Transcript for UCStrategies Experts Discuss ADTRAN Connect 2010

Michael Finneran: Good afternoon, this is Michael Finneran sitting in for Jim Burton, hosting the UCStrategies Industry Buzz Podcast for this week. Our topic this week is about one of the new participants in the UC space, ADTRAN. This past week they held their Analyst Media Conference in Huntsville, Alabama, and a number of the members of the UCStrategies team were there and have a few things to say about it. First up we have Jon Arnold—Jon, can you give us a little overview of what ADTRAN had to say this week and what you thought about it?

Jon Arnold: Thanks, Michael. This was my second event and a few of us were there last year. ADTRAN is one of those companies that doesn’t pop up high on the UC radar and that’s—for better  or for worse—I mean the company is a very strong competitor to Cisco in the sense that they have a comparable product line, they have a huge number of products – you wouldn’t imagine how many products they have until you actually see what they have. But they have similar types of products; they are just not as sophisticated or as well known. But they are also a good story that many people don’t know about. ADTRAN is a public company, they are successful, they are profitable, and I think of them in some ways as a bit like being a Cisco-lite, they have a lot of the same products, but they are not as far along and not as well known, but they have a great reputation and one of the things that I really like about them is that they are very much a US-based company. They do a lot of their manufacturing locally, which creates jobs and it plays very well to a “Made in America” theme, which a lot of people relate to these days. So they have a lot of things going for them.

They are not the most sophisticated marketers, but they are trying to change that and I know others will talk more about the UC thing. I just want to say one thing about UC, which is not an embargo item and that’s why we have to be careful how much we talk about here. But if you go looking on their website, their NetVanta product line, which is based largely on the UC acquisition they had last year from ObjectWorld and we talked about them a little bit before – if you go on their website and look at how they present the UC offering, it's very much just like another product. So it has an SKU attached to it because they are a very product-focused company. So I think they are a couple steps behind other marketers in terms of how they go to market with this technology, because UC is really – it's really a service more than a product. But they’re getting there, but they just have a little bit further to go and that’s why we need to go to these events, because we can help them do that.

The other thing I just wanted to comment about is that ADTRAN is based in Huntsville and as noted earlier, it's the home of the American space program, which not too many people know about, but one of the highlights of our trip was they gave us a guided tour of the HudsonAlpha Biotech Institute. And ADTRAN is one of the funders of that and it's another good local success story of some of the leading edge stuff that goes on down in Huntsville. Of course, right next to ADTRAN is Digium, who we do know quite well and they are also players in the UC space in their own way. So there is definitely a lot of technology know-how down in Huntsville. And it's just something that we don’t always think about, but definitely there is good reason why we go to ADTRAN to get a bit of visibility into what’s going on in that part of the world. I think in time we will be paying more attention to them. We have a few things I am sure that we can help them with on the UC front, so let me hand it off to the next speaker here and keep the conversation going.

Michael Finneran: I think that Dave Michels has an SKU attached to him as well, what did you see there, Dave?

Dave Michels: I had a great time there. I had never been to Huntsville before and it's not the easiest place to get to, but it was a pretty impressive set-up. I was actually really impressed just with the facilities. ADTRAN has a built-in or at-home conference facility; I was quite surprised. They have better conference facilities than the vast majority of hotels I have had conferences at. But Jon was definitely right; they are not high in the UC space. I am pretty much focused on UC on a daily basis and monitoring the news and events and analyses of the products, and I didn’t even really realize they even had a UC product. So I think that they have a lot of work to do on their awareness campaign, which of course is what they are starting to do here with their ADTRAN Connect event. They’ve always been a carrier-focused vendor and they’ve started their enterprise division – I think it was last year or maybe two years ago and the unified division is doing quite well. They are selling not only the switches and routers, but the phone systems, as well. The HudsonAlpha tour that Jon mentioned, they have of course the ADTRAN phones, which is of course a big company in Huntsville might have an ADTRAN phone system. But ADTRAN themselves don’t have an ADTRAN phone system; they have a different older phone system.

So their carrier focus though is providing them a number of opportunities as the carriers are trying to figure out how to get into UC and voice services on-premise. Most carriers of course, are attracted to the hosted services, but not all carriers are attracted to that. ADTRAN has an interesting play with their NetVanta product, where it's basically a 1U box that’s a switch, that’s a router, it’s a firewall, and it's a phone system. It could easily be, as they pointed out, managed by a carrier remotely. And so it's an interesting twist in that the carrier could just throw this box into a customer site, instead of hosted services, and offer a complete managed on-site phone system. That is more a theoretical model, I don’t think it has grabbed traction yet, but it's an interesting model.

