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Brooktrout,
Inc.
continues to execute on industry trends such as movement to IP, movement to speech
recognition and unified communications
Technology
Communications & Equipment
(BRKT – NASD)
Brooktrout, Inc.
250 First Avenue
Needham, MA 02494
Phone: 781-449-4100
Eric R. Giler
President
Interview conducted by:
Diane Reynolds
Co-Publisher
CEOCFOinterviews.com
June 2003
Biography of President and
Founder, Eric R. Giler
Eric R. Giler is president and founder of Brooktrout,
Inc., where he has successfully led the company since 1984. He is on the Board of
Directors of several companies including Netegrity, Inc., and Onset Technology. Mr. Giler
also serves on the Executive Committee of the American Electronics Association (AEA) New
England Council. In addition, Mr. Giler has served on the board of the Massachusetts
Telecommunications Council since its founding, most recently as Chairman. Mr. Giler is a
frequent speaker on topics such as The New Network™, bridging the gap between voice
and data, how to run a successful business, and other technology and business-related
subjects. Mr. Giler holds a bachelor's of science degree from Carnegie-Mellon University
and a master's degree in business administration from Harvard Business School.
Company Profile:
Brooktrout, Inc., headquartered in Needham, MA,
delivers innovative hardware and software platforms that enable the development of New
Network™ applications, systems and services. The Company has a leadership position in
building the New Network by offering core technologies that marry the telephone to the
data network. Brooktrout believes its solid focus on customers, significant
first-to-market products, and strategic acquisitions make it the partner of choice for
today’s hottest communications service providers and enterprise application
providers. Brooktrout is traded publicly on NASDAQ under the symbol BRKT.
Since1984 Brooktrout has developed innovative hardware and software platforms that OEMs,
developers and corporate IT managers build into their communications systems. Customers
worldwide incorporate Brooktrout products into applications, systems, and services that
allow voice, fax and data to be distributed over the New Network™ (IP packet-based)
and the traditional circuit-based telephone network.
Products include:
The TR1034™ delivers fast 33.6Kbps fax transmission speeds, up to 30 fax channels per
board, and features an onboard T1/E1 interface- all with the performance and reliability
that has made Brooktrout the world leader in intelligent fax boards. Unparalleled
performance, carrier-grade reliability, single-slot footprint, and the flexibility to
adapt to changing needs all contribute to reducing the overall cost of ownership,
simplifying installation, minimizing ongoing management, and providing the highest level
of dependable performance.
The TR114™ Series are intelligent boards designed for high-performance fax and
fax/voice messaging systems. The TR114 provides up to 16 intelligent fax and voice
channels offering full fax and voice processing on each. The TR114 is one of the most
widely used intelligent fax boards in the industry. The TR114 is used in New Network
applications such as IP- and Web-based messaging.
The TruFax® Series is a line of intelligent fax
boards that offer small to medium-sized businesses and departmental workgroups dependable
fax capabilities for a variety of computer based fax applications, such as network fax and
fax broadcast. The TruFax Series offers a level of reliability and fax performance that
business can depend on at an economical price point for low volume fax traffic.
Together with Shared Fax on
Windows Server 2003, Brooktrout’s TruFax and TR114 intelligent fax boards enable
businesses to confidentially and securely send and receive faxes directly on their
desktops, eliminating the costs, complications and lost time associated with walk-up,
stand-alone fax machines. The Shared Fax product for Microsoft brings proven
reliable performance to BackOffice and Small Business Server. Brooktrout’s TruFax and
TR114 intelligent fax boards are also supported on Microsoft’s Small Business Server
2000 and BackOffice Server 2000, providing the reliability and affordability required by
today’s small and large businesses.
The Netaccess® PRI-PCI cards with Instant ISDN
Software provide the industry’s most robust digital WAN access feature set. Users can
connect Peripheral Component Interconnect (PCI) based systems to digital networks through
a variety of protocols, including T1/E1, Primary Rate ISDN, Frame Relay, raw data mode,
and others.
