Chapter 12 - Networking: Market Order: LANs 1983-1986
Fiscal year 1985, foretold with promise by Ralph Ungermann in his letter to shareholders in the 1984 Annual Report, dated February 1985, turned abruptly ugly. For in March, a month later, revenues came in at $12.0 million, a skimpy 11% increase over 1984; compared to the accustomed triple digit growth of the past and what management had projected for the year. UB lost $2.1 million of operating income – losses before tax consequences. In an investor research report published by Montgomery Securities dated May 13, 1985, Ronald E. Elijah identified the reasons as production problems with broadband modems, a slowing down in the growth rate of minicomputer sales, and the lack of OEM sales. OEM sales had historically been as high as 20%. The reason: no sales of product to Codex for the last two fiscal quarters. Codex effectively disappeared as a UB customer
There was good news as well. INI had won the first major MAP contract, the one let by General Motors, presaging a great start for UB. A president was hired: Joe Schoendorf. Schoendorf and his new team quickly put together a sales projection of $20 million for the year and an expense plan aimed at dominating the emerging industrial LAN market of MAP and token bus. One not surprising expense was developing a VLSI token bus chip.
The first quarter loss jolted Ungermann into making management changes. Jordan soon resigned, albeit he joined the board. Bass soon returned to do strategic marketing. Since his departure the prior fall, Bass had been consulting with IBM, working with Warmenhoven on IBM’s telecommunication strategy.
By mid-year, the misstep from XNS to OSI had been corrected as John Davidson recalls:
By ‘85, we had an implementation of TCP/IP for both the PCs and terminal servers.
Management changes and ever more new products could not overcome the financial hole generated in the first quarter. So eventhough sales for 1985 rose to $72.2 million, up 38%. a shocking operating loss of $1.9 million could not be averted. The $20 million of revenue budgeted by INI came in with at remembered $8 million with only $3.6 million of UB sales made to GE.16 Jordan opines:
The GM contract was a big deal. I remember the INI business plans, too. Most of it was built around GM, and the first full year of sales, INI’s business plan in revenues – and I was on the board of INI – was $20 million, and I think they did eight. But they had an expense running rate for 20, so it wasn’t working real well. They didn’t get back their expenses equal with revenue.
UB management clearly had problems reigning in their research and development expenses that soared to 19.2% of revenues. The cost of maintaining the breadth of products and technologies necessitated by their vendor-independent strategy was becoming prohibitive. (In contrast, for the same year, 3Com’s research and development expenses totaled only 8.2% of revenues.)
In March 1986, management, concerned with their dwindling $7.3 million of cash, sold $34.5 million of Convertible Subordinated Debentures in a public underwriting.
The financial burden of supporting so many technologies persisted into 1986. Jordan opines years later:
One of the financial knocks against the company in the financial community was that Ungermann-Bass did too many different things, too many different technologies. You heard it a lot in the financial arena. They say: “You guys are biting off too much. You’ve got too many different technologies and that going on here,” and the standard answer to that was: “Look, they’re all basic networking, very similar. They’re just a little bit different architectures, and protocols are all the same, blah, blah, blah,” which is bullshit. They really are different technologies and we were biting off too much. That was a valid criticism, especially looking back on it.
In December 1986, the cash problems of INI required a solution. Too little revenue and too many expenses forced UB and GE to invest another $10 million into INI. UB’s share was $6.4 million: from then on UB would record 57% of future earnings and losses; losses UB could hardly bear
1986 proved to be an even more difficult year than 1985. While sales grew 54% to $110.9 million, an operating loss of nearly $2.0 million was reported. Net income totaled just $18 thousand. Research and development costs remained high: 17.5% of revenue before accounting adjustments. Much of the sales growth was attributed to revenue of INI, albeit UB recorded only $4.7 million of sales to INI.17 (A market research organization had INI sales in 1986 as only $16 million.18)