Newbridge Networks Analyst Conference and Annual General Meeting, "Delivering the Vision," September 23, 1998:
I --- Public Presentations
Terry Matthews:
*Attendance at the conference has grown from 50 the first year to 100 the second, 167 the third, and over 250 confirmed this year.
* NN customers represent 400 large networks, 280 ATM.
* Management platform manages 15,000 nodes in a single domaine.
* Managed ADSL links from 3Com and Efficient Networks. LMDS, ADSL, SDSL, all software managed.
* NN in two trials with CSI.
* FastLane is Microsoft-based directory management system. Growing area with more R&D focus.
* SBC --- 40% U.S. footprint.
* Demand for ADSL is 5 times higher than best estimates.
* Korea Telecom --- LMDS "moving at ferocious rate."
On the horizon:
* 2.4 gigabit fat pipes
* ADSL and DWDM
* Access products and enhanced relationship with Ericsson.
Jim Arsenault --- Internetworking
* Adding premium services. Not going after box to box market. (Cisco).
* Target markets: service providers both incumbent and new, and Global 1000 enterprises.
* Need for bandwidth is insatiable and it needs to be managed.
* Enterprise question: to own or to outsource?
Conrad Lewis --- Broadband
* Good market in Latin America. ADSL inside the building.
* 36170 on sonet ring. Cards for basestations, other customers can be added. One box replaces many. Fast deployment.
* NN is late entrant to ADSL. Waited for rate-adaptive solution. SDSL allows 2-way speeds on single pair. Replaces T1/E1 service.
Joel Bell from MaxLink:
* Now operating in Ottawa.
* All LMDS vendors competed for contract. Why NN chosen?
1) Services orientation is data centric
2) More highly functional at cell site. 36170 does more and built on deployed (tested) product
3) Permits selection among RF equipment suppliers
4) Network management orientation allows monitoring from central point.
5) Understand challenges of start-ups
* 200 customers added, as per recent announcement. 25 cells in 3 cities this year; 130-plus in 2 to 3 years.
Peter Charbonneau --- Affiliates
* Affiliate strategy increases depth and breadth of technology. Brings products to market faster. Single-vendor strategy develops complementary core compentencies. More than 20 affiliates.
* Affiliates coming this fall: HFC, Distributed ATM, Directory Services.
Ken Wiggelsworth --- CFO
Goals, increase market share and penetrate new markets.
In ATM WAN space, NN number one for 5 years in carrier market. Lucent muscling in. 280 carriers serviced. Established carriers don't make announcements, and are moving into new markets and becoming new generation carriers. 20% sequential increase in sales to new carriers/customers. In broadband access, many recent wins. Financial management, operating expenses --- goal to get cost of sales to 36%. Q4 cash flow highest since UB Networks purchase. We manufacture where many others don't.
Sale of ACC:
· proceeds to NN $250M Canadian
· break-even business
· continued access to products and technology
· bringing ERICY to CSI
General Meeting:
Affiliates valued at $1.5 billion
Another contract in LMDS space in 3Q
2Q extraordinary gain of $250M
Next year: double-digit earnings growth, greater market share.
II – Personal observations
CrossKeys
90,000 sq. ft. headquarters, currently use 60,000 sq. ft.
320 personnel, adding 25.
China potential barely tapped. Japan, challenge is in creating awareness. Economics isn't holding them back as much as understanding what they need. Altus might be the first product for this market.
Market share --- difficult to define. OSS market is $15 billion. Software vendors represent about 15%. CKEYF should get 1%. By 2000 total market will be $23 billion.
Tied to NN for 40% of channel.
Revenue stream from At&T depends on customer acceptance. NN's SBC contract gives them [CKEYF] a foot in the door. Nothing guaranteed at this point.
CPQ/DEC is prime contractor and CrossKeys helps sales force of those companies. Joint sales.
CrossConnect is customer driven in partnership with NN sales force.
Resolve has some direct sales, some co-sales with NN.
Netware is distributor model.
Altus – Sales aren't large. $1 - 3 million with 12 month sales cycles. Opportunities are large.
Royalties on 36190 late FY99 or early 2000. Upgrades ongoing.
Q: What about IP?
A: We want IP built into Resolve. This is slated for late 99 and early 2000.
Q: Any acquisitions on horizon?
A: No defined time frame.
Q: Wireless opportunities?
