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PART I |
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1. |
Business |
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1A. |
Risk Factors |
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1B. |
Unresolved Staff Comments |
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2. |
Properties |
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3. |
Legal Proceedings |
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4. |
Submission of Matters to a Vote of Security Holders |
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PART II |
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5. |
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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6. |
Selected Financial Data |
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7. |
Management’s Discussion and Analysis of Financial Condition |
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7A. |
Quantitative and Qualitative Disclosures About Market Risk |
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8. |
Financial Statements and Supplementary Data |
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9. |
Changes in and Disagreements with Accountants on |
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9A. |
Controls and Procedures |
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9B. |
Other Information |
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PART III |
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10. |
Directors, Executive Officers and Corporate Governance |
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11. |
Executive Compensation |
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12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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13. |
Certain Relationships and Related Transactions, and Director Independence |
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14. |
Principal Accounting Fees and Services |
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PART IV |
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15. |
Exhibits and Financial Statement Schedules |
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Signatures |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained herein that are not historical facts or that contain the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “may”, “will”, “should”, or derivatives thereof and other words of similar meaning are forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those expressed in or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, product demand and market acceptance risks, need for financing, an economic downturn in the United States (“U.S.”) economy and telecom market, the impact of competitive products or technologies, competitive pricing pressures, new product development, excess and obsolete inventory, commercialization and technological delays or difficulties (including delays or difficulties in developing, producing, testing and selling new products and technologies), the effect of Westell’s accounting policies, the need for additional capital, the effect of economic conditions and trade, legal social and economic risks (such as import, licensing and trade restrictions) and other risks more fully described in this Form 10-K for the fiscal year ended March 31, 2008 under Item 1A - Risk Factors. The Company undertakes no obligation to publicly update these forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or otherwise.
PART I
ITEM 1. BUSINESS
Westell Technologies, Inc., (the “Company”) was incorporated in Delaware in 1980 and its headquarters are located at 750 North Commons Drive, Aurora, Illinois. The Company is comprised of two segments: telecom equipment and telecom services. In the telecom equipment segment, the Company designs, distributes, markets and services a broad range of digital and legacy analog products used by telephone companies and other telecommunications service providers such as mobile network operators (“wireless”), multi service operators (“MSOs”), integrated carriers, and utility providers (all known as “service providers”) to deliver broadband services over existing copper telephone wires, fiber optic networks, hybrid fiber-coax networks, and wireless infrastructures.
The telecom equipment segment consists of two product lines: Customer Networking Equipment (“CNE”) products and Outside Plant Systems (“OSPlant Systems”) products. The CNE product line includes networking and high-speed transmissions products that allow service providers to deliver broadband services over existing copper, fiber, coax, or wireless infrastructures. The Company’s OSPlant Systems, formerly known as Network Service Access (“NSA”), is a leading provider of next generation outdoor cabinets, enclosures, power distribution, edge connectors, remote monitoring and ancillary network protection solutions. The power distribution and remote monitoring solutions are provided through the Company’s Noran Tel subsidiary, which was acquired on January 2, 2007, and marketed and sold through the OSPlant Systems product line.
The Company’s telecom service segment is comprised of a 91.5% owned subsidiary, ConferencePlus, Inc. (“ConferencePlus”). ConferencePlus provides audio, video, and web conferencing services. Businesses and individuals use these services to hold voice, video or web conferences with multiple participants. ConferencePlus sells its services directly to large customers, including Fortune 1000 companies, and serves other customers indirectly through its private reseller program.
