Castelle Inc. (CSTL)
Interview with:
Scott McDonald, President and CEO
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solutions for easily implementing faxing and printing over local area networks and the Internet.

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Castelle’s “All in a Box” hardware and software fax technology is attractive to IT managers

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Computer Networks

Castelle Inc.

855 Jarvis Drive, Suite100
Morgan Hill, CA 95037
Phone: 408-852-8000

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Scott McDonald
President and CEO

Interview conducted by:
Lynn Fosse
Senior Editor
June 2004

Scott C. McDonald

President & Chief Executive Officer

Mr. McDonald is a veteran business executive and leader with substantial experience in operations, administration and financial management and in building successful companies. His 25 years of professional and business successes have included leading companies in private and public company financings, mergers and acquisitions, financial restructurings, and system implementations at a number of rapidly growing technology companies in Silicon Valley, including Conxion Corporation, CIDCO Inc., PSI Integration, Inc., Integrated Systems, Inc., and Computer Products, Inc. In addition, Mr. McDonald serves or has served on the Board of Directors for a variety of public and private companies, including Castelle, Digital Power Corp., CIDCO Inc., and Octant Technologies Inc. Mr. McDonald holds a BS in Accounting from the University of Akron and an MBA from Golden Gate University.

Company Profile:
Castelle Inc. (CSTL-NASD), a market leader in fax solutions for small to medium-sized workgroups and enterprise applications, develops office automation systems that allow organizations to easily implement faxing and printing over local area networks and the Internet. Castelle's network fax servers, FaxPress and FaxPress Premier, provide a simple way to integrate fax with email, desktop and back-end applications. Castelle products are designed to be easy to use and maintain, and provide an economical way for companies to share resources over the network. Castelle was founded in 1987 and is headquartered in Morgan Hill, California. Its products are available through a worldwide network of distributors, resellers, online retailers, and the Castelle Online Store.

Castelle's FaxPress and FaxPress Premier fax servers provide a complete solution for the network fax environment, combining all the necessary hardware and software into one self-contained, easy to use server appliance. FaxPress system hardware combines an intelligent network interface, a fast image processor, system CPU and one to eight fax modems. FaxPress servers are delivered with Castelle's Client/Server Software, which allows the server to integrate with leading network environments. Castelle's FaxPress Premier™ Analog and FaxPress Premier Digital fax servers represent an advanced, state-of-the-art approach to network faxing. Both the FaxPress Premier Analog and FaxPress Premier Digital support users in various network environments including Microsoft Windows, Novell NetWare, Linux/Unix, and Apple Macintosh. As dedicated network fax servers, the FaxPress Premier Analog and FaxPress Premier Digital provide client workstations with access to incoming and outgoing faxes, phonebooks, transaction logs and other fax-related data via FaxmainŽ, the FaxPress Premier client’s fax transmission and server administration utility.

CEOCFOinterviews: Mr. McDonald, what was your vision when you came to Castelle and how has that developed over time?

Mr. McDonald: “Castelle was founded in 1987 and I personally joined the Board of Directors five and a half years ago as a board member. Two years ago, I was asked to come in as CEO and president and help the company in a turn around situation. What attracted me was the fact that the worldwide network fax server market, which is approximately 250 million dollars in size, was highly fragmented. If a company like Castelle were to focus specifically on the network fax server market for business and enterprise, there could be an opportunity for a focused company to grow in that highly fragmented market. That is what started the germinization of our vision. We have focused on the network fax server marketplace. We have been able to turn the company around profit wise, and we are growing the top line now.”

CEOCFOinterviews: Will you tell us about what you did to turn it around and what you see coming up?

Mr. McDonald: “Initially what we did was focus on network fax servers. As a small company that got started in technology, Castelle focused on print servers and storage devices and positioned itself as a network appliance company. What we have done is to change it in a fundamental way. We have stated our focus and purpose- the network fax server market for business and enterprise. This in and of itself allowed Castelle to focus all of its resources on that vision and objective. We then developed FaxPress Premier, a new product that allowed us to have a digital capability and to address the enterprise marketplace. Prior to FaxPress Premier, our FaxPress product line only addressed the analog fax market. Now we are able to reach a new market with larger installations.”

CEOCFOinterviews: With the advent of email why do you need faxes?

Mr. McDonald: “Most offices need three things: they need to print, they need to fax and they need to email. As such, the trick is to make the integration and implementation simple. What our product does is allow faxing to be integrated easily and seamlessly with emailing and printing. All three office automation tools are necessary in today’s workplace. Specifically, fax is still needed because documents need to be signed and then faxed. Many vertical markets such as legal, financial, real estate and healthcare require signatures and faxing is the only method that can accommodate that. It looks like fax is with us for a long time to come and we are happy about that.”

CEOCFOinterviews: Who is your typical customer?

Mr. McDonald: “The typical customer for us would be small to medium sized businesses and smaller enterprise Fortune 1000 companies that send and receive faxes and are faced with the dilemma of moving towards a paperless office. They need to make improvements in office automation and they need to focus more on the document management aspect of their company. Our FaxPress and FaxPress Premier fax servers allow all network users to easily send and receive faxes from the desktop, and since they integrate directly with programs and applications already being used, the learning curve is incredibly small.”

CEOCFOinterviews: Do they purchase this outright, and what is your revenue model?

Mr. McDonald: “Currently we use a distribution model and our products are available through Ingram Micro and Tech Data, large technology distributors. We also have a worldwide network of value added resellers, partners, and online retailers.”

CEOCFOinterviews: How do you reach your end customer, are they going through distributors and then introduced to Castelle?

