Roscitt's Risk
Former AT&T exec braves choppy waters at ADC
from the June 4, 2001 issue of Broadband Week
A telecommunications equipment supplier undergoing major restructuring and suffering dismal earnings may not seem a great opportunity for an incoming CEO. But Rick Roscitt says he is finding as much opportunity as challenge in taking over at ADC. Coming off the company's quarterly earnings announcement, Roscitt talked with Broadband Week senior editor Karen Brown recently about ADC's present condition and future position. An edited transcript follows.
BBW: What has it been like, transitioning from AT&T Business Services to ADC? Are there any lessons you learned at AT&T that are proving useful now?
Roscitt: It's been very exciting. I think the industry of course has gone through an enormous amount of turmoil in 2001. It's not that the industry hasn't gone through slowdowns before--everything runs in somewhat of a cycle. But it's had such an enormous runup over the last two or three years, and frankly over the last decade it's almost been all about growth. So sooner or later had to be some sort of a correction, and I think '99 and 2000 were just abnormal growth years. So it is a little bit more punishing because of a lot of inventory in the channel and then bankruptcies on the CLEC service provider side don't help because that's just less customers and less competition and it all sort of spirals.
I think what has surprised people--myself included--I knew this was going to be a tough year and there was going to be a slowdown. I think the extent and the broadness of it across all sectors and the deepness of it--and ultimately the stubbornness of it--we'll see. I mean, everyone has the magic word visibility ... they can't tell how long this is going to last literally. But I think we are in for several quarters of just slower growth. We're growing, but it's very slow growth. And that's a tough thing to adjust to, because everyone--whether it is Cisco or Nortel or JDS Uniphase or AT&T on the carrier side and ADC--we've all been hit with the need to correct. And that's sort of painful.
I guess the lesson learned from AT&T (is) we've gone through those cycles on a more regular basis every several years. After 29 years in the industry I can smell this and feel it coming and I was sort of prepped for it when I got here. Perhaps not the deepness and the severity, but I was prepared that there was going to be a slowdown. And so I think it was frankly easier for me to make the decisions on adjusting our expense rates, adjusting our capital spending, adjusting the size of our workforce a little bit easier for me than for people who for 10 years have known nothing but growth. I mean, the biggest problem ADC had this time year was how to ship more product faster.
BBW: ADC has announced it will be restructuring its operations and cutting its work force. Can you tell us a little more about what businesses you may be exiting and what your priorities will now be?
Roscitt: What we have done is a top-to-bottom look at all of our product lines and all of our markets and we are doing a couple of things to strengthen ourselves during this transition period. One, we pick the areas we want to focus on. I'm a very strong believer that you can only be good in a handful of things, and you ought to pick those very carefully.
So we've decided to focus on four growth areas, and they are DSL, IP cable (as opposed to just any cable), optics/photonics and on operating systems software for telecom companies and cable companies, the service providers.
BBW: Now, why these four then?
Roscitt: One, we think the market potential is strong on a global basis for all of those product areas, and two we think we have particular strength in those areas.
In the laser area and optics/photonics, we have one of the finest products in what is known as active lasers in our tunable laser. And in our pump lasers we are technologically in a very good position, patented with intellectual property protection. In DSL we acquired PairGain a couple of years ago and that's just starting to really click for us. In operating systems software we, through a series of acquisitions--Faville and most recently CommTech--we've been able to glue together one of the only systems in the industry that can go in from front end to back end on operating software without seams. So it is a productivity tool for operators, which we think can lower their operating costs. And in IP cable, our acquisition of BAS put us in the lead position on technology on cable telephony over Internet Protocol. So we felt we had strength ... we think that the long-term demand in those areas is very good.
Now those are investment areas. The two areas that continue to pay the bills, keep the lights on and are our bread-and-butter are the fiber and copper connectivity business and our systems integration business, which we just announced had a record growth quarter ... we grew it 51 percent year over year.
Then we looked at everything else and it's either in a harvest mode, where we are drawing cash from it or we are going to sell it or we are going to shut it down. So what we wind up with is the four focus areas plus the two core areas of the business, and that's what we are going to spend our time and attention on.
BBW: Do you see any reason to hope the telecommunications market downturn will reverse? If so, when?
