Network Equipment Technologies, Inc. (NWK)
2003 Interview with: Hubert Whyte, President and CEO
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products that transmit voice, data, and multimedia traffic across a single network using multiple transmission technologies such as Internet protocol (IP), frame relay, and asynchronous transfer mode network (ATM) protocol.

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Network Equipment Technologies, Inc. - feeling good about the company after weathering the storm of the communications industry

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Technology
Telecommunications Equipment

(NYSE: NWK)


Network Equipment Technologies, Inc.

6900 Paseo Padre Parkway
Fremont, CA 94555
Phone: 510-713-7300


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Hubert Whyte
President and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
Editor

CEOCFOinterviews.com
February 2003

Bio of CEO:
Hubert A.J. “Bert” Whyte has served as a Director and as President and Chief Executive Officer of net.com since June 1999, when he joined the company to take it to a leadership position in the new field of service creation for broadband networking.

From 1994 until he joined net.com, Whyte served as President and CEO of Advanced Computer Communications (ACC).  At ACC, he created a new vision and strategy for the company, successfully restructuring the organization and doubling annual revenues before its acquisition by Ericsson.  Prior to joining ACC, Mr. Whyte served as Vice President and General Manager of the Access Products unit of Newbridge Networks Corporation.  He was one of the first members of the European team at Newbridge, focused on marketing to service providers.  Earlier in his career, he gained industry experience with British Telecom, Ericsson, Shell Oil, Business Intelligence Services, Mitel and Siemens. 

Whyte brings more than 30 years of expertise in the telecommunications industry to net.com, much of it in challenging and often high-risk roles in which his vision and entrepreneurial spirit have been called upon to dramatically alter the strategies and the fortunes of the companies he has led.

Company Profile:
Network Equipment Technologies, Inc., doing business as net.com, builds service creation platforms for broadband, IP telephony, and multiservice networks and supplies wide-area networking (WAN) hardware and software. The company's products transmit voice, data, and multimedia traffic across a single network using multiple transmission technologies such as Internet protocol (IP), frame relay, and asynchronous transfer mode network (ATM) protocol.

For network service providers and operators, net.com platforms enable a fast return on investment, lower operating expenses, and profit from rapid creation and delivery of new services to end users. A revolutionary in broadband networking, they pioneered multiservice networking, used by service providers, government organizations, and businesses worldwide. A founder of the Service Creation Community, net.com leads in service creation, the new profitability model for network service providers. With more than 25,000 systems installed in 75 countries, they support the business strategies of customers in every part of the world.

Products Include:
SCREAM Service Creation Manager
SCREAM is the only universal broadband service switch supporting native ATM and IP and BRAS (aggregation and subscriber management), built on an open control platform for enhanced service creation. It has a revolutionary SplitPlane™ architecture, which enables services to be programmed directly onto the network in real time. At the subscriber level and at an individual flow level, it offers guaranteed bandwidth (a unique SCREAM platform capability).

SHOUTIP Advanced Telephony Platform
Breakthrough packet gateway systems serving the IP environment, perfect for the carrier or large enterprise transitioning from circuit to packet. Options include local IVR, Web-based billing, CDR, SS7/C7, and interworking of H.323 and SIP. With open architecture, the SHOUTIP platform was developed to maximize the potential of VoIP systems.

SHOUT900
SHOUT900 is a low-density media gateway featuring integrated SS7, SIP/H.323 interworking, billing and service creation. Advantages to service provider and enterprise users include reduced costs of deploying voice-over-IP (VoIP), reduced equipment requirements and greater versatility in terms of deploying enhanced business services.

PROMINA Multiservice Access Platform
A range of industry-standard switch and voice/data networking products that delivers true multiservice capability. Adding PROMINA nodes increases processing capacity for consistent performance in both small and large networks. A node can grow from PROMINA100 configuration with four feature card slots to PROMINA800 with 96. Up to 250 nodes per domain - hundreds of domains per network. Single platform support for ATM, leased line (T1/E1, FT1/FE1, E3, T3), and/or satellite, highly efficient bandwidth management, dynamic bandwidth allocation, frame relay switching, IP routing, ISDN signaling and voice compression to maximize available bandwidth.
 
NETWORK MANAGEMENT SYSTEM
The SCREAMvue management environment complements the SCREAM Service Creation Manager with easy-to-use applications that support a service provider's ability to create and deliver new broadband services. SCREAMvue provides open XML, Java and CORBA interfaces for rapid service definition and deployment.

SHOUTvue is the network management software for net.com SHOUTIP packet telephony platforms. It provides a simple, intuitive suite of tools for configuration, monitoring, and billing for revenue-generating voice services across the Internet, intranet, or IP network.