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Revenue and total assets from the Company's two reportable segments and product groups for the fiscal years ended March 31 are as follows (for more information also see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K):
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(in thousands, except percentages) |
Fiscal year ended March 31, | |||||
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Revenue: |
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% |
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% |
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% |
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CNE products |
$ 98,095 |
47% |
$ 153,844 |
59% |
$ 194,782 |
69% |
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OSPlant Systems products |
56,618 |
27% |
57,702 |
22% |
43,319 |
15% |
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Total telecom equipment |
154,713 |
74% |
211,546 |
81% |
238,101 |
84% |
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Telecom services |
53,698 |
26% |
48,544 |
19% |
45,070 |
16% |
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Total revenue |
$ 208,411 |
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$ 260,090 |
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$ 283,171 |
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Assets: |
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Telecom equipment |
$ 116,999 |
87% |
$ 190,088 |
92% |
$ 174,131 |
91% |
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Telecom services |
17,229 |
13% |
17,262 |
8% |
17,682 |
9% |
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Total assets |
$ 134,228 |
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$ 207,350 |
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$ 191,813 |
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Financial information for each of the Company’s segments and operations by geographic area are located in Note 11 of the Consolidated Financial Statements included in this Annual Report.
The Company’s stock is divided into two classes. Class A common stock is entitled to one vote per share while Class B common stock is entitled to four votes per share. The Company’s largest stockholder is a voting trust that owned 47.5% of the voting control of the Company as of May 30, 2008. The trust was formed for the benefit of Robert C. Penny III and Melvin J. Simon and their respective families. Certain Penny family members also own or are beneficiaries of trusts that own shares outside of the voting trust. As trustees of the Voting Trust and other trusts, Messrs. Penny and Simon control 52.3% of the voting stock and therefore effectively control the Company.
The Company’s Products
The telecom equipment segment of the Company’s business consists of two product lines, offering a broad range of products that facilitate the broadband transmission of high-speed digital and analog services between a service provider and end-user customers. These two product lines are:
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CNE: The Company’s CNE family of broadband products enables high-speed transport and networking of voice, data, video, and other advanced services. The products allow service providers to deliver services, content, and applications over existing copper, fiber, coax, and wireless infrastructures. Westell CNE products are typically installed in consumer residences or small businesses as a key component of a broadband service package. |
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OSPlant Systems: The Company’s OSPlant Systems product family consists of next generation outdoor cabinets, enclosures, power distribution, edge connectors, remote monitoring and ancillary network protection solutions. These solutions are ideal for wireless backhaul and service delivery to enterprise markets as well as wireless carrier, MSO and utility markets worldwide. The power distribution and remote monitoring solutions are provided through the Company’s Noran Tel subsidiary. |
The prices for the products within each market group vary based upon volume, customer specifications and other criteria and are subject to change due to competition among telecommunications equipment manufacturers. Increasing competition, in terms of the number of entrants and their size, and the increasing size of the Company’s customers because of past mergers, continue to exert downward pressure on prices for some of the Company's products. At some point, the Company may elect to eliminate some products and exit some markets based on an analysis of current and future prospects, and/or enter new, more attractive markets.
The Company’s CNE products enable residential customers, small businesses, and small office/home office (“SOHO”) users to access and share broadband services on networked computers, telephones, cell phones, televisions, media players, and other networked devices. A broad offering of networking products and technologies allows the Company to address several segments of the service provider market, distinguished by the methods used
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to deliver their services – wireline operators (copper and fiber), mobile network operators (wireless), cable multi-service operators (hybrid fiber-coax), and integrated carriers that operate as combinations of the other three.
The following table sets forth a list of the Company's principal CNE products and their applications:
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Product |
Description |
Applications |
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LiteLineTM ADSL2+ Modem
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Customer premises equipment that is connected to a telephone line that has been configured to provide Asymmetrical Digital Subscriber Line (ADSL and ADSL2+) service from the telephone company. The LiteLineTM is a plug-and-play device that connects to the end customer through a single Ethernet or USB port.
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Enables residential and SOHO customers of ADSL service to connect one or more PC’s and other computer networking equipment to the ADSL service for high speed Internet access with routing and security protection all in one box.
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ProLineTM ADSL2+ manageable Modem/NAT Router
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Similar in all ways to the LiteLineTM, the ProLineTM provides the added benefit of allowing remote diagnostics, maintenance, software upgrades and other remotely managed services.
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In addition to providing the same applications as the LiteLineTM, the ProLineTM offers service providers the ability to provide customers a higher level of service and performance.
