To All,
I haven't had the time until tonight to put together my thoughts in the aftermath of the Q2 numbers and the conference call. I will try to address the wide variety of questions and comments that have appeared here on SI. My apologies in advance for the length of this response, but I have a lot of ground to cover. Please note that I have NOT spoken to anyone at Ancor since the conference call. These are MY opinions only.
There were several people that wondered what other questions I was going to ask. Here is a list of what I wanted to cover:
1. Brocade's switch management software appears to be very well done. (Based on the preview available on their web site.) Does Ancor have similar software with similar features? If so, why doesn't Ancor have a demo available on their web site?
2. Brocade's zoning software has also gotten some attention. How important is this, and does Ancor have anything comparable?
3. How many Reg D investors have converted, and how does this affect the float?
4. Does Ancor have sufficient cash to ramp up for a significant OEM, and if so, how long will there be sufficient cash for that purpose?
5. Have there been any negotiations to sell the company?
6. What happened to Hucom to make you believe that the $1 million could not be collected? Did they go bankrupt?
I also had more general questions surrounding the $4.4 million charge, possible avenues of financing, and the timing of the decision to abandon the LAN side of the business.
As far as Ken cutting me off during the conference call, I don't really think it was due to the nature of my questions. The answers I was getting weren't very good, but Ken doesn't strike me as someone who just cuts someone off like that. (I've met Ken, Cal, and Steve, and they all seemed like nice, straightforward people.) It could be that they aren't used to having tough questions asked during the conference calls, but after posting numbers like those, they should have braced themselves.
If I were running Ancor, I would have handled the conference call in an entirely different manner. I would have said from the start that in light of the numbers, the conference call would be extended for AS LONG AS IT TOOK to field all the questions. If it was desirable to limit the length of the questions, that should be spelled out IN ADVANCE, with the opportunity to follow up as necessary.
As to the content of the call, I would have elaborated on why things were taking so long, INCLUDING EXAMPLES. I would also have detailed, to the extent possible, what areas were lacking in the MKII, and what Ancor was doing to correct these inadequacies. I would have discussed at length the financing alternatives, and the possible impact on shareholders. I would have spent some time on the decision to abandon the LAN side of things, and focus on the SAN. (Even an acknowledgment that Gigabit Ethernet was becoming a major player in the LAN, to the exclusion of Fibre Channel would give investors more confidence in management's ability to correctly predict the future. Remember, a couple of years ago, I thought that Fibre Channel had a legitimate shot at the LAN side. I was WRONG, and I've been saying so for a long time now!)
I would have talked extensively about a vision for the future of Fibre Channel in general, and FC switching in particular, and how it would affect companies in the future. The trade magazines are full of Fibre Channel material now. I would have leveraged some of that material to show the direction that the industry is moving, albeit more slowly than we would like.
As to the charge of "management bashing", I don't think that's what I've done. This is a company that many of us expected to be PROFITABLE a long time ago. We just got done with a quarter that generated a $7.7 million LOSS. That's more revenue than Ancor is likely to generate for the entire year, at the rate they are going. That isn't management bashing. That's simply holding them accountable.
A couple of people have inquired about the charges. I believe the $4.4 million was mostly LAN gear that was destined for Hucom. A small portion of that was probably MKII prototypes and the like. As to comments about no further charges, I asked Ken about that in one of the previous conference calls. He said that there wouldn't be. This obviously signals a drastic shift in strategy at Ancor.
Now, on to the future. I agree with some of the others who say that Ancor should now be considered a startup. In essence, that's what they are, and the downside risk at this point is less than $2. I still believe that they have very good Fibre Channel technology that has some intrinsic value, and Roy Sardina's comments simply reinforce that view. The market simply hasn't arrived quite yet, and that has hurt Ancor very badly.
If I were in charge at Ancor, here would be my strategy. Some of these things might already be in the process of being changed, but I don't know.
1. Get some fire in the belly from top management all the way down to the most junior employee. If Ancor doesn't have people who want to succeed, I'd get rid of them, and hire some people who do. The Fibre Channel market will move quickly when it decides to move, and I want Ancor to be at the cutting edge.
2. Leverage the engineering talent at Ancor to make ABSOLUTELY SURE that the MKII has EVERY feature wanted by the potential customers. This is perhaps Ancor's BEST CHANCE. I don't want to be following Brocade around for the rest of my days. I want to LEAD! Stop arguing with the customer about what features should be available. Just GET IT DONE! I don't want excuses, I want results! I would make the MKII the BEST Fibre Channel switch in the business. Bar none!
3. I would hire a PR person to deal with the industry magazines. His ENTIRE job would be to write Fibre Channel related technical articles, case studies, and letters to the editor that would provide increased exposure for Ancor.
4. I would set up a high-performance test lab at Ancor HQ to showcase Fibre Channel's capabilities, and what benefits an Ancor solution could provide to customers. Real-time, full motion video, high speed data backup, number crunching, etc. could all be demonstrated without a huge cash outlay.
5. I would lose the existing ad campaign. If an advertising campaign is deemed necessary, I would position Ancor as a technological leader, not as a saxophone playing beatnik. And I would put a picture of the switch in the ad!
6. I would take a serious look at improving the appearance of the MKII. Internally, this is a gorgeous switch, but esthetically, it would look nicer in black. A simple, inexpensive change, but one that needs to be done.
7. I would get the products that are under development done, and get them out in front of customers. Don't let Brocade or McData be first with an 8-port, 32-port, or 64-port switch. Don't let somebody else be first with a FC to GE gateway. Ancor needs to be FIRST at something. The amount of time that it takes Ancor to bring a product to market is simply too long. The development cycle has to be shortened, in order to remain competitive.
8. I would optimize the MKII for the LAN, so that it can function as a drop in replacement for the existing 1 Gig gear. Then, phase out the old gear. Put all future development efforts into the MKII.
9. I would seriously consider entering the Gigabit Ethernet market. If nothing else, proving that Ancor has this capability would increase their value to potential suitors.
10. I would get the financing DONE NOW! In order to restore investor confidence, another "going concern" statement has to be avoided. This financing should take the form of a partnership or equity investment, to avoid further dilution.
11. If there is any hint of impropriety, I would settle the lawsuit! The less negative issues hanging over Ancor's head, the better.
12. I would seriously consider licensing MKII technology and/or patents to other Fibre Channel companies. This would provide a small, but steady revenue stream.
These are simply my suggestions. I'm not trying to run Ancor, and management probably isn't real happy with me at the moment anyway. However, I have correctly identified a few flaws in their business plan that could have been corrected a long time ago. If they had, things might look a bit different now. The Fibre Channel switch market would still not be here yet, but there would be some incremental revenue from other sources.
As far as ANCR as an investment, I honestly don't know. Based mostly on Roy's revelation that Vixel paid around $40 million for Arcxel, whose switch is not nearly as technologically advanced as Ancor's MKII, I think a $24 million market cap is too low. Even figuring in some dilution from additional financing, I think the intrinsic value of the technology is higher than $2 a share. (I could be wrong, and I certainly have been before, but that's the way I see it.) What I and other investors need to see is that Ancor has enough of a vision to develop a plan, the engineering talent to bring it to market, the sales force to sell it, and the will to make it happen.
Craig |
