Adaptec Shareholder Meeting Report (long).
Finally got this written up; sorry it's so late. The following comments are taken from my notes of the meeting. I've tried to be as accurate as possible, but no guarantees of course. These are my impressions and opinions; others may differ and I'd like to see alternative views.
The meeting opened on schedule about 9:30am on Aug. 20; there were about 150-200 people in attendance including company officers, management, employees and shareholders, up considerably from past years' numbers of 50-75 at most (this was my 6th meeting attendance in a row). Interim CEO Larry Boucher ("boo-shay") ran the show; he was a founder of the company in '81 and has been a board member ever since, with most of his time the last few years spent at outside companies (Auspex and now Alacritech alacritech.com ) he's founded. He immediately stated that since he's been back as CEO "only two weeks" (a phrase we were to hear again and again) he didn't have time to prepare a presentation per se, and in fact the only slide we saw on the screen was the time schedule for the meeting itself. This made me wonder "what about staff to prepare something? what about the other board members; they've been there for years?".
As a result, his opening pitch was brief, and came after perfunctory meeting business of approving minutes, conducting the election etc. I was disappointed that there was absolutely no opportunity for current board members to defend their reelection or otherwise debate any of the issues. All measures passed, as I expected. Personally, I voted my shares and my proxies for the board (only because Saviers is gone and Adler replaced him on the slate; if these weren't true, I'd have voted against), against the share/option issues (let's see some improvement, guys, then we'll talk - why reward the same in both good and terrible times?) and for the auditing firm.
Boucher introduced management in attendance (Adler got applause), expressed his view that ADPT had faced tougher times in the past when confronted with the IBM-PC interface killing the old ST-506 (I remember those days) and when IDE killed off the original PC interface. Both had big impacts on ADPT; the company adapted (so to speak) and prospered eventually. Boucher says it can do it again; this is not as tough as the previous challenges. Well, we'll see, won't we?
Also announced was that a publicly-accessible and publicized conference call will be made before the end of the current quarter, during which management will lay out its strategy for the future. To my knowledge, this is a first for the company; conference calls are usually for analysts and held immediately after earnings release - they have not invited shareholders or the general public to listen in (sometimes we do anyway).
The Q&A session was lengthier and more interesting, as one might expect. Boucher came back to his "I've only been here two weeks" excuse several times to dodge questions. To which I thought "well, there are lots of management in the audience - point to one of THEM to answer the question, dammit!" Didn't happen; it seemed clear to me that management wants to buy time for now while trying to come up with and present a coherent strategy. They didn't put an emphasis on full disclosure, that's for sure. Yeah, times are tough and management has its hands full, but this crew has been there a long time and I was very disappointed that a better shareholder-relations effort wasn't made.
My overall conclusions: it was a neutral to very slightly positive meeting; nobody ran out of the doors to buy more stock, that's for sure. It'll take at least a few quarters to get the train back on the rails. The company is betting its foreseeable future on the core SCSI business, convinced that it's technically superior (evolving the physical and logical sides to meet changing market needs) and where the market will be for future revenue and earnings growth. I sure hope they're right, and am looking forward to a clear enunciation of the "new Adaptec's" strategy.
Here are some of the topics addressed in the Q&A, not necessarily in chronological order:
-- How active will John Adler be, now that he's returned to the board of directors?
Boucher said Adler will be working up to 1 week per month at Adaptec, and told the story about traveling to New England to meet up with John and his 92-foot boat; the goal was to persuade Adler to return as CEO. This turned out to be a non-starter, Adler refusing the position but convincing Boucher that he could handle it as interim CEO and agreeing to return to the board. Boucher said that after 3 days sailing down the coast to John's home in Florida, he wasn't sure HE wanted to come back! One of the few humorous moments of the meeting.
One lady stood up and asked for John's resume; why was he qualified to be placed on the board? This elicited abundant laughter, as most people in the room knew Adler and his history quite well. John looked quite surprised to be asked the question, and in my opinion was pretty flippant in his response - the woman genuinely didn't know anything about him and wanted to know more. He briefly covered his experience at ADPT and other companies prior to that, and seemed to satisfy the questioner.
-- How about addressing SCSI at the low end of the market, where $1,000 PCs are common?
ADPT is not abandoning this segment, but "face reality", it's a small market for the company and never a core target. UDMA/IDE "really nailed us" - about 20% of the desktop business has been lost as a result, but the company expects to get some of that back. The pattern of the past shows SCSI starting to move back into the segment, because displacing technologies like UDMA "stick around too long" and new generations of SCSI once again provide the best performance. Therefore, Boucher expects to gain back some share of the low end. But company focus is on servers, specifically NT servers, as the core "significant growth" business, i.e. SCSI (both logical and physical, although Boucher expected parallel SCSI to die 10 years ago, and it's still around) and RAID. Looks like a lot is riding on NT5.
-- From Larry J. "the company needs better analyst guidance"
Boucher: "probably a good comment" and "will work on it".
