When Piyush Patel took over as Cabletron's chairman and CEO in July 1999, he was viewed as someone who could fix the then-struggling networking concern and dress it up to be acquired. Nearly two years later, Cabletron is one of the few networking firms delivering strong quarterly results and daring to be optimistic about the future.
Patel's secret: addition by subtraction. First, Patel tossed poorly performing products. Then he focused the company on hot markets, something Patel was used to since his days at Yago Systems, a highly touted switch maker that was acquired by Cabletron in 1998.
A little more than a year ago, Patel turned Cabletron (NYSE: CS) into a holding company with plans to spin off four independent subsidiaries: Riverstone Networks (Nasdaq: RSTN), a newly public company that sells metropolitan area infrastructure technology to service providers; Enterasys Networks, which sells network technology to large enterprises; Aprisma Management Technologies, which makes infrastructure management software; and GlobalNetwork Technology Services, a network consulting firm.
Cabletron said Wednesday Enterasys and Aprisma will be spun out to shareholders shortly.
Here's what Patel had to say:
ZDII: You were one of the few networking companies that were able to stick to its outlook for the next quarter. What makes you confident about the first quarter when your rivals are warning?
Patel: I think we've been having good quarters. For the June quarter we beat expectations by a penny. The fourth quarter was also strong. I'm feeling confident that we can meet the guidance that we gave for the next quarter. I'm also confident about the future prospects for Enterasys and Aprisma.
What is fueling your results? Is part of your ability to beat estimates the fact you are working from a smaller base in revenue? You don't have the laws of large numbers to worry about.
That definitely helps, but on a combined basis the revenue is close to $1 billion a year. That's not a small number. There are several factors for our success. We launched our transformation about a year ago and got rid of all product lines that had slow growth. Then we focused on only the fastest growing markets. Another thing I would say is that we basically focus on customizing products to help customers build networks and get a return. By that I mean how do you generate more from your existing network and how do you improve your profitability. That last part has really helped us through this tough time. Lastly, I would say we are executing very well. I challenged our employees to work 12 hours a day and they responded by working harder. I think we have the right strategy and are working hard to achieve it.
Regarding the announced spin-off of Enterasys and Aprisma and forgoing an IPO like you did with Riverstone, how does that affect your operating results and cash position? Wouldn't you make more money with an IPO?
As you know, a lot of people look to IPOs as a way to raise funds, but we have a really strong balance sheet with $1.1 billion in cash and short-term securities. So for us I think the IPO is really more of a marketing event instead of a fundraising event. What we are doing is basically looking at how to drive these companies to a higher potential from a business point of view. The highest chance to accelerate growth is a direct spin to shareholders rather than worrying about the IPO market.
So would you say the Riverstone IPO was more of a marketing event?
Yeah. Absolutely. Riverstone is in a hot metro market and as you know they blew away revenue estimates and beat earnings-per-share estimates. And they continue to do well. We're happy with the results of the Riverstone IPO, but as the market conditions keep changing, the best option is to do a direct spin of Enterasys and Aprisma and help them achieve their highest potential.
Once all four of the companies held by Cabletron are spun out, what's left of the company?
We have a plan to spin out 100 percent of our companies to shareholders. Right now I have to tell you management is spending all its time focusing on the spin-outs.
Will you become an incubator with your $1.1 billion? Will you distribute the cash to shareholders as a dividend or buy another company?
All those options are possibilities. We will consider a host of options to optimize returns to shareholders. If I distribute the cash to shareholders will that maximize value? Or can I to do something else to optimize value? Those are the kind of things that go on in my mind.
IPOs usually leave newly public companies with a lot of cash on their balance sheets. How much cash will Enterasys and Aprisma start off with since they aren't getting an IPO?
We have not finalized the actual amount of cash, but when a company does an IPO it usually has $50 million to $100 million in cash. It will be somewhere in that range. It will be enough to make sure that the companies are very well funded because it is in the best interest of all shareholders. Both of these companies are profitable. Enterasys, which only deals with enterprise customers, is very profitable, and Aprisma was profitable two quarters ahead of schedule. The amount of money we will put into them will ensure that they continue to do well even in tough situations.
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