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VersaLinkTM Gateway |
A compact, versatile gateway device that combines an ADSL2+ modem along with wired Ethernet and WiFi networking features. Versions are also available without the ADSL2+ modem, for wireless and other service providers.
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Enables residential, SOHO, and small businesses to network their broadband service to multiple PCs and other networked devices with wired and wireless access.
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TriLinkTM IMS Gateway |
Multi-service gateway that combines the ADSL2+ modem and networking capabilities of VersaLink with Voice over Internet Protocol (“VoIP”) ports for connecting standard home phones and WiFi-enabled cell phones to the broadband network. Versions are also available without the ADSL2+ modem, for wireless and other service providers.
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In addition to VoIP and networking features including IMS support, the TriLinkTM IMS Gateway supports Fixed Mobile Convergence (“FMC”), and Fixed-to Mobile Substitution (“FMS”) applications that blend wired and wireless phone services.
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UltraLineTM Series3 Wireless Broadband Home Router |
Ultra high-speed gateways that deliver secure, high-quality, data, voice, IP video services, and advanced services and applications over a variety of network access methods and home networking technologies, including fiber optic, copper, coax, WiFi and Ethernet. |
UltraLineTM supports a wide variety of wired and wireless broadband applications, particularly high-speed IP data video services delivered over fiber optic networks. |
OSPlant Systems Products. The Company’s OSPlant Systems products provide service providers with products to transport, maintain and improve the reliability of services delivered over copper and fiber lines in the local access network.
- 3 -
The following table sets forth a list of the Company's principal OSPlant Systems products and their applications:
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Product |
Description |
Applications |
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T1 NIU-PM (Network Interface Unit with Performance Monitoring) |
T1Network Interface Unit with Performance Monitoring that stores circuit performance and maintenance information for a single T1 circuit. |
Provides a “demarcation point” or hand-off between the telephone company equipment and customer’s equipment on T1 circuits. The NIU PM units provide enhanced maintenance and remote performance monitoring of T1 circuits. This functionality provides troubleshooting capability that helps the telephone company reduce maintenance costs and customer down-time. Additionally, it creates an opportunity for preventive maintenance activities by the telephone company to improve their customer satisfaction.
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NIU Mountings |
NIU Mountings are electronic enclosures with connectorized backplanes that house NIUs, NIU PM units, and HDSL Remote Terminal cards, including those from other manufacturers such as Adtran.
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Deployed by telephone company at their customer’s premises locations to terminate their T1 circuits. | |||
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DS3 products |
DS3 Network Interface Units with and without Performance Monitoring capability along with the Mountings to house these plug-in cards. |
Facilitates the maintenance, monitoring, extension, and demarcation of DS3 facilities. Can be deployed in central offices for a DS3 hand-off to alternate carriers, and also customer premises locations.
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T1 Repeaters |
T1 Intelligent Office and Line Repeaters. |
Facilitates the extension of T1 service to subscribers that are more than 3000 feet* from the central office and those that are served beyond a fiber multiplexer. (*Distance will vary based on gauge of copper wire)
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VirtualEdgeTM |
A flexible mix and match architecture panel for Ethernet (Cat5E), fiber or coax cable. These panels are available in either standard 19” or 23” relay rack mount as well as wall mount.
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Provides a physical demarcation for services at the customer premises. Mounting and connector flexibility provides customers multiple applications, and minimizes space required in equipment rooms.
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SwingRack |
A unique hinged wall mounted housing to hold a standard 1 or 2 RU rack mount device to the wall, eliminating the need for floor mount relay racks. |
Provides a solution in tight equipment closets rooms to mount in a standard 1 or 2 RU (19” or 23”) rack mount devise in a vertical “upright” position hugging the wall that nicely swings down to a horizontal position for installation and maintenance purposes.
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(Continued from prior page)
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Product |
Description |
Applications |
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Shade™ |
A GR-487 Issue 2 compliant universal environmental equipment cabinet supporting up to 225W of internal heat dissipation using the Company’s patent pending Dynamic Cooling System.
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Provides an actively cooled outdoor equipment Cabinet designed to reduce the effects of solar loading and internal equipment heat generation to help ensure maintenance free equipment operation in conditions ranging from -40°C to +65°C.
