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CHARLES SHELDON - NETWORK HARDWARE RESALE LLC (NHR)
CEO Interview - published 05/09/2005

DOCUMENT # ABR601

CHARLES 'CHUCK' SHELDON is CEO and co-Founder of Network Hardware
Resale, LLC (NHR). Prior to its incorporation in 1996, he bought and
sold used IBM computers and communications equipment as a part-time
project while pursuing a political career as Mayor of Hermosa Beach,
California. NHR now employs over 100 people in the United States and
Europe, and has enjoyed over 36 consecutive quarters of growth and
profitability. Prior to NHR, Mr. Sheldon had a varied career with IBM in
marketing and sales management, as a business writer and real estate
broker.

Sector: BUSINESS SERVICES

TWST: What is Network Hardware Resale?


Mr. Sheldon: Network Hardware Resale is the largest reseller of pre-
owned Cisco in the world, with three offices worldwide and growing. Our
headquarters is in Santa Barbara, California, as is our main warehouse
facility. We have an office in the New York/New Jersey area and an
office in Amsterdam, The Netherlands. We are currently investigating an
office in Asia. Our value proposition is relatively simple. We provide
enterprises, large and small, and service providers high-quality, pre-
owned network equipment from the leading manufacturers ' including Cisco
Systems, Juniper Networks and Extreme Networks ' at up to 95% off list
price. We deliver most product overnight and all equipment comes with a
standard one-year, advanced replacement warranty. We procure our
inventory ' which currently stands at around $100 million, list price '
from current or previous Cisco users that have excess equipment due to
canceled projects, recent network upgrades, network outsourcing,
mergers/acquisitions or downsizing. Our ability to purchase directly
from our clients for cash or trade, and in any quantity, is another
compelling reason our clients turn to us. About 40% of the hardware we
purchase is unused in the original box. We have a staff of 30
professionals in the US and Europe, who test every single port, every
single card, every single module, run data and pass data through every
chassis to ensure it is in good working and physical condition. If the
equipment needs a little touching-up, say if it has a scratch, we will
paint it. An important distinction between us and others, is that we are
not in the fix-it business; we don't repair anything. Our experience
tells us that a broken unit never performs the same and ultimately
fails. We will not deal in that end of the market.

TWST: What is the competitive landscape at this point?


Mr. Sheldon: There are many competitors throughout the world; however,
none are anywhere near our size. In 2004, we generated approximately $80
million in revenue. What's interesting about our industry, though, is
that our competitors are also our clients. About 20% of our business is
done in what we call wholesale, which means we both sell to our
competitors and we buy from our competitors in the instances when we do
not have something we need in stock. When we buy hardware from our
competitors/wholesale clients, we treat it in the exact same fashion as
we do when we purchase from our retail clients. We assume nothing. We
bring it in, we test it thoroughly, refurbish it as necessary, and
usually turn it around the same day it arrives. So, in any case, we are
able to fill the orders completely with the advantage of the general and
wide community of dealers throughout the world.

TWST: What is the actual market space from the perspective of the
universe of companies that may be expanding current capabilities with
matching equipment that you could supply as opposed to the migration to
new generations of equipment and technology?


Mr. Sheldon: A very good question. At Network Hardware Resale, we have
the entire product line of mature to newer technologies/products
available from Cisco, Juniper and Extreme. And, with some exceptions, we
have most of the latest and greatest technologies/products available. If
a product was announced by the manufacturer within the last three
months, it is unlikely we would have it in inventory or be able to get
it. However, anything beyond that is typically available on the
secondary, or pre-owned, equipment market. We have tremendous product in
stock. In Cisco, we have SUP 720s and 6509s and Fabric Enabled Gigabit
and 10 Gig blades, and the latest GSR equipment including Engine 3
Gigabit and OC-48 cards. We have Juniper M160 chassis, M40E chassis and
all interfaces up to OC-192 ' all ready to ship. So it's somewhat of a
misnomer, and understandably so, that one would expect us to only have
older products. Of course, we have end-of-life products from all of the
manufacturers, which we sell every day. Our clients ' primarily network
managers/engineers ' aren't always looking to migrate to a newer
technology every time Cisco or Juniper announces the latest and greatest
box. Many are looking to extend their current network capabilities, buy
what they are currently using, or 'spare' their networks. In some cases,
the products they are seeking ' the 7200 series, 3640s, 6509s ' are
three and four years old or more. The savings is greatest, the older the
hardware. However, our clients can still save somewhere between 30% to
50% on the latest technologies.

TWST: What is your agenda? What are your priorities for the next 12 to
24 months? What would make that time frame a success?


Mr. Sheldon: We are ramping up our sales force in Europe and the East
Coast of the US. As I said, we are investigating opening an office in
Asia and we continue to evaluate the opportunity to grow through
acquisition. We are also contemplating expanding our product offerings
over the next 12 to 24 months to include storage products. Our priority
is to continue to ensure the highest quality product and client
satisfaction. We believe the demand is out there. By our estimations,
the second-hand, or pre-owned network equipment market is somewhere
around $2 billion per annum. That leaves a lot of room for growth.

TWST: What has been the funding history of Network Hardware?


Mr. Sheldon: We are self-funded and have no debt. We have a large credit
line, which we use on occasion for large buy packages. We have, in the
past, purchased several million-dollar packages at once. Our ready
access to capital really separates us from most of our competitors.

TWST: Introduce us to your top-level management team, the leadership,
and professional credentials you have. Are there areas there you're
looking to add or augment?


