Xircom, the eight-year-old Silicon Valley company that makes PC Card LAN adaptors and modems for notebook computers, knows what it's like to be a darling of the networking industry one day and to hit rock-bottom the next. For Xircom, says chairman, president and CEO Dirk Gates, 'all hell broke loose' in April of last year, when an ill-fated diversification strategy brought the company to its knees financially. Gates has since managed to return Xircom to profitability by quickly and resolutely re-focusing the company on the PC Card space. In Hong Kong last month to launch the newest entries in that space - a family of Fast Ethernet adaptors - a very successful Gates spoke with IDG Hong Kong's Don Tennant about his close encounter with failureIDG: Did you ever release a product that was just plain dumb - a product that there simply wasn't a market for?
DIRK GATES: Where we did the dumb thing was in the wireless LAN space. For years now we have been struggling with the wireless LAN product. The technology we were using was a 1Mbit/sec technology. What we found was that the market just doesn't exist. The challenge was asking a broad, horizontal user population to take a 10-fold decrease in performance for the ability to be highly mobile inside the office.
They weren't buying the 10-fold decrease in performance, and oh, by the way, there was roughly a doubling of price. "So Mr Customer, please spend twice as much to buy a wireless LAN adaptor that communicates at one-tenth the speed but that you can move around in the office." That's been a challenge, and it's been exacerbated by the fact that we're now messaging the market - us and every other network vendor - to go to 100Mbit/sec. So the wireless technology is now 100 times too slow, and two times as expensive as it should be.
It's painful to admit, but in retrospect we spent quite a bit of money investing over the last three or four years building that product. We think we've learned a very valuable lesson there. In retrospect, the products where we've been very successful were ones where we have taken established communications technologies that have been used on the desktop, and we've shrunk them into a form factor that makes sense for the mobile user.
IDG: You've described 1995 as a "perilous" year for Xircom. What happened?
GATES: Back in 1993 and 1994, we looked at the market we were in - pocket LAN adaptors, shifting to PC Cards. We realised the PC Card space would soon be much more highly competitive; we'd come under market-share and margin pressure and that was driving our diversification strategy.
In '95 it became clear to us that the diversification strategy wasn't going to be successful rapidly enough; and there was a question of whether we could ever succeed in the wireless LAN space. The market just wasn't happening.
We were also moving in other directions. We were looking at remote access server cards that would enable NT servers or Novell servers to act as remote access servers. We also in early '95 acquired a company called PRI - they were an OEM supplier of ISDN board-level technology. So we did all this stuff in the name of diversification.
The acquisition was probably the straw that came closest to breaking the camel's back - our cash got very low because of that. That came at a time when all hell was breaking loose on every other front, and that damn near killed us.
If the negotiations had dragged on for as little as three or four more weeks, we probably would have pulled the plug. But we were just gathering the information about our channel inventory and our market share and all that other data about just how badly we were doing at the end of the first calendar quarter of '95, simultaneously with racing down this path to finish the acquisition.
We got a clear picture of just how poorly we were doing market-share-wise, coupled with our channel inventory which had ballooned to about four months of product - it was a bad position to be in. So had the acquisition negotiations taken a few more weeks, we probably would have taken a look at our status at the end of our first calendar quarter [and scrapped the acquisition]. It was two weeks after the close of the quarter that we finalised the acquisition. About a week or two after that we were starting to collect market share data and channel inventory data. We were much worse off than we had anticipated.
This was April of '95 - we had just finished the acquisition, just paid all that cash, drained our balance sheet, realised that our channel inventory was still way out of line. We took our pricing down 25 per cent, and in that one quarter we basically had to stop shipping in to the channel. We had $US40 million in calendar Q1 in revenue, and about $16 million in calendar Q2 as we drained the channel. We sold out as much product quarter over quarter, we just didn't sell in as much. The $16 million came from areas where we didn't have channel inventory problems. But that all racked up to a tremendous loss for the quarter due to reduced sales and the write-off from the acquisition. Then the following quarter, the operating expense ballooned because of the acquisition - we were trying to squeeze the two companies together and drive synergy and get the operating expense down, but we didn't do that rapidly enough.
In the final calendar quarter we came pretty close to breaking even; and in the last couple of quarters we've been growing 15 to 20 per cent, focused on the PC Card space profitably. It feels much better today. But having all that blow up in our face simultaneously was tough.
So '95 was a tough year - we got beaten up pretty bad financially. We came pretty near to scraping the bottom of the barrel for cash. But it served as a really good wake-up call.
IDG: Was there ever a move within the board of directors to get rid of you?
GATES: For the most part my board was pretty supportive - I don't think there was a call for that. The fact is we turned it around in a couple of quarters. If this had dragged on for a few more quarters, no doubt someone would say, "OK, time for a change."
IDG: How strong is your board right now?
GATES: At this point on my board I have Bill Schroeder, who was a vice-chairman at Conner Peripherals; Bruce Edwards, the [former] CFO at AST - he's no longer there; Gary Bowen, the VP of sales and marketing at Bay Networks - he's leaving [Bay] as well; recently we just added Michael Ashby, who is the CFO of Pacific Telesys; and also Del Yocam, who was COO at Apple during the early years. So I have all different backgrounds, from operations to finance to pure marketing to sales. Every one of these members of the board now has operated in a billion-dollar company.
IDG: Most of which have screwed up - Bay Networks, AST, Apple. What's the deal there?
GATES: That's the good news. Because then they can tell me what not to do.