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Spectrum Signal Processing has successfully refocused the company
to application specific solutions and is well positioned in its defense and satellite
communications target markets
Technology
Electronic Instruments & Controls
(SSPI - NASDAQ)
Spectrum Signal Processing Inc.
2700 Production Way, Suite 300
Burnaby, BC V5A 4X1
Phone: 604-421-5422
Pascal Spothelfer
President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
January 13, 2004
BIO:
Pascal Spothelfer
President and CEO
Pascal provides leadership to Spectrum and together with the executive team and the Board
of Directors, defines the company's strategy and oversees its implementation. He has been
a director of the company since March 1999 and was appointed as Spectrum's President &
CEO in January 2000. Prior to his appointment at Spectrum, Pascal was the Senior Vice
President, Strategic Development at Teekay Shipping (Canada) Ltd. From 1994 to 1998,
Pascal served as the COO and later President and CEO of NovAtel Inc., a high tech company
specializing in global positioning systems. Pascal holds a PhD in Law from the University
of Basel and a MBA from INSEAD.
Company Profile:
Spectrum Signal Processing Inc. (TSX:SSY; NASDAQ:SSPI) is a leading supplier of
software-defined platforms for defense electronics applications. Spectrum's products and
services are optimized for military communications, signals intelligence, surveillance,
electronic warfare and satellite communications applications. Spectrum's integrated,
application-ready products provide its customers with compelling time-to-market and
performance advantages while mitigating program risk and cost parameters. Spectrum Signal
Processing (USA) Inc., based in Columbia, Maryland, provides applications engineering
services and modified commercial-off-the-shelf platforms to the US Government, its allies
and its prime contractors.
CEOCFOinterviews: Mr.
Spothelfer, how has Spectrum Signal Processing changed under your leadership?
Mr. Spothelfer: “There has been a tremendous amount of
change since the beginning of 2000. When I came on board we started to transition the
company from being a general purpose, signal processing supplier to offering application
specific solutions for selected target markets. We put a lot of effort in two directions;
one was in the defense sector, particularly for communications, intelligence and sensor
applications and the second direction was the commercial Voice Over Packet market. We had
very good success on both sides technologically, but the commercial telecommunications
market as we all know, pretty much imploded in 2001 and stayed flat in subsequent years.
As a result, earlier this year we decided to disengage from the Voice Over Packet
business and to focus all of our attention on the defense business, notably military
communications, signal intelligence, sensor and electronic warfare applications. We’ve
been successful in this refocusing effort in 2004.”
CEOCFOinterviews: Did world events help to fuel your decision
to refocus?Mr. Spothelfer: “Independent of global events
in the last few years, a longer term transition has taken place in the defense sector in
general, in that information superiority has become one of the key aspects of military
engagement. This means that communications, intelligence and electronic warfare have
become more and more important, which is reflected in the budgetary appropriations that
are being made. We are certainly targeting one of the growing segments within the defense
market, which overall is not growing at a tremendous pace; if you exclude the budget
growth in the United States, on a global basis, the defense budgets haven’t grown
substantially. However, the communication and intelligence segments of the defense budgets
have grown and continue to do so.”
CEOCFOinterviews: What is it that you are actually selling?
Mr. Spothelfer: “What we sell are essentially real-time
computer systems that are specially configured to handle applications for military
communications, signal intelligence, sensor and electronic warfare. We combine the
hardware for real-time processing systems with all of the necessary software that allows
the customer to program their specific application onto our platform to create the actual
end-user system.”
CEOCFOinterviews: Do you configure them for each client?
Mr. Spothelfer: “We have developed base technologies
that are easily configurable, thus the same type of base technology can be used for signal
intelligence or electronic warfare systems as can be for military communications. The
customer tells us the kind of configuration they want and we configure it specifically for
their application. We are increasingly integrating our signal processing platforms with
front ends, like receivers and transceivers, so that we are delivering more of the
solution to our customers. Our goal is to save our customers risk, time and money from the
time that they get one of our products in, until they have a complete solution and to
allow them to focus entirely on their core competency - application specific software.”
CEOCFOinterviews: Are there additional parts to that solution
that you would like to provide?
Mr. Spothelfer: “We have already made major strides in
that direction by entering into value added reseller agreements with software vendors like
Wind River Systems, to include the embedded operating software. We also have agreements
with companies that manufacture the parts to take an analog signal, convert it to digital
and then feed it into our system. We just entered into an agreement with DRTI (Digital
Receiver Technology, Inc.), a leading supplier of military communication tuners. We then
take these various elements and integrate them with our platform and deliver a completely
configured, programmable solution.”
CEOCFOinterviews: Can you tell us about the competition in
your market space?
Mr. Spothelfer: “We essentially have two sets of
competitors; one is the merchant competition, commercial-off-the-shelf or COTS suppliers
of similar products to ours, the other, and bigger one, are our customers. The Tier 1 and
Tier 2 defense contractors have tremendous technological capabilities and for any
particular point solution they can do in-house what we are delivering to them as a COTS
solution. However, we compete effectively with our value proposition of reducing the cost,
time to market or solution and technological risk within their project, so that they can
focus on the application specific software. Our customers’ choice between COTS
procurement and in-house development makes them our main competition.”
CEOCFOinterviews: Your website emphasizes exceptional
technical support, training, customer care and services; how do you differentiate yourself
in that area?
