nice article on adct:
Aiming for the Top
Fast-growing ADC Telecommunications is poised to challenge the heavyweights in the networking industry. The key, experts say, will be to broaden its offerings.
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MARTIN J. MOYLAN STAFF WRITER
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Cisco Systems, Nortel, Lucent. They're name companies that produce the chips, switches and other gizmos that are driving the telecommunications revolution, making increasingly snazzy phone, Internet and video services possible. Their expertise and execution have won them recognition not only among the firms that buy their components but also among the general public.
Could Minnetonka-based ADC be in their league?
It sure wants to be. The next few years will tell whether or not it has what it takes to play with the big boys. If it succeeds it'd give Minnesota its highest-profile tech company since mainframes ruled the computing world and the old Control Data Corp. was in its glory.
In the past five years, ADC's sales have more than tripled. It's on track to do more than $3 billion in sales this year. And it's aiming to crack $10 billion in revenue within five years.
``When people talk about Lucent, Nortel and Cisco Systems, we want them to add ADC to that group,'' says Bill Cadogan, the company's chief executive officer. ``As we cross through $10 billion in revenue, we want to be viewed as one of the elite technology companies in the country.''
To attain its next level of growth, though, ADC has to become a more widely recognized name, as well as prove it has the breadth and depth of products and services needed to compete across the board with the likes of a Lucent.
It needs the name recognition to help capture market share, as well as investor mind-share. Meanwhile, it needs to show that it has moved well beyond being a jack-and-plug company whose fortunes are too closely aligned with traditional phone companies, which still account for about 55 percent of its sales. It must prove it can serve cable, wireless and other telecom firms as well as it has served phone companies.
In effect, ADC is an arms merchant to the world's warring telecommunications providers, equipping them with everything from jacks and plugs to billing software and fiber optic laser pumps needed to design, build, operate and manage their networks.
With more than 30,000 products in its inventory and a customer base that includes AT&T, Qwest, SBC, Sprint, BellSouth and WorldCom, it's pretty much a certainty that ADC equipment helps brings you your e-mail, Internet sessions, cable television programs and phone calls.
``Outside of our industry, ADC is not recognized for what it is: one of the fastest-growing companies not only in our industry but in the country -- and it's a company in what is perhaps the fastest-growing segment of the telecommunications industry,'' says Cadogan, 52, who has been ADC's chief since 1991.
That segment involves the ``final-mile'' connections from phone or cable company offices to consumers and businesses.
The bottleneck in delivering new services, especially high-speed ones such as streaming video over the Net, comes there. ADC touts itself as a one-stop shop for the cable, wireless and traditional phone companies looking for everything needed to bridge that final mile.
With ADC's equipment, cable TV companies can turn themselves into phone companies, wireless firms can offer service reliable enough to tempt some subscribers to drop their landline phones, and phone companies such as Qwest can supercharge Internet surfing speeds on their old copper networks.
``In that last-mile segment, we intend to be the leader,'' says Cadogan. ``We're changing communications from low-speed to very high-speed, any time, anywhere communications. Three, four years from now, you'll be able to watch a Vikings game at home from the perspective of sitting on Daunte Culpepper's shoulders.''
Broadly speaking
As challengers to Qwest and other incumbent phone companies hooked their networks and equipment to the incumbents' systems, ADC has profited handsomely.
``A major driver of their growth has been the interconnection of CLECs (competitive local exchange carriers) into the incumbents' networks,'' says Charles Pluckhahn, head of telecommunications research at Stephens Inc., a Boston investment banking firm. ``ADC dominates that space. In some segments, they've been seeing growth rates of 100 percent annually.''
CLECs are phone companies looking to enter markets and take business away from the incumbents. Now, the outlook for CLECs is not as sunny, he says. And investors view ADC as an equipment play on the CLECs, which have yet to take much business away from incumbent phone companies.
Despite its intense spending on research and development and its methodical acquisition of firms meant to broaden and deepen its portfolio of products and services, many investors worry that ADC may not be broadly enough diversified.
``The fear on ADC is that it has not moved much beyond its days as a jack-and-plug type of company,'' says Pluckhahn. ``I think they have. The question is to what degree. In the next several quarters, we'll see.''
ADC's annual sales are dwarfed by those of Cisco, $18.9 billion; Nortel, $28.5 billion; and Lucent, $34.5 billion. But it's in their league now, says Frank McEvoy, an analyst with U.S. Bancorp Piper Jaffray.