The Panavue Management Platform supports net.com Promina 800 Series Multiservice Access Platform. It provides flexible web-based configuration and management of WAN access network elements.

CEOCFOinterviews: Mr. Whyte, where was Network Equipment Technologies when you became its CEO and what changes did you orchestrate?

Mr. Whyte: “I came aboard just over three years ago and, at that time, the business was in decline, so there was a requirement to do ‘major surgery’ on the company. The decline persisted for a while, and then about a year-and-a-half ago we started to move forward and upward in the right direction. I think we are one of the very few companies in our industry today with a growing business. After a period of restructuring and managing the business, and positioning where we should be, we are now starting to see the benefits of that hard work and we have had six quarters of good growth. Better still, the new products are starting to get recognition in the marketplace. Recently two of the big communications journals, Internet Telephony and Communications Convergence, announced our product, SHOUT900, as the product of the year.

The other area that is making us feel good and excited is that incumbent carriers like SBC (NYSE: SBC), BellSouth (NYSE: BLS) and Verizon Communications (NYSE: VZ) are starting to review their network architecture. We built a product that fits very neatly into the new architecture they are looking toward building in the next year-to-two years. We feel good about the company; we are a nice size and we continue to grow. We have twenty years of history in the industry and we are weathering the storm that the telecommunications and communications industries have had for the last two or three years in a very positive manner. I will say, this has been our best year and next year is even going to be better. I am very excited. After going through some early pains, and I might say it was a lot of pain that the company had to endure for the last two to three years, I am very pleased with what we are doing.”

CEOCFOinterviews: How did you know what direction to go in, making the right choice in getting products that are needed, especially in this environment?

Mr. Whyte: “You have to be old like me, with over thirty years in the communications field, and have an understanding of the network and what the customers who build those networks require as they move forward. We have chosen the right customers, the ones who were essentially left standing after the storm. We have picked the right position from a technology point of view with our SCREAM Service Creation Manager platform, the position they need to move forward into the distant future. It is not luck; it is strategic foresight. There are many companies out there that have the wrong product for the wrong space and I think next year is going to be very tough for them.  But for us, we continue to get endorsements from those major customers around the world. I’m telling you, it is very exciting for us!”

CEOCFOinterviews: What is your main product line today?

Mr. Whyte: “Our main product today is our PROMINA line, which still sells very well. However, from a new product point-of-view, SCREAM is the product that is getting us a lot of recognition, although more from customers than from the media. That is because we are talking about a new concept called ‘Service Creation’ and it is a different business model. It is only starting to get recognition out there in the media. SCREAM and SCREAMlink allow customers to take our legacy platform, which is doing very well, and migrate to new networks. SCREAM as a product that allows incumbent carriers to build a new architecture through broadband, an architecture that is very similar to a telephone network in that it allows them to create new revenue and demand on their network and grow their businesses. SCREAM is ‘plumbing,’ but it has an open interface to allow software from people like MicroSoft Corporation (NASD: MSFT) and Oracle Corporation (NASD: ORCL) to influence how the platform operates in the network.”

CEOCFOinterviews: With regard to your SCREAM platform, what is the goal for the carriers?

Mr. Whyte: “The goal is for the incumbents like Verizon, SBC, and Deutsche Telekom to re-architect the network to the SCREAM platform or similar products. There are very few competitive products with the SCREAM capability today that would sit within the edge of the network, which is historically called the ‘local’ part of the network, and allow them to manage the demand and supply of the services they deliver to the network to consumers and to enterprise. It is very difficult to explain how big that is for companies like us, but it is a huge opportunity in the hundreds of millions of dollars as they move their architecture forward. The challenge for everyone in the industry is when will they start doing that? At the moment those incumbents are spending less than they were two or three years ago and they are much more cautious about how they spend. We just have to move forward with them and prime our products into that new architecture. When they make those decisions to spend we will be sitting, we hope, in a very sweet position to benefit from that business.”

CEOCFOinterviews: What is Service Creation?

Mr. Whyte: “Carriers have built services on their networks for the last hundred years; they are the things that attract people to use their network and carriers must continue to do that. What ‘Service Creation’ allows them is to do that in a more automated fashion. Today, when you ask for a new telephone in your home, you set off a chain of events and in about a week to two weeks, you get a telephone. We want that to happen instantly, and carriers want it to happen instantly. When you ask for a new service on their broadband network, it should be immediately available based on how much you are willing to pay for those services. They should be immediately able to grab the billing information and to provide the service, and immediately able to manage that service for you.