Mr. Spothelfer: “We understand that our job doesn’t
stop after we have sold a product to a customer. These products are in the field for a
long; long time and while these systems are being used by our customers’ customers
technology changes. In addition, the applications become more and more sophisticated with
new technology insertions over time. We are therefore selling a product to our customers
that have to evolve over time and we are offering the support to allow these technology
insertions and upgrades on a continuous basis. The only way that we can do this is to
first, train our customers so that they can use the equipment that they buy from us in an
optimum fashion. The second is to support them as they develop the application and third
is to have the resources available to upgrade the systems and to deliver services to them,
so that they can move to the next generation easily. Through that whole process they are
protecting their software investment, which is the biggest investment that they will have
to make. It is this combination of services and the care that we take in helping the
customer through the full life cycle of the product that differentiates us.”
CEOCFOinterviews: Spectrum had a good last quarter and year;
what do you see on the horizon?
Mr. Spothelfer: “There are lots of challenges and lots
of opportunities and I think that from a challenge point of view, this year we still
benefited from substantial revenue from our Voice Over Packet side, which as we have
stated in our public communications repeatedly; will go away next year. So we have to
replace that revenue with our core revenue in the defense and Satcom (satellite
communication) sector. That means that we need to see our core revenue grow. This has been
happening over the last few quarters. To achieve this growth we launch new products and
provide our customers increasingly with more value. The second challenge we have is that
we are a publicly traded company with an increasing burden of the cost of being public. We
need to be able to distribute this cost over a larger revenue base. As we discussed on our
last conference call, we are expecting a growing revenue base and are in addition now
looking at other growth opportunities, including acquiring other product lines or other
businesses so that we can grow our revenues faster than we could through internal growth
alone.”
CEOCFOinterviews: You mentioned that the international market
is not as great as the U.S. market; how do you come out geographically and do you see that
changing?
Mr. Spothelfer: “I think that the international markets
are very attractive to us, it is just that the defense budget internationally has not
grown to the same extent that the U.S. defense budget has grown over the last four years.
However, within the international defense budget, the budget reserved for the type of
solution that we are offering is clearly increasing as well. Generally speaking, in the
international arena the customers we are dealing with do not have the same level of
technological sophistication as our U.S. customers do. There certainly are some European
defense contractors that do, but in many instances the technology level is less advanced
internationally than in the U.S. which opens up a tremendous opportunity for us. Today we
do about 75% of our business in the U.S., 15% in Europe and 10% in Asia, and I expect
Europe to become a larger percentage of our revenue.”
CEOCFOinterviews: Is it a matter of bidding on contracts or
knocking on doors; how do you win business?
Mr. Spothelfer: “We win business by penetrating a
growing number of customers. We are focused on, and very active with, a selective customer
base who are the ones we expect to win the defense procurement programs from in their
respective countries. At the same time we have to be aware of what programs are around so
that we can make the match between program and customer, then approach the customers for
solutions that are suitable for the program that they are pursuing. It’s a
combination between looking at the various programs from a business development point of
view and knocking on doors."
CEOCFOinterviews: Do you have the management team in place to
facilitate your growth?
Mr. Spothelfer: “Yes, I do. I think that one aspect is
the number of people that you have and the other, more important one is their quality. I
don’t know of a company that is well managed who isn’t resource constrained. The
challenges consist of operating at maximum capacity and at the same time being able to
take on new things and not having to invest heavily ahead of the curve, but being able to
sustain profitability and adding resources as you go. That is not only an ongoing
challenge, but also an exciting part of our business. I certainly have the
management team that is capable of managing along these lines.”
CEOCFOinterviews: How about the investment community?
Mr. Spothelfer: “I think the investment community was
very excited this year, when we focused on our core market, on the defense and Satcom side
and then showed that we could become profitable quarter over quarter. I think that we have
been very much rewarded over the last ten months by the stock market for these efforts. We
also realize that we have to continue to deliver stateable financial results and we have
to continue to announce design-ins that illustrates our long-term growth potential. We are
doing both right now and I think that it bodes well for our valuation.”
CEOCFOinterviews: Is attracting potential investors a focus
for you?
Mr. Spothelfer: “Absolutely! I think that I mentioned
the cost of being a public company is substantial. If a company is not in the position to
take advantage of its public company status, i.e. the easier access to capital; then there
is no point in being public. We are putting a considerable amount of time and effort into
keeping our company in the mind of the investment community and take advantage by being
able to raise capital in the market.”
CEOCFOinterviews: What should investors know about Spectrum
that may not be realized at first glance?
Mr. Spothelfer: “I think that we are an
interesting investment proposition because of our business model: we are fiscally
conservative, which really limits the downside risks for the company and at the same time
we are engaged in many activities with very attractive long-term growth potential. We
therefore combine limited down side with solid financials and add the optionality of
exciting growth. I think that is a very interesting formula for somebody who wants to
invest and stay loyal to the company.”
CEOCFOinterviews: In closing, what is your four-year plan?
Mr. Spothelfer: “We are planning about four years out
and over the next four years we clearly are embarking on a substantial growth path. We
will stay true to our core technology and our core capability. We are not looking at
diversifying our revenues but at growing our revenues within our core business and there
is ample space to do so. The combination of a fragmented industry in the COTS arena and
budgets that continue to grow with a customer base that increasingly relies on COTS
suppliers to enable them to focus on the core competency, makes our markets very
attractive and we have the products and services to take advantage of this market.”
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