Mr. McDonald: “It is a combination of those methods. Our distributors work in conjunction with our marketing department to sell, promote and increase awareness for our products through various mediums: fax, email, print, and online. We also do some targeted marketing to healthcare, financial and government customers since we recognize these to be growing markets for fax technology.”

CEOCFOinterviews: If someone orders your product through Ingram, how are you paid?

Mr. McDonald: “When we sell product to Ingram Micro and Tech Data, they pay us. Part of the distribution model is they provide terms for customers that buy through them. Many times there are resellers in the middle helping the end customer to find some value added resources such as consulting and installation help.”

CEOCFOinterviews: What have you figured out that others have not?

Mr. McDonald: “We have not allowed ourselves to focus on other areas. In the worldwide fax server marketplace, we are one of the ten leading companies. Sometimes the larger companies tend to have a lot of initiatives and play at one time. We are small and we have decided that our best means of survival and growth is to focus exclusively on the network fax server marketplace, to focus on providing an easy-to-use hardware and software solution that addresses the needs of offices looking for a complete document management solution.”

CEOCFOinterviews: You have had eleven consecutive quarters of profitability. Would you like to comment on the financial stability of the company?

Mr. McDonald: “We are a company that has no debt, we have an excess of four million dollars in cash, we are growing modestly at the top line, we are profitable and we now have an opportunity to address and capture more of the network fax server marketplace.”

CEOCFOinterviews: Did you previously mention that Castelle’s fax solution is unique because it includes both hardware and software?

Mr. McDonald: “Some of the formidable competitors in the network fax server market are a software only solution. When an integrator recommends a software solution to a company, they would then need to get hardware in the form of fax modem boards or server, and then they would need to integrate it and make it work together. When you go that route, it is much more expensive and much more involved. What is attractive to IT managers about the Castelle solution is that it is an all- in-a-box solution. The hardware and software is all in one so we call it plug and play. That is attractive to some people and we are trying to make it known that it is a solution that is out there. More and more people as time goes on are attracted to that solution.”

CEOCFOinterviews: Not withstanding the eleven profitable quarters, how have you been affected by the downturn in technology?

Mr. McDonald: “I would think that the economy over the last couple of years has affected us at some level. But because the pricing of our product has ranged in the fifteen hundred to ten thousand dollar range, prior to FaxPress Premier, it allowed our product to still sneak into companies’ technology IT budgets. It did not hurt us and we were able to grow slightly during that time. Now with FaxPress Premier, which ranges from ten thousand to fifty thousand dollars, we think we are positioned as the economy is modestly recovering and that it will continue to fit into companies’ budgets.”

CEOCFOinterviews: Are you active only in North America or are you competitive worldwide?

Mr. McDonald: “Castelle sells our network fax servers primarily in the United States; probably in excess of 80% is distributed in the United States and less than 20% internationally. Internationally, we work with partners. The primary parts of the world where we do very well would be the U.K., Europe, and in Japan. It is because we have strong partners in those areas of the world.”

CEOCFOinterviews: What are the challenges you face as you continue on your path?

Mr. McDonald: “I think the challenges that we face are being a small company and getting the word out. We need to continue to focus on profitability and growth at the same time, so there are limited amounts of resources in the form of advertising and marketing. We partner with very strong and highly recognizable companies such as Tech Data and Ingram Micro. Our products also sell though CDW and partners worldwide that allow us to be focused and targeted, which goes back to our overall strategy of focusing exclusively on the network fax server marketplace. This allows us to put all the dollars that we have available towards that effort. I think by doing that, by being good at what we do and having good products, we are able to get the Castelle name out there and find end users so that we can sell more products.”

CEOCFOinterviews: Do you do much R&D?

Mr. McDonald: “R&D is a very important component of our current success and our future success. It was probably a two year effort from our R&D department and our engineering department to launch and introduce FaxPress Premier. It took a long time to do that and now we have it. There are always continued software releases, updates and enhancements for ease of use. With the introduction of Microsoft 2003 this year our initiative was to make sure that our product was compatible with the most recent version, and likewise with Lotus Notes or Novell GroupWise. We have ongoing continued efforts to make sure that our product works seamlessly with those email systems.”

CEOCFOinterviews: Why should potential investors be interested and is there anything they should know that perhaps they do not realize when they first look at Castelle?

Mr. McDonald: “If you look back at the last two years, the company was trading at 45 cents a share and we have been consistently above three dollars a share in six to nine months, so there has been a significant turnaround in the valuation and exposure of the company. You do not find too many small, medium or large companies that have no debt and have cash. We are generating a profit and we are growing. As I stated before, with FaxPress and our new product, FaxPress Premier, we have an opportunity to grow in this worldwide network fax server market. I think that is a nice opportunity or investment play for someone. We have the ability, we know what we are doing and our mission is to grow in that marketplace. We have experienced two years of growth and it remains to be seen if we will be able to continue, but I think that we will have a good shot at continuing to grow in the network fax server marketplace.”

CEOCFOinterviews: As CEO, what are your different functions on a daily basis?

Mr. McDonald: “It is a combination of many things including cheerleader; you provide the vision. I think that the most important contribution that I make for the company is to provide the vision and that is a combination and collaboration of talking to many people and assessing the marketplace as well as the competition and then coming up with a very clear vision. I think I articulated that we are focused on the network fax server marketplace for business and enterprise. We want to provide the best all in a box solution that is easy to use. You then communicate it all over again to all levels of management. You then make sure that all the objectives of each of the departments are all aligned and focused and supportive of that vision. If you do that and you are right and close in your vision, then I believe you have a good chance at succeeding. So far, we have done that at least over the last two years and I think we are positioned to continue to do that. I reinforce the vision and focus, and I am there to remove barriers from my direct reports and my employees to allow us to have our best shot at succeeding in our mission.”


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