We change the network from what it is today, flat-rate and ‘all-you-can-eat,’ to give it a more automated and dynamic nature. Service creation is about allowing carriers to build profitable services through their networks in a much more rapid manner than they have done in the last hundred years. SCREAM is the platform that allows them to do that more easily. The Service Creation Community, which we helped to found, is a consortium of companies that are working together to help the service provider deliver new revenue generating services, and it is growing everyday. The members of the Service Creation Community are working to show carriers how they can more rapidly and profitably deliver new services through their networks. The founders include: Siemens ICN (NYSE: SI), MicroSoft, Paradyne (NASD: PDYN), Accenture (NYSE: ACN), ADC Telecommunications, Inc. (NASD: ADCT), Oracle, and Hewlett-Packard (NYSE: HPQ). We are not saying that we have all the solutions today, but to help stimulate the industry, we need to go back to people like SBC and say “Look, if you did this to your network, you could create more revenue,” and that is what most customers want to hear. They want to hear ways of reducing cost for delivery of services and ways to make money from services.”

CEOCFOinterviews: Particularly in these tough economic times!

Mr. Whyte: “Absolutely! Operational costs for a company like SBC are huge. If they can take out five, ten or fifteen percent of that, their whole P&L will improve going forward.”

CEOCFOinterviews: What is creating the interest and excitement in your SHOUTIP platform?

Mr. Whyte: “The voice network is essentially over what is called a ‘time-division multiplexing architecture.’ People are moving to an IP packet architecture. They are trying to put voice over a packet architecture because it is more efficient and offers lower costs. There are very powerful reasons to move voice onto this new packet-based architecture and SHOUTIP platforms are an excellent vehicle to do that. In the marketplace today, SHOUTIP platforms truly are the ‘smartest’ platforms in their class and customers are realizing that. We can be more efficient than our competitors and we can scale better than our competitors, so those things are good for the shopper. It is early days for SHOUTIP; we only started to kick SHOUTIP off properly in the beginning of this year. It is a very intelligent media gateway (voice over IP platform) and it focuses on a couple of key points; growth areas, calling-card area and the wholesale area, which we think we will benefit from going forward. We continue to get more endorsements for the product, both from the technology market and from customers. We feel very good with these opportunities going forward.”

CEOCFOinterviews: Please explain what you provide with SHOUTIP and how it is applied.

Mr. Whyte: “We provide a piece of hardware that allows them to connect to the network and then they get a very sophisticated suite of software that allows them simply to drag voice from the old network and put it on the new network. That is the key; it is a simple and elegant way to take voice from the old network, which is expensive, and put it on a new network, which is much more cost effective than the old network. In doing this, through our plumbing and through the sophisticated software of SHOUTIP, they can create a good business for themselves.”

CEOCFOinterviews: What is your revenue model?

Mr. Whyte: “We sell the SCREAM platform for the edge and we offer the whole implementation and service of that platform. We can couple within carrier organizations to build those types of network architectures they are seeking to grow to. We have been supplying to those companies for the last fifteen years, so we already have networks within Verizon, SBC, British Telecom, France Telecom, Deutsche Telekom, etc. There is a business there already and a relationship that we have worked through with them that is historical. They understand that we are not a start-up company, but a company with tremendous history and knowledge of the network, and a company that has delivered quality reliable products for twenty years. We believe that works in our favor as we move forward.”

CEOCFOinterviews: What are your channels to the market and how is your relationship with government agencies?

Mr. Whyte: “We have three channels to market; one is the government channel, another is enterprise channel for corporate America and corporate international, and the other is the carriers. All of those markets are struggling economically and that is visible within the media for everybody. The government, however, is a channel that we have had for about fifteen years and have built tremendous relationships within the various agencies, not just in the United States, but worldwide. Those agencies are spending; some of it because of the tragic events of last year, but they are trying to build much stronger communications relationships between various agencies and organizations within government. They want to understand what is going on within the world much more rapidly.

We have been a leader in the provisioning of networks to those customers for fifteen years, and as they have extended and expanded those networks, we are benefiting from that. In addition, we have a new set of products that link into the old products that we have been selling and allow them to migrate to higher speed broadband networks. The combination of the tragic events of last year that have created a demand for highly secure networks, as well as the expansion of networks that will support European countries’ entry into the EU via NATO, and the fact that we now give our legacy customers an elegant migration strategy creates a growth picture that is one of the real rare events within the industry right now.”

CEOCFOinterviews: Are the international markets affected by the current economic environment and are you expecting growth there?