Roscitt: Sure, it's just a matter of time and that is the magic question as to exactly when that is going to happen. I don't think it happens overnight because I think the CLECs will not snap back ... I think there are going to be seven to eight nationwide CLECs and that's going to take an industry restructure to work it out. On the other hand, I think the PTTs and the ILECs and the IXCs of the world are all going to run out of gas in their networks in a matter of time because they are continuing to utilize their networks for high-speed, high-capacity data applications, and those eat up networks.
It's a complex formula where you have to work your way through inventory, and see some restructuring. You have to believe that we are not headed toward a global recession but we're in a slowdown that will pick back up again economically. My best look is it's going to take another two quarters until things shake out.
BBW: Given these grim conditions, what is the potential for consolidation within your sector? Have you been approached about a buyout? Is ADC looking at making any acquisitions?
Roscitt: I think there is always higher potential for consolidation, both on the service provider side and on the supplier/manufacturer side, when there is a prolonged industry downturn, because the people are not positioned to weather that. And then coming out of that there will be some people that will come out of the chute much faster. They will be able to use their market cap--their stock--as a currency, making other properties look cheaper.
There's a lot of single-product companies on the supply side of the industry, and I think they are the most stressed. With an ADC for example, we grew our service business 51 percent and we have that to lean on. The ones that are going to get in trouble have one or two big customers, a single product line. It's going to be very tough for them unless they are very well funded to withstand a long market downturn.
On the other side you've got other opportunities like Alcatel and Lucent--if that should come together and I have no insight whether it will or not--should that come together I think that will push the industry toward greater consolidation.
So I think it's going to be an interesting year. We are getting phone calls all the time from companies that are distressed, asking if we are interested.
BBW: Is the reverse also true? Are you also getting phone calls from companies interested in buying you?
Roscitt: Less that right at the moment, but we are out actively marketing some of the properties that we are going to get out of, and so we are having lots of conversations within the industry about pieces of ADC. We're way too underpriced to entertain a sale right now.
BBW: ADC recently announced a major ad campaign in several mainstream publications. What is the goal for this campaign, and what is the rationale behind such a drive at a time when business is slow?
Roscitt: All the literature I've ever read over the course of 30 years on advertising said the most inopportune time to back off on advertising is when things slows down, because in fact advertising can strengthen your brand. A lot of other people back off at that point and the market's less cluttered. But is also a time to drive some recognition and some energy. So what we want to do is get the new ADC launched in a good way. If you believe there are a couple of quarters, and there is a lag between brand awareness and advertising and product knowledge and purchase, what we're really setting up now at the end of this year is a campaign in the second half of this year that is really focused on 2002 and 2003. So it's forward looking.
BBW: What is the biggest challenge you face right now? What wakes you up at night?
Roscitt: We've made a lot of big bets in terms of structure, in terms of product line, in terms of our get-to-market strategy, competition and where the industry is headed, which customers to focus on. Those aren't keeping me up awake at night because I think maybe we made some things that are maybe 10 degrees off the mark (and) we'll adjust along the way.
The thing that you worry about a lot is, "Have we overdone the cuts, and the market is going to come back much more quickly than everyone suspects? Or have we underdone the adjustments to our spend rate and are we going to wind up with too much expense and not enough revenue?"
This lack of visibility--and I think if you ask any of my colleagues in the industry--is the most unnerving part. We just announced our quarter and what we said to the analysts is, we are being very conservative. We are projecting very flat revenue streams for the rest of this year, and we are adjusting our expense and spend rates to that.
Some people may say that is very conservative and pessimistic, but much like an airline seat, once you spend the money you can't get it back. Once that flight takes off it's too late to do much about it, so we are being conservative and what keeps you awake at night is wondering exactly when the demand rate will pick up.
BBW: In closing, is there anything else you want to add?
Roscitt: The last thing I would add is a philosophical point, but one I believe in deeply, which is--you sort of hit on it earlier--ADC. People ask me a lot, "Are you concerned you went to ADC at the wrong time?" It's probably the exact right time to get there. This whole industry is going to go through turmoil, but it isn't as if broadband applications are going to go away. So ADC is perfectly positioned that when the growth returns, and it is a matter of when, not if. We're a wonderful company with high-quality products and good people. We are going to be very well positioned, if we do the things we said we are going to do and we execute well for a lot of growth, when growth returns. So you just have got to get over the short-term hurdles, which are painful and difficult along the way, and not lose sight of the fact there is a bright future ahead of you.
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