The NS700™ platform is the leading OEM solution for advanced SS7 call control and
non-circuit related signaling platforms deployed in over 70 countries worldwide and
available in PCI and cPCI formats. Each board within the NS700 product line can support up
to a total of 32 SS7 signaling lines on-board. Brooktrout’s extensive range of SS7
modules allows developers to leverage the capabilities of the SS7 network and develop
carrier-grade applications for SS7 circuit-switched call control, SS7/IP convergence, GSM
MAP SMS, CDMA IS41, and INAP Intelligent Network devices.
The TR2020™ platform is designed to offer a broad range of on-board TDM to IP
packetization capabilities. With a full suite of codes, echo cancellation and a proven set
of signaling protocols, it is a comprehensive platform for TDM / IP media conversion. The
TR2020 also offers a number of other functions including voice compression and interactive
voice response (IVR), as well as fax and data relay. The TR2020 also included embedded
support for VQmon TM, developed by Telchemy Inc., and adopted by ETSI. VQmon TM is a
monitoring agent that incorporates unique, non-intrusive voice quality measurement
techniques. Integrated VQmon QoS monitoring capability allows service providers to measure
voice quality by channel in real-time, a key foundation for managing QoS in the network.
The TR1000™ platform provides advanced media
processing, call control and network connectivity ideally suited for a wide variety of
speech, voice, messaging, conferencing, and fax applications. It is specifically designed
to support multiple, scalable services within both the enterprise and service provider
environments, and to provide a seamless migration path from circuit to packet networks.
The performance and flexibility of this feature-rich platform allows systems to scale in
both density and functionality to meet evolving technology and business requirements.
CEOCFOinterviews: Mr. Giler, please tell us about Brooktrout.
Mr. Giler: “Let me
walk you through what I call, ‘Brooktrout at a glance’. Brooktrout builds
enabling technology for communications applications. Very simply, we design and build
circuit boards and software that go into some of today’s and tomorrow’s most
exciting telecommunications applications. From a business perspective, we did $73.5
million dollars in revenue in 2002. We have $46 million dollars in cash and marketable
securities, and no long-term debt; we have 12.3 million shares outstanding. The company
was founded in 1984 and we have been public since 1992. I am one of the company’s
co-founders. We are a global company based out of Massachusetts with operations in
California and New Hampshire; our international operations are based in Brussels, Belgium,
and we have several sales offices worldwide. At the end of the first quarter of 2003, our
employee count was 230 people worldwide and we sell to about 400 customers per
quarter.”
CEOCFOinterviews: Please
tell us about some of the trends in the marketplace.
Mr. Giler: “One
trend in the marketplace is a huge movement to the Internet and other IP networks. Most
people think of the Internet primarily as a data communications vehicle, but we have also
seen a huge movement to move voice traffic over the Internet. A lot of the voice
applications that were traditionally done over the circuit-switched telephone network are
now being done over the Internet. The second market trend is the adoption of speech
recognition or the ability for a computer to understand who is speaking on a telephone
call. That’s becoming the user interface for recognizing what someone is saying.
Finally, there have been a number of advances in tying all of the different types of
messaging together, for example, tying your voice mail to your email. In all of those
areas, Brooktrout builds products that enable OEM developers and IT managers build
communication applications”
CEOCFOinterviews: What is driving companies to come to
Brooktrout for these products?
Mr. Giler: “The uncertain business environment, the weak
economy, and general risk avoidance corporations are driving companies to come to
Brooktrout. Many of these corporations are outsourcing technology development to
Brooktrout that they have previously developed internally, not just for our technology,
but because of the current business environment. There have been surveys done over the
last year of customers and potential customers of Brooktrout’s, which indicate that
over the next three years companies with more than $250 million dollars in sales plan to
reduce the number of R&D professionals engaged in enabling technology development by
over 50%. It is a very powerful movement from a business perspective to outsource enabling
technology. Our products are used both in the Internet or the IP network; they are used
inside either by the enterprise or the business; and they are also used on the public
switched telephone network, the traditional telephone service that most people get.”
CEOCFOinterviews: Can you give us an example of how your
products are used or applied in each area?
Mr. Giler: “In the public switched network, recently,
the telephone companies have come up with a new service called ‘Call Intercept’.
