Chapter 13 - Data Communications: Adaptation 1979-1986
13.24 Network Equipment Technologies
The head of steam that NET management had been promising for the last two years became self-evident to insiders during the first half of 1986. In March, NET announced its second product the IDNX/40. The IDNX/40 sold for $45,000 – $70,000 depending on the configuration, roughly half the sales price of the IDNX/70. In early April, management told the board that revenues topped $8.7 million for its first full fiscal year. The good news would continue. Their sales ramp rate was so fast, NET became profitable in April 1986 with revenues of $6.7 million for the quarter ending June 1986 and profits of $400 thousand.
Bruce Smith, the President and CEO, remembers not only why NET was successful, but why the competition was not:
You take my product and you compare my box with the Cohesive box, I have some advantages. Take the networks that I can build and the certainty I can provide for critical applications, and get a customer to think about his whole problem, I win hands down almost all the time. The company was designed that way, and the product was designed to fit into that sort of an architectural concept, and I think that credit needs to be shared among all of the early people, in terms of reaching up into that next level. You talked about the second generation; ‘what is this thing really, what’s the layer beyond the layer I would think about?’ Culturally, I think that’s the thing that differentiated us from our competitors. I think it’s the cultural limitation that meant that the General Datacomm’s didn’t make it. We defined the problem differently. That’s the issue. It is the attacker’s advantage.
Attacking meant leaving no sales on the table. Management was learning that when customers created their new networks using IDNX’s, they almost always had to buy more statistical multiplexers and other slower speed data communication equipment. But since NET did not manufacture such equipment, the customers had to buy product from other Data Communication firms that not only meant giving competitors business, but also leaving the door open for them to convince the customer to buy their T-1 multiplexers, not NET’s. This was a problem that had to be solved if NET was going to be seen as a full service network provider.
In August 1986, wasting no time, NET acquired ComDesign, Inc. of Santa Barbara, CA for $6.2 million.22 Bob Dolan had founded ComDesign in 1977 to build LAN products, that was, until he heard about Micom. Dolan remembers:
I saw this little company, Micom, that was making a killing of $5 million and then $15 million fiscal years selling statmuxs, I thought “That’s kind of great, but it doesn’t do that much. It’s kind of a trivial thing.
By 1986, ComDesign had revenues of $12 million but had not attained a scale that gave management or investors confidence that they would ever become a public company. So when NET came courting, the conversations progressed quickly, particularly when they learned that NET intended to go public as soon as possible.
During this period, NET had also filed a lawsuit against Cohesive Networks to cease use NET proprietary information that had been edited and used against them in selling situations. After DCA investigated the lawsuit and had their lawyer discuss the matter with Smith, Nordin of DCA agreed to stop the practices and NET withdrew the lawsuit.
NET’s sales growth continued to impress investment bankers and conversations to go public resulted in the preparation of the prospectus. In January 1987, NET became a public company, raising $26 million with a post money valuation of nearly $200 million. Investor demand soon drove the stock price to $27.00 per share, valuing NET at greater than $300 million. (Venture investors who originally bought shares at $.0166 realized a 96,285 percent return and those who bought shares at $.75 in June 1986 realized a 2,033 percent return.)23
For fiscal year ending March 1987, NET’s sales were $47.4 million, representing a growth rate of 450%. Profits totaled $5.1 million.
To the winners go the spoils and, on June 16, 1987, NET and IBM announced terms of an agreement between their two companies. IBM would begin selling the NET products under a non-exclusive worldwide marketing, installation and service agreement. IBM would also contribute funding to future NET product development and incorporate NET technology into its networking products.24
As Richard Kimball, the research analyst covering NET for Montgomery Securities would write on June 24:
We believe the stock will continue to command a significant premium based on robust market growth, the company’s product and management abilities to fully exploit these strong markets, and the fact that earnings are expected to almost quadruple in fiscal 1988, expand over 60% in fiscal 1989and more that 40% long term.25