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CellPak® |
Outdoor passively cooled equipment enclosures |
Provides a sealed “passively” cooled equipment enclosure ideally suited for demarcation hand-offs from a Wireline Carrier (Telco or MSO) to Wireless Carriers.
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Power Distribution Products |
Fuse Panels and Battery Distribution. |
Point of secondary DC power distribution to operate equipment. Safely protecting operating equipment in the event of fault current. Providing fault current alarms through visual and remote indicators.
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SiteVu Remote Monitoring Systems |
A powerful compact and flexible monitoring system that provides visibility to remote site environmental and equipment status issues. |
A remote monitoring product that provides complete real time visibility to remote sites from the user’s desk top. Applications include environmental information such as temperature, air flow, humidity and smoke, battery condition, and equipment operating status. | |||
Research and Development Capabilities and Engineering Base
The Company believes that its future success depends, in part, on its ability to maintain its technological leadership through enhancements of its existing products and development of new products that meet customer needs. The Company is focusing on expanding its product offerings in the equipment segment from basic high speed broadband Internet access to more sophisticated applications such as home wireless networking, voice, video and information service delivery converged services and IPTV/Video. The Company works closely with its current and potential customers as part of the product development process.
In fiscal years 2008, 2007 and 2006, the Company spent approximately $22.7 million, $24.4 million and $20.3 million on research and development (“R&D”) activities, respectively.
The Company's quality systems, including product development processes, are registered to TL9000, which is the Telecommunication Industry's sector-specific version of the ISO9001:2000 International Quality System Standard. These processes are also registered to ISO9001:2000.
The Company's R&D personnel are organized into product development teams. Each product development team is generally responsible for sustaining technical support of existing products, conceiving new products in cooperation with other groups within the Company and adapting standard products or technology to meet new customer needs. In particular, each product development team is charged with implementing the Company's engineering strategy of reducing product costs for each succeeding generation of the Company's products in an effort to be a highly valued, superior quality long-term supplier, without compromising functionality or serviceability. The Company also
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leverages its relationships with its manufacturing partners to produce new cost-reduced versions of existing products. Also, the Company performs some product development, focusing on software development and system testing via contacts with outsourcing firms in India.
The Company believes that the key to this R&D strategy is choosing an initial architecture for each product that enables engineering innovations to result in performance enhancements and future cost reductions. The Company’s products are designed in conjunction with input from procurement and outsource manufacturers and an analysis of feasibility to reduce costs. The Company believes it has a quality record that is grounded in a solid interface and transference of knowledge between design and outsource manufacturing teams.
The Company is also growing the software content of its products, and the majority of the Company's design engineers, including those at the contracted outsourcing firms, are software engineers. Greater software content in the Company's products is not only necessary to deliver the more sophisticated applications listed above, but is also a key element of the Company's strategy to focus on differentiated, value-added products and solutions. In some cases the Company sources software technology from outside suppliers through licensing agreements, which typically but not always give the Company the ability to modify the licensed software to meet the needs of the Company's customers. Some software technology is obtained from the open source community. The Company also develops its own proprietary software where needed to provide the desired functionality. Software from all of these sources is typically integrated into the final product releases, and tested by the Company's system test engineers, by outside test labs, by industry certification groups, and by the Company's customers before going into volume production and deployment.
In some cases, the Company utilizes technology, whether hardware, silicon chip, software or other, that is only available from a single source. In these cases, the Company will typically obtain a contractual agreement with the technology supplier that gives the Company access to the technology for the intended lifecycle of the products which incorporate that technology. However, it is not always possible to obtain such an agreement. Additionally, technology suppliers to the Company may go out of business or may be subject to injunctions or natural disasters which prevent them from being able to supply that technology to the Company in the future. Additionally, the technology may evolve due to changes in industry standards or changes in the market, and the Company's contractual agreement may not necessarily give the Company rights to that evolved technology in the future. Were the Company to lose the ability to obtain needed technology from a supplier, or were that technology no longer available to the Company under reasonable terms and conditions, the Company’s business and results of operations would be materially and adversely affected.