The Huntsville connection, of course, Jon mentioned Digium, and you’ve got Mark Spencer, the CPO and founder of Digium just across the way there. And Mark came from ADTRAN and he was originally involved in this NetVanta project and so there’s a little bit of crossover there, although they don’t mention that very much. The NetVanta phone system is Windows-based, where the Digium stuff is all Linux-based and Mark’s focus now is on Linux-based stuff.

Interesting conversation around their channel for the NetVanta phone system and UC solutions, which is a hundred percent channel-based; they are not selling it directly at all. And of course, their channel includes carriers as well as direct resellers, which they are trying to build-up. They talk a lot about their channel philosophy. They talked about really making it a low risk solution for the channel players and part of that low risk is the way that they are ramping up the channel. They are allowing channel partners to sell the phone systems, without being fully certified by requiring them to use ADTRAN professional services to install them, which is a nice stepping stone, as opposed to committing completely and getting all trained and everything and finding out whether you can fill it or not. And the other thing that was interesting about the channel is that they are keeping the prices fairly low. They had a customer testimonial there from a school district and that customer said that the ADTRAN phone system is coming in at about a third of the price of the competitive bids that they were getting on other phone systems. David?

David Yedwab: This is David, let me hop in and actually I wanted to jump back up to the top. While ADTRAN is much smaller with only around a half a billion dollars or a bit more in revenue, the fact their revenues grew this past quarter 20% year over year, while we’ve been hearing some of the bigger guys saying that the market has really gotten soft is sort of interesting and it speaks to the potential play for ADTRAN to grow. And they said their focus and the reason for their success is because of their focus on three critical inflection points around the industry. The first being broadband; which certainly we know is driving service provider take-up. The second, mobility; which again is driving sales and in their case their big mobility play is actually the infrastructure for wireless carriers – the wired infrastructure if you will or fiber infrastructure between cell sites. And the third inflection point is the emergence of cloud services. While they didn’t talk very much about any existing cloud services, clearly with their service providers being major customers, as well as routes to market, we’re certainly going to be seeing -- I believe we will be seeing in the future more of a play by ADTRAN in the cloud space and certainly as broadband, mobility, and cloud continue to evolve, if their sweet spots continue to be successful and they grow to the next magic, if you will, billion dollar revenue mark, we certainly will be hearing more about them. Their folks seem to be very bright from an engineering and technology perspective and as was said earlier, they’ve got a lot to learn in the marketing area. But fortunately, they’re playing in a place where they are not directly competing with the big guys at this point and if their channel leverage and pricing aggression continues, we should see some potentially good growth from them. I do believe that their UC product as it rounds out and matures; will be providing some advantages for the small and medium business-focused portion of the marketplace, which really hasn’t been receiving as much attention as I believe it should since as we all know, most of the business growth happens in the small and medium business marketplace. Let me now turn it back over to Pam.

Pam Avila: Thanks David. Wow! There’s not much left to say. But I do want to agree – ADTRAN is one of those companies that you just want to cheer for. Their company culture is very strong. It was just a really fabulous experience to be there. This was my second one. You want to see them do well. They’re trying to take all the right steps, they are thinking it through very carefully and so you are going, “Yes! Go for it!” My only concern is that I did not see a lot of change – a lot of advance in their unified communications product line and their solutions from last year to this year. But that could be partly because the year was spent just absorbing the ObjectWorld acquisition and getting everything set up to move forward. But they seem to have a strategy in place that should work well for them and it will be interesting to see where they go over the next couple of years in unified communications.

Dave Michels: This is Dave again. I want to emphasize what David said about their financial results. I didn’t really – they were more or less off my radar so I hadn’t been watching ADTRAN, but I went back and looked when I got home and their stock has more than doubled in the past two years and based on their CFO and their CEO’s comments around that, they see a lot of growth in the future. They see a lot of trends coming together that will continue to drive that. I was pretty impressed with that because the past two years have not been a period where a lot of companies have doubled their share price.

