Nice article on NN and ATM growth
(via NN thread)
ottawacitizen.com
Friday 29 May 1998
Newbridge growth machine
given a fine-tuning
Unapologetic about UB, vice-chairman
Sommerer says there's still a $10B-a-year
firm in the making
James Bagnall
The Ottawa Citizen
For nearly eight years,
Newbridge Networks Corp.
vice-chairman Peter
Sommerer has been at the
heart of one of this region's
strongest growth machines.
The Austrian-born engineer
was handed the job in 1990
of installing some
professional management in
what was then a highly
entrepreneurial outfit
careering out of control.
Then, from 1991 to 1997,
Newbridge sales jumped
nearly tenfold while its
workforce soared to nearly
6,000 from 1,200.
But the go-go years came to an abrupt end with Newbridge's purchase last
year of UB Networks of California -- an event that has triggered huge
losses, zapped Newbridge's market value and stalled the company's sales
momentum.
It was Mr. Sommerer who initially took on the task of integrating UB
Networks into Newbridge's computer networking business. And he bears a
good share of the responsibility for the consequences that continue to flow
from it. But an executive's ability to deal with a wrong turn is often just as
revealing as his experience in coping with good fortune. And Mr. Sommerer
yesterday showed some of the steel that characterizes Newbridge's top
management.
"The company acted in a decisive fashion when revenues didn't meet
expectations," he said yesterday after an address to more than 200
members of the Ottawa Centre for Research and Innovation. "Basically,
that's history," he said, referring to the UB Networks debacle.
Partly at his behest, Newbridge trimmed 300 of UB Networks' 1,000 or so
employees upon acquisition. The company announced last December and
January that it would sack another 450.
In February, Newbridge revealed it would absorb a $181.4-million
restructuring hit related mainly to the problems at UB Networks.
Mr. Sommerer said yesterday the entire experience has chewed up an
inordinate amount of executive time at Newbridge and hinted that the
company is still working to get back into fighting trim shape.
"Research and development and operating costs as a percentage of sales is
too high," he said.
During the two years ended April 30, 1997, these costs were a relatively
constant 35 per cent to 36 per cent of sales.
But in the nine months ended last Feb. 1, the ratio soared to nearly 46 per
cent. Part of the problem is that sales of Newbridge's original product line,
based on time division multiplexing technology, fell just as UB Networks'
revenues tanked.
But further, draconian cuts appear to be out of the question. Mr. Sommerer
said he is counting mainly on fast growth of the company's flagship product
line -- which is based on asynchronous transfer mode (ATM) technology --
to restore the company's financial and expense ratios to health.
There is evidence he is right to do so. Eric Blachno, an analyst with New
York-based Bear, Stearns & Co., predicted earlier this week that sales of
Newbridge products based on ATM and other packet technologies such as
frame relay, will grow 55 per cent in fiscal 1999, which ends April 30.
This will have a big impact because packet products designed for
telecommunications networks made up half the company's total sales in the
third quarter ended Feb. 1.
Mr. Blachno reckons Newbridge sales will now hit $1.9 billion in fiscal
1999 compared to his estimate of $1.6 billion for fiscal 1998. (Newbridge
is expected to release final results for fiscal 1998 next Tuesday.)
In short, Newbridge is still very much a growth company -- a fact more
evident to locally based employees than those operating elsewhere.
Mr. Sommerer said the company's global workforce "over the last three
quarters" has been kept flat, suggesting it is now roughly 6,300 strong. At
the same time, however, Newbridge has increased the number of its
Kanata-area employees to about 3,300 from 2,800 on April 30, 1997.
That's a slower rate of employment growth than the company had been
projecting last summer, when Newbridge president Peter Charbonneau was
talking about net annual increases locally of 800 to 1,000 workers.
But it's still enough for Newbridge to start thinking about the construction of
additional office towers.
"Whether it happens this quarter or six quarters later, who knows?" Mr.
Sommerer said. "In terms of the basic drivers and the logic behind it,
[Newbridge] is as strong as ever. If anything, it's stronger."
Emphasizing the point, Mr. Sommerer said "Ten billion [in annual sales] is
quite tangible," he told the crowd.
Like all his senior colleagues, Mr. Sommerer is convinced Newbridge is
faced with an historic opportunity. Put simply, corporations, telephone
companies and other service providers are upgrading to high-capacity
networks capable of handling voice, video and data signals.
ATM is one of several technologies that will form the heart of these new marvels. "This is as certain as anything can be in business," Mr. Sommerer said.
What's less certain is the pace at which the big companies will actually upgrade their networks. Newbridge must constantly calibrate its spending plans according to sales trends.
When the relationship between spending and sales falls out of whack, as it did last fall, the result is often a traumatic change in the firm's market value.
Newbridge's share price closed yesterday at $40.25 on the Toronto Stock
Exchange -- well off its peak of $95 last October.
Although much of this precipitous decline reflected the difficulties associated
with Newbridge's purchase of UB Networks, Mr. Sommerer isn't
particularly troubled by it.
"The market either loves you or the market doesn't love you," he said, "If
people pay prices that are in the stratosphere, don't blame Newbridge," he
added.
In his view, there is a natural rhythm to growth in technology firms -- and if
either the company or its investors get ahead of themselves, there will be
consequences.
But if there's something worse than excessive growth, he said, it's
experiencing no growth at all. The trick for Newbridge, and its top
operations manager, has always been to find the happy median. After more
than 20 years at Mitel Corp. and Newbridge, Mr. Sommerer knows how
difficult that is.
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