The Company’s products are subject to industry wide standardization organizations which include the Internet Engineering Task Force, the MoCA Alliance, the DSL Forum, CableLabs, the American National Standards Institute (“ANSI”) in the United States and the International Telecommunications Union ("ITU").
The following table lists the principal products currently under development along with their description and expected application:
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Product |
Description |
Applications |
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UMA Terminal Adapter |
Residential device that converts standard analog phone signals to Unlicensed Mobile Access (“UMA”) format for communication over a broadband connection.
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Allows connection of wired home phones to UMA services offered by mobile network operators. |
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Application Gateways & Devices |
Family of products that combine networking, remote control, and remote access capabilities for IP-based home devices and appliances.
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Enables a broad variety of services for media sharing, monitoring, and security in a broadband connected home.
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The Company anticipates that it will generate revenue from the products listed in the above table in fiscal year 2009 and fiscal year 2010. However, there can be no assurance that the Company will be able to introduce such products as planned.
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Customers
The Company's principal customers historically have been major U. S. telecommunications service providers (“telephone companies”). In addition, the Company sells products to several other entities, including public telephone administrations located outside the U.S., independent domestic local exchange carriers, competitive local exchange carriers, inter-exchange carriers, wireless service providers, Internet service providers, and business enterprises. Revenues from international customers represented approximately $11.6 million, $7.3 million and $7.5 million of the Company's revenues in fiscal 2008, 2007 and 2006, respectively, accounting for 5.6%, 2.8% and 2.7% of the Company's revenues in such periods.
The Company depends, and will continue to depend, on the telephone companies and other independent local exchange carriers for the majority of its revenues. Sales to the Company’s largest two customers, Verizon and AT&T accounted for 34.0% and 19.8% of the Company's revenues in fiscal 2008, respectively. Consequently, the Company's future success will depend upon the timing and size of future purchase orders from telephone companies, the product requirements of the telephone companies, the financial and operating success of telephone companies the success of the telephone companies' services that use the Company's products, and the Company’s level of success in diversifying its revenue stream beyond the telephone companies. Any attempt by a telephone company to seek out additional or alternative suppliers or to undertake the internal development of products could have a material adverse effect on the Company's business and results of operations. In addition, the Company's sales to its largest customers have in the past fluctuated, and in the future could fluctuate significantly from quarter to quarter and year to year. The loss of such customers or the occurrence of such sales fluctuations would materially adversely affect the Company's business and results of operations.
The Company’s contracts with its major customers are primarily pricing and product specification agreements that do not require a specific level of quantities to be purchased. Each customer provides the Company with purchase orders for units on an as-needed basis.
Telephone companies and the Company's other customers are significantly larger than, and are able to exert a high degree of influence over, the Company. As a result, our larger customers may be able to reschedule or cancel orders without significant penalty. Prior to selling its products to service providers, the Company must undergo lengthy approval and purchase processes, which are discussed in the section, titled “Marketing, Sales and Distribution.”
Marketing, Sales and Distribution
The Company sells its products in the U.S. through its domestic field sales organization and selected distributors. The Company has maintained an established sales force and channel to domestic service providers since its founding in 1980.
The Company markets its products domestically within the United States, as well as in Canada and Europe. In North America, the Company’s OSPlant Systems products are sold directly to the service providers or in some cases to distributors who service these carriers. The Company’s CNE products are sold directly to service providers, or in some cases to distributors who service these carriers. Additionally, the CNE products are sometimes recommended to servicer providers by other companies with whom the Company has a partnership in place. The Company believes that the service providers’ sales channels are very dynamic and continually looks to adapt and configure its sales force and processes to meet these changes.
Prior to selling its products to service providers, the Company must undergo lengthy approval and purchase processes. Evaluation can take as little as a few months for products that vary slightly from existing products and often longer for products based on new technologies and/or new service offerings. Accordingly, the Company is continually submitting successive generations of its current products, as well as new products to its customers for approval.