A couple other thoughts I had; one was about their manufacturing facility. I have been more or less conditioned to think manufacturing is a pretty negative thing and we can’t manufacture very cost effectively, and the companies that are tempted to manufacture in the U.S. should get a demerit, but they have convinced me otherwise. I thought they did a pretty good job of that. First off, they only manufacture domestically, I think they said somewhere around 40% of their product line. But they made a big deal about 1) they do all their purchasing and they manage their when there are shortages which suppliers or with themselves, which product lines get the components when there’s a shortage, as opposed to letting the vendors who have managed to get parts determine that.

And then secondly; they talked about that they love to see their manufacturing lines idle, because that means that they have found a cheaper way to have it done and they don’t believe necessarily that they could have done that if they didn’t have their own manufacturing capability to understand the true costs of manufacturing, as opposed to the vendors competing and pitting against each other.

And then lastly, they talked a lot about how the manufacturing and the design phases are intertwined and it allows them to do continuous improvement to improve the products, where a lot of companies don’t have that because they send that out. So I thought that was a pretty good story about manufacturing.

But my concerns, like Pam – there were a few concerns that came up and for me the concern was around their UC capabilities. They have a phone system that is clear. They have a UC SKU, as Jon pointed out that you can add on to their phone system and what I never heard was what their UC phone system could do and I don’t know what the UC feature set really is. They talked about CEBP. They talked about UC as a fairly understood – “Oh you want a UC, use this.” But I never really got a clear grasp of what is in their UC portfolio.

Jon Arnold: Dave you were in and out of Jeff’s deep dive on UC, right?

Dave Michels: Yes, I was.

Jon Arnold: They did cover a fair bit of the feature set, but I do agree it's not well communicated.

Dave Michels: UC is just such a broad area – for example; they say that it could do CEBP – they mentioned a couple different things, for example they said they could initiate a phone call. Most phone systems can’t initiate a phone call; it requires a human to initiate a phone call and that caught my attention. So I started asking them some questions around that and what kind of protocols or what kind of applications could do that and I immediately ran into a bunch of issues around that feature set. And so it's great that they have some check box features, but exactly how developed and mature they really are, I don’t think is very well understood, at least not by me.

Jon Arnold: Yeah, we all got spoiled because we see the stuff up close from everybody else, right? So the bar can get set pretty high after you see a few of these things.

Dave Michels: One feature that the customer had actually mentioned in the testimonials that they really liked about their phone system, which I had never seen from anybody else, was the ability to schedule pages – overhead paging. And so they have a need to send before the alarm – I think it was before they arm the alarm system – they wanted to have a page go off, the alarm system is about to be armed. And most of those systems don’t have a way of doing that and I never really thought about it. It's great to hear new features coming into the fray.

David Yedwab: Let me sort of backtrack on that, Dave. You weren’t in attendance last year; there was a much deeper dive on the capabilities of the UC system as it existed last year and off line in discussions about things. They were involved in several tactical issues over the year, which may have delayed their roadmap a bit, but they made some money on it and I think we’ll all agree that making money is certainly a first priority, so I wouldn’t be surprised to see the product family mature a lot more over the next year. Now that they’ve got it integrated with ADTRAN’s processes and they’ve taken advantage of a couple of these high runners, I believe that we will be seeing progress in their product family over the next year.

Jon Arnold: I just want to come back to the point Dave made earlier about the manufacturing culture there. I just want to reiterate that because so many of these companies now are very much software and even cloud-based and this is a company that is a step or two behind in that evolution and they very much are a manufacturing-oriented company and I think we can see how it cuts both ways. I mean I totally agree with what Dave is saying that that manufacturing culture really helps them make their products very high quality and lower cost. They emphasized that many times over. And the bottom line to David’s other comment -- that makes them profit and at the end of the day that is really the most important thing for survivability. So I think that really plays to the strength and again, as again as I say, they have access to a labor pool there that is probably not that expensive and well trained and that pays dividends over time. But the flip side of that is because they are so product and engineering focused – marketing is really not their forte and we’ve already touched on that a little bit. So if I could choose between a company that has that set of skills, as opposed to one that’s a really good marketer, but maybe not so sound technically, I’d take ADTRAN hands down any day.

Michael Finneran: Well, an interesting assessment on the company. High quality, low cost, a financially strong organization, and one that seems to be stuck in the process of moving from products and manufacturing to delivering solutions. We will certainly keep an eye on ADTRAN and how they move forward in UC. But in the meantime, I would like to thank the team members for contributing, and those who were there, and to our audience, thank you much and we will talk to you next week.