights of your presentation, or the pitch that you wanted to give out to this crowd here?
BALKANSKI: I had two messages I wanted to pass on. First, that Datacomm our system company that deploys broadcast video networks was the apple in my eyes, and we're needed to be better known by the investment community. The other that our Codec investment, Codec is a compression and decompression engine in one chip, that our Codec investment was paying off and that our very dominant position -- in the niche Codec application could be parlayed in a dominant position in wide consumer businesses.
SUNDIUS: How do you think your presentation went with maybe the questions that you received in the breakout session, or even the attendance?
BALKANSKI; I was very happy about the quality of questions and the sense that the business has stabilized and that the outlook sequentially going forward was for improvement second half of this year, and into next year. The attendance was very encouraging. I think Wall Street people like to get up early.
SUNDIUS: Most of them are from the East Coast. So, they get up a little later.
BALKANSKI: That's right.
SUNDIUS: In the beginning of 1996 your stock price was up as high as in the $70 range. We're looking today in around $18 or so. Do you see days when it will be that high, or it'll rebound even in -- maybe even from the mood that you got from the attendance here today that maybe the worst is over ,and that prices will go back up?
BALKANSKI; Well, days I don't know, but most every night I dream of it being that high... SUNDIUS: (LAUGHTER)
...then I wake up and I realize where the stock prices are. I think that we have the ability to build a great company in digital video. And if we are building a great company Wall Street will reward it and Wall Street will get us back to higher and higher valuations. So, we're trying to focus on turning the corner, toughing it out, growing the top line, making the best of Datacomm and our Codec presence and hope that the rest will indeed take care of itself.
SUNDIUS: OK. Well, the best of luck to you in realizing those dreams, and thanks so much for being here with us again.
BALKANSKI: Many thanks.
SUNDIUS: OK. We've been speaking with Alex Balkanski, who is the president and CEO of C - Cube Microsystems here at the Robertson Stevens Semiconductor Conference in San Francisco. You're watching CNBC/DOW JONES BUSINESS VIDEO. Stay with us.
END
Content and programming copyright 1998 CNBC/Dow Jones Business Video, a division of CNBC/Dow Jones Desktop Video, LLC. Transcription copyright 1998 Federal Document Clearing House, Inc. No portions of the materials contained herein may be used in any media without attribution to CNBC/Dow Jones Business Video, a division of CNBC/Dow Jones Desktop Video, LLC. This transcript may not be copied or resold in any media. THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
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