Although the service provider approval processes may vary to some extent depending on the customer and the product being evaluated, they generally are conducted as follows:
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Laboratory Evaluation. The product's function and performance are tested against all relevant industry standards and the customer’s written requirements, usually provided to the Company in the form of a Request for Proposal.
Technical Trial. Small quantities of the product are installed in the field for simulated operation in a field trial. The field trial is used to evaluate performance, assess ease of installation and establish troubleshooting procedures.
Marketing Trial. Emerging products are tested for market acceptance of new applications and services. Marketing trials usually involve a greater number of products than technical trials because products are typically deployed in several distinct markets in the service provider’s network. This stage gives service providers an opportunity to establish procedures, train employees to install and maintain the new product and to obtain more feedback on the product and the new applications and services from a wider range of operations personnel and consumers.
Commercial Deployment. Commercial deployment usually involves substantially greater numbers of products and locations than the marketing trial stage. In the first phase of commercial deployment, a service provider initially installs the equipment in select locations for select applications and services, and will typically start billing for those services. This phase is followed by general deployment involving greater numbers of products and locations across the service provider’s serving area. Commercial deployment does not usually mean that one supplier's product is purchased for all of the service provider’s needs throughout their serving area as service providers often rely upon multiple suppliers to ensure that their needs can be met. Subsequent orders, if any, are generally placed under single or multi-year supply agreements that are generally not subject to minimum volume commitments.
The relationships that the Company establishes in this extensive process are critical in almost every case. The Company has a history of working closely with the service providers in this fashion and the Company has won numerous quality awards from a variety of customers over the past twenty years.
The Company is focusing on new channels, markets and partners for its newer products. The deployment of emerging fixed mobile convergence (“FMC”), IPTV/video and advanced in-home services all represent opportunities for the Company’s TriLinkTM and UltraLineTM Series3 products at customers beyond its traditional base of customers.
Technical Support
The Company maintains 24-hour, 7-day-a-week telephone support and provides on-site support. The Company also provides technical consulting, research assistance and training to some of its customers with respect to the installation, operation and maintenance of its products.
The Company has general purchase agreements with most of its major customers. These agreements may require the Company to accept returns of products within certain time limits, or indemnify such customers against certain liabilities arising out of the use of the Company's products. Although, to date, the Company has not experienced any significant product returns or indemnification claims under these contracts, any such claims or returns could have a material adverse effect on the Company's business and results of operations.
The Company's products are required to meet rigorous standards imposed by its customers. Most of the Company's products carry a limited warranty ranging from one to two years for CNE products and up to seven years for OSPlant Systems products, which generally covers defects in materials or workmanship and failure to meet published specifications, but excludes damages caused by improper use and all other warranties. In the event there are material deficiencies or defects in the design or manufacture of the Company's products, the affected products could be subject to recall.
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Outsourced Manufacturing
The Company outsourced its manufacturing operations from Aurora, Illinois, to offshore suppliers during fiscal year 2008. The manufacturing facility in the Aurora building is now being used for distribution. Reliance on third-party offshore subcontractors involves several risks. (See Risk Factors)
Standard commercial components available from multiple suppliers are procured by the offshore suppliers. There are also single-sourced components needed to produce products. The Company has direct relationships and purchase contracts with suppliers for these items. One of the single-sourced items in some of the CNE products consists of a license to run a proprietary operating system. There are a number of other suppliers in the market that could supply the Company with similar technology, however, it would take the Company at least nine months to reengineer the product and subsequently get product approval from customers. This delay would materially adversely affect the Company’s business. All purchase contracts are short term in nature.
A substantial portion of the Company's shipments in any fiscal period can relate to orders for products received in that period. Further, a significant percentage of orders, such as NIUs may require delivery within 48 hours. To meet this demand, the Company maintains inventory at its facilities or outsource suppliers. In addition, the Company maintains some inventory at the customers’ sites pursuant to agreements that the customers will eventually purchase such inventory. Because of the rapid technological changes to our products, the Company faces a recurring risk that the inventory it holds may become obsolete.