A lot of people who have caller ID from the telephone company have become disenchanted
with it because of the number of telephone calls that come in where you cannot figure out
who the calls are coming from. There are calls that are blocked out of area caller,
wireless caller, etc., which will appear on the screen and the person does not know who is
calling. The phone companies, in order to combat losing these customers for caller ID,
because of the difficulties in figuring out who is calling, have developed the new Call
Intercept service. When a telephone call comes in from one of these unidentified sources,
the telephone at the consumer’s residence never even rings. A voice message is played
back to the caller instructing them that the party they are calling doesn’t take
calls from telemarketers and that they must unblock their phone number if they wish to
connect. There were 450 million of those types of calls turned away in the last few
months. Every one of those calls had a voice message played back to the caller and every
one of those went through a Brooktrout circuit board. That is an example of how our
products are used in the public network.”
CEOCFOinterviews: What about at the enterprise network?
Mr. Giler: “At the enterprise network, what call center
operators are beginning to do is plug a microphone and headphone into the computer instead
of having the separate phone line and separate phone number. Call centers are those places
like customer service centers or tech support centers where people who make phone calls
are hooked up to computers at the same time. These call centers have replaced their
telephone systems with a Brooktrout IP or Internet Protocol technology product, which
essentially allows those telephone calls to be routed over the computer network from the
call center operator. Finally in the enterprise network side, if today you are receiving
your faxes and they automatically go into your email, that is done by a Brooktrout
product. Brooktrout has about 75% of market share of what is called the local area
network fax market. In addition, this combination of facsimile in e-mail is continuing to
grow substantially as the email market continues to grow.”
CEOCFOinterviews: How
closely do you work with your customers and how vital is the growth of their business to
the growth of yours?
Mr. Giler:
“Essentially we sell our equipment on an O.E.M., Original Equipment Manufacturing
basis, which means that our customer’s success is our success, so we are very, very
tightly linked. You can view that as positive or negative. We tend to view it very
positively because we have lots of customers. One of the things I first mentioned is that
we sell to more than 400 customers per quarter. Therefore, we have safety and diversity in
the number of accounts that we sell to and we are an integral part of their success. The
development costs to switch from our product to another product are very high, so most
customers stick with us from the inception of the product through the product’s life
cycle. So once we design our product into a partner’s application, it remains there
for many years, so the revenue stream becomes predictable based of course upon the success
of the customer, so we try to get as many customers as possible.”
CEOCFOinterviews: Do you
have long term contracts with them or is it on an as need basis?
Mr. Giler: Typically for an OEM customer, the contracts are
on an as needed basis, so there are no take-or-pay contracts in our industry and it is
very uncommon to have that. That is not to say that you don’t get a predictable
revenue stream because to the extent that many of these customers have very predictable
business cycles, it’s possible to aggregate all of them to come up with reasonable
forecasts for our business. We only forecast our business at one quarter publicly;
internally we have business plans that go out over three years.”
CEOCFOinterviews: How
much time and energy are you spending on increasing existing business and expanding into
new markets?
Mr. Giler: “We
spend a fair amount of time on both. We have a direct sales force that covers accounts
worldwide so we spend time globally working various accounts and potential opportunities
as well as investing in new technology areas that are connected with what we already
do.”
CEOCFOinterviews: Have
current trends in the economy affected your business either positively or negatively?
Mr. Giler: “The
communications market in general has had a significant sell off, both investor wise as
well as company sales wise. Our sales are bumping along the bottom, but we don’t
think it is getting any worse. However, it will be a while before it completely recovers.
However, it is worth pointing out that we designed our business so that it will actually
grow in a time of general decline and we believe that it is possible over the next few
years for our business to grow even though the rest of the communications industry is flat
or declining slightly.”
CEOCFOinterviews: How do
you keep up with the rapid changes in technology?
Mr. Giler: “Very
simply, we invest a huge percentage of our sales dollars in research and development.
We spend approximately $15 million dollars on R&D and for a company that is
doing $73 million dollars in sales that is a pretty substantial amount.”
CEOCFOinterviews: Do you
see that slowing down over time as things settle?