Mr. Sheldon: This is a family-owned business. My two sons are in the
business and they are my Sales Managers. Both Mike and John are
experienced in all aspects of the business and share ownership with me.
Our CFO, Karen Anne, is an MBA and a CPA with 10 years of auditing
experience. She has been with the company for five years and is a very
important cog in the management team. Rick Stevens is our VP, Marketing
who brings over 20 years of marketing experience in the network
industry, previously holding Senior management positions with such
industry leaders as Nortel, Extreme and Alcatel. I also have a very
competent and experienced seven-year employee, Glenn, who manages the
Amsterdam office. The manager of our East Coast office, Julie, also rose
up to management through the sales department. I have just employed a
sales trainer, who I have charged with the responsibility of getting
down to the real heart of great salesmanship and time management, and is
on board right now. And I think over the next 24 months, we will
probably add a second-level of management in Amsterdam. That operation
now has some 30 people and it has two managers. We will probably add a
manager there.

TWST: What are the sales and marketing channels that you have today and
how will they continue to change and evolve?


Mr. Sheldon: We are a direct sales organization. All salesmen are
charged with the responsibility of drilling down on potential network
equipment users and they do that mostly over the phone. That model will
continue; there's no reason to change it. We are, however, budgeting a
significant amount of money this year and ongoing to visit more of our
clients. Since we are a worldwide organization, we need to visit our
clients more often and that will happen. We spend a lot of time on
client visitations in Europe. You might be interested that in Europe we
have approximately three nationals for every major country. It was an
important priority for me when we opened the European office two-and-a-
half years ago, that we have a French national selling into France, a
German national selling into Germany, etc. We just hired our first
salesmen to cover Scandinavia and Italy. We will continue to grow our
sales force country-by-country based on the opportunity. In Europe, we
see the greatest opportunity in the UK, more than all of the other
countries combined in Europe.

TWST: Does this area of the industry have room for consolidation? Is
that a valid growth channel or strategy?


Mr. Sheldon: I think there is going to be some consolidation and we are
currently looking at some opportunities. Interestingly, until five years
ago, this industry was dominated by maybe five to 10 dealers, including
NHR. Today, there are likely thousands of very small dealers in the
business. My guess is that consolidation will take place among the
original 10. Consolidation is an interesting subject in this industry. I
hearken back to what I said before; our competitors are also our
clients. Frankly, I welcome the competition. I welcome a dealer who has
something in inventory that I don't have, that I can buy to fill orders
for my own clients. I believe most feel the same way. Our business has
benefited from competition, not suffered.

TWST: From the client's perspective, is this strategy then to look for a
one-stop shop type of supplier where they can find a full panorama of
equipment or are they generally looking to fill a specific need?


Mr. Sheldon: Good question. That really depends on the client. For
certain of our small- to medium-sized clients, we are their one-stop
source for equipment. For our larger enterprise or service provider
clients, we complement their existing Cisco relationships. These
organizations purchase from Network Hardware because they can realize
significant savings without sacrificing quality, performance or service.
In addition, most of the original equipment manufacturers often have
long lead times of six to eight weeks, on average. NHR can deliver most
products overnight. That obviates price in most cases. Many of our
Fortune 1000 clients initially turned to us for this reason. Over time,
we have moved these relationships along to handle more of their needs.

TWST: Is this simply a US focused market for you? Is it a global market?
What are the opportunities and can you address them?


Mr. Sheldon: Today, the US represents about 60% of our business. Outside
of the US, most of our business is in Europe. We see enormous growth
opportunities in all locations, but particularly in Europe. As I said,
by the end of this year or early next year, we expect to have a full
operation in Asia. We already generate several millions of dollars a
year in Asia ' all by e-mail. Once we have a presence there and we hire
nationals who can understand the culture and the language of specific
countries, we expect this office to be a significant contributor. We
firmly believe that our ability to grow and to grow profitably is only
constrained by management talent. We need to make sure that our span of
control and controls in general are in place before we expand. It is the
death knell of many businesses. They expand too quickly without the
controls and management talent in place. As long as I'm careful about
that, I believe the opportunity is unlimited.

TWST: Companies that say they are going into Asia or mention China,
historically it takes some kind of relationship or partnership in the
local area to be a success. How have you approached the opportunities
there? Is there a timetable for your development in China or in the
broader Asia marketplace?


Mr. Sheldon: I think you have to separate China from the rest of Asia in
answering that question. We do not believe there is a business model
difference in the way we do business in Korea, Taiwan, Japan, Malaysia
or Australia and our experience there has been very positive. Our
initial focus in Asia will not be China. However, over time ' and as we
understand the market better ' we might consider a presence in China.
Our strategy is not to begin there. There are many other powerful
countries in Asia that already welcome our value proposition. When and
if we move into China, it will likely be through a partnership. But it
is not my first priority.

TWST: What would be a value add that Network Hardware Resale provides on
the refurbishment and testing? Do you tend to upgrade at all?


Mr. Sheldon: In the hardware arena, we regularly upgrade power supplies,
modules, memory, etc. However, we do not upgrade and will not touch the
software. The software that comes on a chassis goes out with the
chassis. We never attempt to convince a client to buy anything other
than what he wants to buy because he cannot accomplish what he wants to
buy within the second-hand market. Our clients are not getting a lesser
configuration or making some kind of compromise or sacrifice by doing
business with us. We are, in almost all cases, providing them exactly
the configuration that they want and need.

TWST: Thank you.


CHARLES 'CHUCK' SHELDON
 President & CEO
 Network Hardware Resale, LLC
 26 Castilian Drive
 Santa Barbara, CA 93117
 (805) 964-9975
 (800) 451-3407 - TOLL FREE
 (805) 964-9405 - FAX
 www.networkhardware.com

Copyright 2005 The Wall Street Transcript Corporation
All Rights Reserved


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