Competition
The markets for the Company's products are intensely competitive and the Company has no reason to believe that this competitive environment will ease in the future, especially in the rapidly changing markets for broadband products. The Company’s primary competitors vary by market. The Company’s principal competitors with respect to its OSPlant Systems products are Adtran, ADC Telecommunications Emerson, Purcell and Telect. The Company's principal competitors with respect to its CNE broadband products are primarily Siemens Information and Communication Network Inc., Motorola (Netopia), 2Wire Inc., Cisco Systems Inc. (Linksys), D-Link Systems Inc., Actiontec Electronics Inc., Thomson and ZyXEL Communications Co. The Company believes that it is currently one of the leading sellers of DSL products in North America. However, many of the Company’s competitors are significantly larger, with broader product lines, and have more financial resources than the Company. To compete against these competitors, the Company focuses on quality, time to market and the ability to react quickly to market changes leveraging its U.S. based product management and product development teams. The Company expects that continuing competitive pressure from Asian based manufacturers will continue to exert downward pressure on pricing.
Since the Company currently derives the majority of its revenues from the sale of products to telephone companies, the Company faces competition from alternative products optimized for other broadband networks. Telephone companies face competition from MSOs, new local access providers and broadband wireless service providers that are capable of providing high speed digital transmission to end users. At the end of 2007, 40 million customers used cable broadband in North America in contrast to 34 million DSL subscribers. By 2009, Infonetics, a service that provides industry trend data, is forecasting approximately 49 million cable broadband users in North America versus 40 million DSL users resulting in approximately 45% market share for DSL. In addition, the Company believes that the deployment of DSL, HDSL and fiber networks are reducing the demand for the Company OSPlant Systems traditional transmissions products including T1 office and line repeaters and T1 NIU’s with and without performance monitoring. (See Risk Factors)
Telecom Services
ConferencePlus, Inc., founded in 1988, is a full service conferencing company that manages and hosts specific software and applications relating to conferencing and meeting services. ConferencePlus is a 91.5% owned subsidiary of the Company and manages its teleconferencing and meeting services through its main operations center in Schaumburg, Illinois, and a facility in Dublin, Ireland. ConferencePlus services generated $53.7 million, $48.5 million and $45.1 million in revenues in fiscal 2008, 2007 and 2006, respectively.
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ConferencePlus allows multiple individuals, organizations and/or businesses to conduct conference calls using a combination of voice, video or web such as graphs or spreadsheets. ConferencePlus offers conference call services that can include a blend of audio, graphics, spreadsheets or other documents that can be carried over and archived on the Internet to enhance the traditional voice conference call. By enabling the sharing of this blend of information, ConferencePlus can help organizations increase productivity and save money by reducing travel time, bringing down travel costs, and making it easier for people in remote locations to work together. Teleconference and meeting service technologies also allow organizations and individuals to collect and disseminate information faster, more accurately and without the associated costs of face-to-face meetings.
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ConferencePlus is distinguished by three strategies: |
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• |
Diverse Distribution Channels |
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• |
State-of-the-Art Network and Integrated Systems | |||
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• |
International Reach |
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Diverse Distribution Channels
ConferencePlus has historically acted as a provider of conferencing and meeting services on a wholesale basis, managing and hosting applications for major carriers and telecommunications resellers. About 40% of ConferencePlus’ revenues come from indirect commercial teleconferencing services to customers who market or use ConferencePlus services under their own brand name. Such companies choose to outsource and private label audio, web and video teleconferencing services to maintain continuity, save costs and focus on their core competencies. By selling into indirect or resale customers, ConferencePlus effectively increases the size of their sales organization without incurring the expense necessary with a direct sales force.
ConferencePlus also sells its services directly to companies through its national accounts sales force. This area continues to be a strong part of ConferencePlus’ business and the Company expects to continue to invest resources in this area in order to maintain a diverse mix of revenue distribution. The deployment of this strategy is designed to improve the recognition of the ConferencePlus brand, which has strategic long term benefits to the Company.