Mr. Giler: “With the company’s business model, our
current spending of $15 million on R&D, equates to a sales rate of $100 million a
year. Therefore, we are spending a little bit in advance to our business model, but our
business model would suggest that we spend about 15 cents on the dollar for R&D.”
CEOCFOinterviews: Do you
see further global expansion?
Mr. Giler: “From a
global perspective, we have good business relationships in Japan where I would look for us
to continue to improve upon. We would also like to eventually get more aggressive in terms
of going into the rest of the far eastern countries. We already have a well-established
presence in North America and Europe.”
CEOCFOinterviews: As the
demand becomes higher are you going to be able to fulfill it? Do you have enough
employees?
Mr. Giler: “The
answer to that is on two sides. The first is a substantial manufacturing capacity. We use
external turnkey subcontractors; one of our key external turnkey subcontractors is SCI Sanmena, which is a very large global subcontract electronics
manufacturer. So they build our designs on a turnkey basis and then give them back to us.
Therefore, the capacity from a manufacturing perspective is not an issue. On the other
side, our business is very scalable. Most of the head count increases that we would do as
our sales increase would be talent in engineering, sales and marketing. Fortunately, the
economy is in a very different situation than it was a few years ago. There are very
qualified people available now, many more who would like to work at Brooktrout than we
could afford to put on, so we don’t foresee there being a labor shortage problem as
the sales go up either.”
CEOCFOinterviews:
Because a lot of the products are subcontracted out, how do you control the quality of the
products?
Mr. Giler: “We do
incoming test and inspection here at Brooktrout, but most people will tell you that you
have to design the quality in; you can’t test the quality. It’s much more
effective when you are doing your basic engineering to design the quality control into the
product. We do a lot of automated tests, so our equipment is all tested by computer
systems. It provides a very high degree of outgoing product quality.”
CEOCFOinterviews: With
all of the products that you have currently, do you see yourselves developing new ones or
concentrating on the ones that you already have?
Mr. Giler:
“It’s not so much a revolution as an evolution. As I mentioned before, a very
large percentage of dollars goes to R&D for developing new products. We try to
build on the technology that we’ve already developed but by the same token we
continue to try to get into the new product lines, because if you don’t, then your
customers, or partners, will be forced to do it internally. That is not what we want to
happen. We want our customers to continue to outsource their development and come to us
for the new products they need.”
CEOCFOinterviews: Do
your customers give you input and then you develop on that?
Mr. Giler: “Some
comes from our customers, some comes from our R&D staff, some comes from market
research, and I can say that it is equally divided, but we do get a lot of customer input
in terms of what we need to develop.”
CEOCFOinterviews: Have
investment trends affected Brooktrout?
Mr. Giler: “I think
it steadies itself out just based on Brooktrout’s stock price, having been relatively
stable during these times. I do believe, however, that people are still very wary of
investing in telecommunication companies, and rightfully so. So, it will be some
time before investor confidence and the industry at large improves.”
CEOCFOinterviews: What
would you say to a potential investor?
Mr. Giler: “An
investment in our company is a long-term proposition. We believe over the long term, if
you believe in the industry trends such as movement to IP, movement to speech recognition
and unified communications, and if you believe those trends are going to continue and
Brooktrout is capable of continuing to execute on those, our business will grow over the
long-term. Growth means profitability, and profitability helps to justify your investment
in the stock.”
CEOCFOinterviews: Plus,
with all of the consolidation that did go on, the companies that are left are very strong
and I think that people have to realize that the worst is over.
Mr. Giler: “Oh yes,
and if you look at Brooktrout’s balance sheet that’s a very good indicator of
staying power and a continuing positive cash flow that we have been able to generate even
with small loses.”
CEOCFOinterviews: In
closing, what are your competitive advantages?
Mr. Giler: “There
are very few companies that participate in our sector. Most of the companies that we would
compete with are the companies that we sell to who would use their own internal R&D
staffs. All I would do is to point any potential investor to look at and see what the cut
backs in the R&D spending in the larger communication companies and that is where
Brooktrout’s competitive opportunity lies.”
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