A: Yes.
Q: How about funnel?
A: Still strong.
Q: How would a Siemens break-up affect you?
A: There are several scenarios:
· A bad breakup where future business is broken off.
· We deal directly. 36190 expertise would be difficult to replace.
· Optimal where work with 36190 would be on-going.
Q: Any new partners on the horizon?
A: None of the potentials have gone away. We're in active discussions. They all move slowly. New people come to the table all the time. [In random conversations at reception, I heard two names and was told October-November time frame.]
Q: What do you need to get the stock price up?
A: Announce a couple partnerships, get more liquidity: get float up. 3.3m in float now, in December this will increase to 10.8; have blow-out earnings --- so far we've met or exceeded; get NN up.
Q: What's the status with analysts?
A: There's a new analyst at Warburg Dillon Read who plans to cover in next 4 to 8 weeks, DLJ may start in a couple quarters, and RBC Dominion in next 4 weeks. We also have a few conferences coming up. John recently presented at DLJ, and in October there's Wheat First, and November Warburg Dillon Read and Toronto Dominion. Also hoping to get into AEA show.
Cambrian Systems
I met with CFO, Ron Blair, and discussed the DWDM industry in general and Cambrian in particular.
Q: Can you break down the ownership?
A: 40% NN, 22% T.M., 38% private investors and institutions.
Q: How many personnel?
A: 38 a year ago, 150 now, plus 11 co-op and 6 contractors. 70 in R&D --- all best DWDM engineers came over from Nortel.
Q: Are you in trials?
A: 3 field trials will begin in October. One other possibility under discussion.
Q: Size of Metropolitan Market?
A: A year ago it was estimated to be $1.9 billion in 2002. Recently it was raised to $2.3 billion by 2001, and $4.3 billion by 2002.
Q: Cambrian's market share?
A: 20%
Q: Your three-story tower is under construction. You'll be in by January. Is this sufficient?
A: Second tower has broken ground and we estimate we'll need the space within 3 months of moving into first tower.
Q: Status of IPO?
A: Still looking at 12 to 18 months. [I believe this is a standard answer and could change based on NN's over-all strategies.]
Vienna Systems
I took very few notes. The company is owned 33% by NN, 12% TM, 22% Peter Sommerer, and 33% other.
After visiting these three affiliates --- CrossKeys, Cambrian and Vienna --- I came to a new understanding of the complexities involved for both Newbridge and the individual companies. Many have hidden assets few recognize and making decisions that might favor the parent at the expense of the affiliate, or vice versa, must take the wisdom of Solomon.
Besides visiting the affiliates, I had a tour of NN's headquarters, including the R&D facilities and manufacturing. Colin Perry, director of manufacturing, said they've added between 60 and 70 since January and will be adding another 15, all for ATM. The R&D center is extremely impressive --- Bell Labs Quality to the nth degree. The 36170, for example, is reliable to 5 nines (or 5 nines and a 5) which means it's only down 18 seconds a year. Compare to Cisco's fiasco at AT&T where it was down 3 days.
Analyst guidance from John Lawlor:
Gross margins edge down 20 basis pts. per quarter. Not 100 bp as last Q. Gross margins 58.3% FY99, and 57.6% FY200.
Operational costs 46%, with goal to reach 36% in 6 quarters. $196.2 Q1; and $201 Q2. 38.5 for FY.
Comfortable with concensus: .18 Q2; .23 Q3; .28 Q4.
UBNet --- break-even.
What about wireless? In 8 to 10 weeks we may have better idea of deployment numbers. [Another contract on the way.]
What about recent market share statics? IDC and DataQuest show NN as number one in WAN/ATM. We have press release ready to go out.
In summary, it's an exciting time to be a Newbridge investor. The company has the flexibility and drive of a start-up and the wisdom and direction of a seasoned veteran. There is still much to be done and Alan Lutz has proven in his first hundred days he's capable of leading the company through the necessary hurdles to reach $5 billion in 2002. Expect a couple new Exec. VPs and more changes in the ranks; watch for more analyst coverage and a couple major funds taking positions; and be prepared for another partnership announcement. I don't know the timing but I do know there were more hints than Lucent acquisition rumors --- and that's going some.
To those who introduced yourselves, thanks for making me feel at home. Ottawa is a beautiful city and its citizens among the warmest I've ever met.
Later --
Pat
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