State-of-the-Art Network and Integrated Systems
A critical part of ConferencePlus’ approach is its state-of-the-art network and integrated systems. ConferencePlus has a state-of-the-art network infrastructure that enables it to take advantage of the relationships it has with major telecommunications providers to provide quality service. ConferencePlus has deployed equipment in carrier Points-of-Presence to take advantage of the higher capacity and the lower cost structure available with such deployments.
ConferencePlus has built an integrated reservation, scheduling and billing system called Conferencing and Reservation Billing System (“CRBS”) that is a significant differentiator in the conferencing market. CRBS allows ConferencePlus to leverage its operations on a global basis. This reliable and scalable system is seamlessly integrated in the operational environment from the point of reservation through the billing process. This integration allows ConferencePlus to enjoy scale advantages and to be able to provide transparent branded services to its customers. This system is built and maintained by an in-house team of engineers, developers and technicians who continually work to improve and enhance the system based on industry trends, customer requests and strategic direction.
ConferencePlus has extended certain capabilities of CRBS to a publicly available web portal where customers can sign up for service, manage their accounts and control their conferences. ConferencePlus has also tightly integrated with third party suppliers of web conferencing services to enhance our audio and video services. In addition to making these services available to customers, ConferencePlus has the ability to privately brand the entire web experience to match any other brand visualization that may be required. This capability is beneficial for both indirect customers where this helps support the indirect brand as well as for large enterprise customers where branding can help drive corporate adoption.
ConferencePlus has also begun leveraging the capabilities of CRBS for certain large scale conferencing deployments where the technology can simplify and streamline the usage, billing and cost accounting services for select customers.
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International Reach |
As customers globalize their telecommunications services, ConferencePlus has expanded its operational presence internationally to meet these needs. In addition to its main operational centers in Schaumburg, Illinois, and Dublin, Ireland, ConferencePlus has teleconferencing bridges located in Chicago, Illinois, Broadview, Illinois, Oakbrook, Illinois, and London, England. ConferencePlus is able to serve the teleconferencing needs of customers headquartered anywhere in the world through these facilities. The ConferencePlus facility in Dublin, Ireland, was established in 1998 to help meet the growing demand for global conferencing service. The international market for teleconferencing is expected to grow as a result of deregulation and improved networks with associated reductions in end user costs.
ConferencePlus’ indirect or private label customers and many of its other customers are significantly larger than, and are thus able to exert a high degree of influence over, ConferencePlus. ConferencePlus depends on large customers to provide a significant percent of its revenues. A loss of one of these customers would have a material adverse effect on ConferencePlus’ business. The Company has a strategy in place to mitigate the loss of a major customer. Prior to selling its services, ConferencePlus must undergo lengthy approval and purchase processes. Evaluation can take a few months for services that vary slightly from existing services used by the prospective customer to a year or more for services based on technologies such as video or data teleconferencing or which represent a new strategic direction for the customer, as in the case with private labeling teleconference services for a large reseller.
Competition in the teleconferencing business is intense and ConferencePlus expects that competition will increase due to low barriers of entry and recent entrants into the audio teleconferencing service market. Many of ConferencePlus' competitors, including InterCall, AT&T, Verizon, Premiere and British Telecom, have much greater name recognition, more extensive customer service and marketing capabilities and substantially greater financial, technological and personnel resources than ConferencePlus. There can be no assurance that ConferencePlus will be able to successfully compete in this market in the future or that competitive pressures will not result in price reductions that would materially adversely affect its business and results of operations.
Government Regulation
The telecommunications industry, including most of the Company's customers, is subject to regulation from federal and state agencies, including the FCC and various state public utility and service commissions. While such regulation does not affect the Company directly, the effects of such regulations on the Company's customers may, in turn, adversely impact the Company's business and results of operations. For example, FCC regulatory policies affecting the availability of telephone and communications services and other terms on which service providers conduct their business may impede the Company's penetration of certain markets, and/or make the markets less financially attractive. The Telecommunications Act of 1996 lifted certain restrictions on carriers’ ability to provide interactive multimedia services including video on demand. Under the Telecommunications Act of 1996, new regulations have been established whereby carriers may provide various types of services beyond traditional voice offerings.