``Like Lucent and Nortel, ADC is broadly diversified, has a significant revenue base and global reach,'' he says. ``It's in high-growth markets and through acquisitions or internal development has the products to address market opportunities. They have built their optical component (and related fiber) business, for instance, into a business that will approach $500 million in revenue. A few years ago, it did not exist.''
ADC's network systems and software business should pick up, expects John Butler, SG Cowen Securities managing director, covering the optical networking sector.
``ADC is a great component play, but it is a well diversified company,'' he says. ``Its evolution has been impressive. Does ADC have a shot at becoming a company like Lucent or Nortel? Yes. It all depends on growth, acquisitions they make and product lines they're in.''
Says Pluckhahn: ``In the next year, year-and-a-half, if ADC shows its revenue mix is really linked to things other than interconnection equipment, that will be the proof that ADC has moved into a new league. They've been talking about that for a long time, about wireless and fiber. This will be a testing time for them. The proof will be in the orders.''
Destiny and details
To be sure, the stocks of most telecom providers and suppliers are getting beat up these days, as investors worry about the effect of competition on service providers' profits and a slowdown in the building and upgrading of telecom networks.
Conventional wisdom says carriers must sooner or later deploy the advanced networks needed to provide whiz-bang services such as truly high-speed wireless Internet access and full-motion Internet video that'll rival the quality of cable TV.
The thirst for high-speed, high-capacity telecommunication services will be akin to our previous passions for more tangible avenues of transport -- railroads, highways, airports, the reasoning goes. We needed them to move people and things. In the digital age, we need fatter and faster telecom ``pipes'' to move information.
It's an article of faith, it seems, for ADC, its peers and customers that the build-out of advanced telecom networks will continue unabated around the world.
ADC's inventory includes simple low-tech plugs, essentially the same ones that operators once used on switchboards to patch through phone calls. Even today, there's a need for them to make some physical connections.
But ADC, which holds 250 U.S. patents and has another 170 pending, has plenty of high-tech tools in its box, too. They include photon laser pumps that enable carriers to increase fiber optic capacity up to 32 times. In short, with the pumps, they can push a lot more phone calls, e-mail messages, data files and other traffic over fiber optic cable.
In the not-so-distant days of 2,400-baud modems, who would have thought the Internet would become such a graphically rich medium or conduit for the dissemination of CD-quality music? But it is. So, it's not unrealistic that within a few years, the Web will provide many of us with full-motion video as good as broadcast TV or better.
Meanwhile, businesses, especially those of national or international scope, need more and more bandwidth to move often massive amounts of data between offices. In a 24/7/365 world, many already move work around the globe, shifting it from one time zone to another as one group of workers goes home and another -- a workday behind -- heads to work.
Setting a standard
``It has almost become a law that as we build the infrastructure, the content providers come up with ways to consume the bandwidth (network speed and capacity).'' says Lynn Davis, president of ADC's broadband connectivity group. ``The demand will continue to grow forever.''
The elements that threaten to slow down ADC are macroeconomic, says Davis. ``If the overall economy slows down, if money gets tight, if energy costs cast a pall over the entire economy, those are the things that are going to slow down our business,'' he says.
His division, which has more than tripled its annualized sales since 1997 to $1.7 billion, focuses on standardized copper and fiber products that increase network speed and capacity.
``We want a standard that will be acceptable in Germany, China, Texas,'' says Davis. ``And we try to understand our customers business formulas, what we can do to help them be more productive and generate more revenue at lower cost.''
Overseas markets account for about a fifth of ADC's sales. And there's lots of room for growth abroad, especially as lesser-developed nations leapfrog to the latest telecommunications technology.
ADC is especially bullish about China.
``If you take the ten-year view, China is probably the most exciting telecommunications market in the world,'' says Cadogan. ``We see the day when we could do $1 billion a year in China. It clearly has that level of potential.''
The company makes, assembles and tests about 70 percent of its products in its own facilities.
They include a 334,000-square-foot, $43 million plant in Shakopee. Machinists there oversee highly automated machines, integrated with robots, that bang out plugs, pins, metal cases and other components used in ADC products. Attached to each tool-and-die machine is a plastic placard noting its six-figure price.
About 30 percent of ADC's products come from subcontractors and other suppliers. To reduce costs, the company also uses offshore assembly and sourcing.
In the telecommunications equipment business, an enemy is also often a customer or key supplier, says Davis. ``Lucent is our biggest competitor,'' he says. ``But it's also our largest supplier and it'll be on my top 20 list of customers. That's the nature of the industry today.''
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Martin J. Moylan, who covers technology and telecommunications, may be reached at mmoylan@pioneerpress.com or (651) 228-5479. |
