INTERVIEW: Taking the Test of Time Even Errol Ginsberg’s Ixia has suffered the travails of a telecom sector that is still a few quarters away from recovery. By MICHAEL HART Staff Reporter These days, it seems like hell in the telecom world. But even hell has its circles. At Ixia in Calabasas, the earnings reports look familiar. In the last quarter of 2001, the testing equipment developer had $3.3 million in net income on $17 million in revenue, down from $4.1 million on $26.5 million in revenue in the same quarter a year earlier. Its stock was trading at $8.50 on April 2, down from the $12 range it has been in most of the time since going public in late 2000. Nevertheless, the company that develops products to test the next generation of telecom equipment has $116 million in cash to work with, has acquired one company and the product line from another in the last six months and expects to buy more, and since it went public in late 2000 has never had a quarterly net loss. And it has a founder, president and CEO in Errol Ginsberg who says he believed so strongly in the original impetus for the company that, while stock prices may fluctuate and earnings may be less than anticipated at the moment, he was willing to take on an initial public offering in October 2000 just as the market was beginning to sour on technology-related issues. Ginsberg spent more than 15 years working for one computer-related firm or another after emigrating to the U.S. from South Africa in 1981. Finally, in 1997, he recognized the potential in what appeared to be a wide open market for products that could test Ethernet switches and decided to strike out on his own. He approached Jean-Claude Asscher, chairman of Tekelec Inc. where Ginsberg was once vice president of engineering, and asked for help. Asscher said yes; today he is also chairman of Ixia’s board. At one time, Ginsberg said he thought Ixia could avoid the travails others in the telecom sector have suffered because it was busy preparing for whatever the next generation of technology would be, something his customers would always have R & D; money for. Now Ginsberg says, he underestimated the impact a slowdown in the telecom industry would have on companies like his and believes Ixia still has at least a few rough quarters ahead of it. Ginsberg spoke recently to Business Journal editor Michael Hart about the slowdown, how and why he founded Ixia and what the future may hold for the company. Question: In the simplest terms possible, what does Ixia do? Answer: We’re in a pretty specialized area that’s hard for people to understand. We build products that generate traffic that would be equivalent to millions of users on the Internet, but in a controlled way so that devices that are (used) in the Internet can be tested, so when they are installed they don’t fall over and die. Q: How did Ixia come about? A: I saw an opportunity. I had been doing consulting for a company that back then was building a product that was designed to test Ethernet switches. That was right at the beginning of Ethernet switch units, a massive growing market. Then I worked for a company that was building the switches, basically traffic control products. We were customers of the company I’d been consulting for. We were buying the products I had been involved in developing previously. So now I’d had both sides. After I’d been there about a year I saw the market was still growing and I saw an opportunity to build a competing product. Q: You have said that, in those early years, you did pretty well funding growth with cash flow. So why did you decide to go ahead with an initial public offering in late 2000? A: It’s true, we had enough cash to fund growth at that point in time. The IPO allowed us to get a number of things accomplished. We were able to hire a lot of good people. That certainly was part it. The other part was that an IPO gets you a lot of visibility in the market. It tends to give you more credibility in front of your customers. You start to be perceived as a large company. It gave us a very strong balance sheet. At this point, we’re sitting on close to $120 million in cash. Customers don’t have to have any concerns about whether we’re going to be around next year. It’s a good way to provide liquidity to shareholders and it gives us a significant amount of cash to acquire other companies which we’ve done. Q: You went public on Oct. 17, 2000, not exactly an auspicious moment for many IPOs. The atmosphere at the time didn’t give you cause to hesitate? A: We were due to start trading that day at 11 o’clock. Earlier that morning, the Dow had dropped about 400 and something points, which I didn’t even know about. By the time I got in there (to the Merrill Lynch trading floor in New York) it had recovered, but they would have postponed the IPO if that drop had continued. It opened and we were priced at $13. It started trading at $23, so we had a pretty successful offering. The stock has held pretty steady. It has gone up and hit a high of $39, but it has traded pretty steadily around $12 for quite some time. Q: But now it’s in the range of $7 or $8. What happened? A: I don’t know. It’s market-driven. The telecom market, as you know, is in pretty bad shape and that has affected our sales as well as our stock price. Cisco’s our largest customer. If you look at our price relative to Cisco’s stock price, it trades very similarly up and down. Q: A year ago, you said Ixia was dealing with next-generation technology and, consequently, was likely to avoid the perils of a momentary downturn in the tech sector because telecoms would continue to invest in research and development. Were you right? A: Back then it wasn’t obvious how much these companies would suffer in the downturn. They did start to cut back on R & D; and it did affect us. We were probably na & #271;ve back then to think they would keep spending as much money on R & D.; The reality is that, if companies are going to stay in this business, they still need to do R & D.; But they’re definitely much more conservative than they were a year ago about how they spend their money. They’re certainly much tighter with their money. Q: When did it become clear to you that Ixia would experience a slowdown in sales? A: For us it was a year ago, but the beginnings of it probably started a year and a half ago. Back then, nobody really knew what was going on. When we were on the road show (in October 2000), people were aware of a lot of the problems they were having, but our sales were extremely strong. So it took another six months before we started to see an impact. Back then, people talked about, is it going to be one quarter, is it going to be two quarters? They didn’t realize the depths of the problem. Q: From your point of view, what are the prospects for a turnaround? A: People are much more aware now of what has transpired with this telecom slowdown. Some companies in some areas are starting to see some improvement. But overall people don’t expect much improvement for at least three quarters. Some segments that serve the telecom sector are starting to see some improvement. The chip companies, for instance. A lot of companies stopped new orders going out about a year or two ago and now they’re having to replenish that. We’re going to have a tough time over the next few quarters. Q: Given the relatively small number of competitors you have in what is a pretty narrowly defined niche, how hard is it to stay on top of the market? A: You have to have your test product ready to test your equipment vendor’s product prior to him releasing it. Otherwise, you’re too late. An example right now is the 10-gig Ethernet, which is the latest thing in technology that’s hitting the market this year. We’ve had the 10-G products since the third quarter of last year. We were very early indeed for the technology cycle. Vendors have started showing 10-G Ethernet products and will start shipping later this quarter and next quarter. Q: Are you worried about others seeing an opportunity the way you did and getting into the market? A: The barrier to entry today is pretty significant. We’ve been at it for four years now. We have 120 engineers working on various products. To come along and attack some area that we are already in is a formidable undertaking. It’s not an unlimited market in size. Usually, the second and third players to a market get some percentage of it and everybody after that gets a limited percentage because those before them have 95 percent of the market. Q: You’ve said one of your main goals was to own your own company. Why was that so important to you? A: It was very simple. I didn’t want to work for another boss. I felt I’d had enough experience over the years that I didn’t need somebody else to tell me what I needed to do on a daily basis to run a company. I wanted to build a company that would be successful and we could make a decent living. There are about 60 million shares outstanding. At 12 bucks a share, that’s over $1 billion in market cap. So that’s success beyond anybody’s wildest dreams, including everybody who started working here in the early days. There are engineers here who are millionaires now, which is great. Q: Is there anything about starting a company and running it that you didn’t expect? A: You spend all this energy creating a company and creating products that you think are good and have value for your customers. Most investors don’t really care about that. You tend to be a commodity that’s bought and sold. If you’re fashionable, and the industry you’re in is fashionable and if people like you, they’ll buy your stock and if you fall out of favor, they’ll dump it. Nobody cares about the products you create. That was kind of a wakeup to me.