Me: no kidding. They'd damn well better; 3 big expectation misses (so far) in a row have really pissed the analysts off.
-- More from Larry J.: questions about current quarter profitability, future quarters' profitability and possibility of being acquired.
Boucher declined to comment on any of these. Since this was not an analyst-guidance meeting, I'm not surprised.
-- Reiner Welz wanted me to ask about "core activities" in SCSI and RAID markets, specifically, does this include FireWire (1394), Fibre Channel (FC) and USB?
Boucher said he believes 1394 to be specialized, and that ADPT is "involved, but not driving it". Regarding Fibre Channel, ADPT has "not covered ourselves in glory" to date, there is really no significant revenue anywhere, and is waiting for Storage Area Networks and NT5 to mature. ADPT has to be on top, but needs to see a large growth environment. Will continue to be a major player in connected disk drives. USB was not addressed, but I see it as a low-speed, almost free, interface that's not part of ADPT's business strategy so not really relevant.
-- What is the company's growth path for the future?
Boucher said that I/O is the fastest growing area of the personal computer business, and SCSI has a long life ahead of it.
Comment: note that I do not believe that Boucher said that FC is an integral part of the strategy in his comments. It has been reported in various postings by others that ADPT is exiting or sidelining their FC development. Whether true or not, it's my impression that Boucher did not commit to FC in his comments, but it's likely ADPT will watch the market and jump in when and if there is "significant revenue" to be had.
-- New CEO
Management is not ready to go get one yet, as of the date of the meeting they hadn't even selected a headhunter firm, and was not expecting to actively start interviewing anytime very soon. There may be internal candidate(s) as well. No mention of the recruitment process for a new CFO, either.
Comment: this tells me that either the management is trying to get a strategy together first, then go get a CEO/CFO to execute that strategy or they're trying to keep top management lean while prepping the company to be sold. I think the latter is a small possibility, but I'll bet they're concerned about a hostile takeover with the stock at such a low price.
-- I asked about the Symbios deal, or rather, non-deal
ADPT was told "no way, no how" by the FTC. Fierce resistance was apparently expected on antitrust grounds. Why was it so expensive to kill the deal? Boucher said he couldn't give details, but the total cost was about $20 million (per Andy Brown, controller), they had to pay a Symbios "tariff" which I took to mean a cancellation fee or some such, and in retrospect the company would have had to spend "a LOT more" to integrate Symbios and make it work. In response to my followup question, Boucher acknowledged that the further ADPT got into the deal, the less exciting it looked. No further elaboration.
Comment: I wonder about having to pay a cancellation fee to Hyundai. Even I know enough about contracts to include an "act of God" clause saying that such fees were also not payable if the deal was broken due to government objection. Wonder if such a clause was omitted or if there were other reasons? We're not likely to find out.
-- Bob Nichols asked about option repricing
Boucher said it's a difficult thing to do, but necessary to retain key employees, and that the board did not reprice its own options.
-- I asked Boucher to address QLGC, Symbios and other competitors, especially in light of QLGC's recent quarterly report of record revenue (33% revenue growth) and earnings. QLGC is now about 1/6 the size of ADPT in terms of annual revenue run rate.
Boucher said that ADPT had become a "little bit defocused" and allowed QLGC to grow faster (when, in fact, ADPT was shrinking) but from a smaller base. ADPT can do it too. He seemed acutely embarrassed having to address this issue, and I can see why: ADPT has been blaming the poor results this year on a shrinking market due to cyclical decline, yet a significant competitor seems to be growing nicely in very similar markets.
-- What ever happened to the ATM (Asynchronous Transfer Mode) technology that was supposed to be so hot a couple of years ago?
It was "something of a mistake on our part", and turned out that nobody wanted it. It was really an infrastructure play, not an I/O play, so wasn't a good fit with ADPT's core business. No more dollars will be spent on ATM unless it comes to the desktop or server markets, which doesn't seem likely. Gigabit Ethernet killed it. A humorous note was hit when a shareholder wanted to know what ADPT was doing in the ATM business anyway; it took Boucher a moment to realize the shareholder was referring to Automatic Teller Machines and correct the misperception.
-- Four of nine directors own 40 or fewer shares as of the latest report
Boucher said he can't comment on "personal things", but said some directors didn't agree with the company's recent strategy (not naming names) and that Boucher personally is buying via the company purchase plan. (This plan, by the way, permits employees to dedicate up to 10% of salary to purchase stock at a 15% discount to each quarter's beginning or end price, whichever is lower.) No other directors commented on this or any other topic, and I don't see a significant personal commitment on the part of ADPT management to own stock purchased in the open market.
-- Miscellaneous comments from Boucher
- Grant Saviers was on a "high-dollar, high-risk path", which the board eventually refused to agree with.
- Boucher's latest startup, Alacritech, will develop products to be marketed by ADPT. These products are very much under wraps; no comments whatsoever were made about what's coming.
I welcome feedback or comments in case I overlooked something or got it wrong.
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