Mr. Whyte: “I think that when we talk about the economic environment it’s not just a U.S. phenomenon. In fact, many other parts of the world are more distressed, Germany, France and Japan for example. The issues that we see here domestically are transported around the globe. It is very tough around the world. We are in all the key spots around the world such as China, Japan, the UK, France, Germany and Scandinavia, which will allow us to benefit when the industry comes back. We also address markets like South America and Africa through partners and agents. We are very well positioned, as the market globally becomes more positive. It is tough out there for everybody. We have a ‘tight ship’ right now and we intend to keep it tight until we see signs of the business coming back. Although we continue to grow and we are doing very well, we are not running ahead of ourselves, but we are taking each step one at a time. I think that is the motto for the company going forward: be very careful, wait for the business to come back, and prime ourselves so that we can grow as it comes back, because we know that many of our competitors may not be standing next year.”

CEOCFOinterviews: What place do acquisitions and joint ventures have in your plans?

Mr. Whyte: “We clearly have built a tremendous relationship with the early members of the Service Creation Community, which is expanding, and we are seeing more opportunities within that community. We continue to look for technology and ideas and we will explore those avenues. We are also cautious; we have nearly 100 million dollars in the bank; ‘cash is king’ in our industry and we intend to keep it that way, within our bank, for as long as possible, with the anticipation of the industry coming back. We are not making rash decisions; we are being very careful and I think that you have to be in this environment.”

CEOCFOinterviews: Do you manufacture your hardware and software and do you need an inventory or is it on a custom basis?

Mr. Whyte: “We have a bit of both; we outsource many of the components, integrating within our facility. We have an inventory and we meet customer requirements on delivery. We have a balance of manufacturing models, which has served us very well in these tough times. We have a cautious approach towards inventory and good relationships with our contract manufacturers and that has worked for us.”

CEOCFOinterviews: Do you need to bid on contracts and is price a factor for the customer or does your quality and ability take-over?

Mr. Whyte: “That depends on the opportunity. With some opportunities, there is a process with other competitors involved. It is about the propositions, price, and service and how strong the company is. All of those elements go into it. We also have networks out there, and they expand and grow, where there is really no competition. The beauty of a network is that they never stand still, but get bigger, and change and adapt. We get new business, too, and we have to go through competitive bidding for that business. Sometimes it is about price and other times it is about functionality and capability.”

CEOCFOinterviews: Is customer service a big feature of your company?

Mr. Whyte: “Yes, we have an outstanding service organization that has built a tremendous reputation over the last twenty years. We manage and service mission-critical networks; these networks cannot go down and they must deliver communications across the globe. Within the government, some of those are solid, rugged networks, which we have to maintain. For global customers like Reuters Group and VISA International, we build networks that go across the world to areas where it is sometimes a struggle and difficult to provide support. We have built an organization to do that; when we get issues in our networks, we get onto it very rapidly and customers are extremely pleased with the type of service organization and the ethics and quality that service organization brings.”

CEOCFOinterviews: What sets you apart from your competitors?

Mr. Whyte: “We experienced the pain before everyone else and everyone else is still in pain. We took the hard decisions before anyone else. Therefore, we were better prepared when the storm hit. We covered ourselves up pretty well, because we could see the storm coming. I think we have chosen very interesting opportunities for the future for our technology with products that are ‘going with the flow’ as far as industry is concerned. We are an international company with relationships around the world with major customers; that’s a powerful thing to have within the company. We have three excellent channels and we know how to sell into the government, carriers and enterprise. A mixture of things sets us apart. Sure there are other companies like us, but when you bundle them all up, I think it shows that we are well positioned going forward.”

CEOCFOinterviews: What would you like to say to your shareholders and potential investors?

Mr. Whyte: “I think our investors have been very patient with the company as we have had to restructure and build the business again. Even though we have shown evidence of growth over the last five quarters, obviously when you look at our evaluation, it is really around our cash-value. Equivalent companies have incredible values, but not with the strength that we have in our foundation. I want our investors to be patient; I think they will see continued improvement in our business and I hope they will see the benefit of our strategy. The disappointing thing for our investors is that the industry collapsed about two years ago and we have had to ride that storm like everybody else. There will be a day in the sun for this company again and I am very pleased that we are marching forward in a most positive way towards that day. I thank my investors for being loyal and I thank them for staying with us; I think our investors will benefit from that in the future.”

CEOCFOinterviews: You are certainly selling below book value now!

Mr. Whyte: “That is correct and there are companies out there that just do not have the potential and possibilities that we have, nor the cash in the bank and the international prizes, and two new products that attract big opportunities. The market is the judge; they want to see us continue to improve and as those improvements are presented to them, like the product of the year for SHOUT900, it shows another indication that we are starting to see some benefit.”

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