CHARLES COTTON - VIRATA CORP - (VRTA)
CEO Interview - published 09/20/00

DOCUMENT # KAP233

CHARLES COTTON has been Chief Executive Officer of Virata Corporation since September 1997. Mr. Cotton joined the company in January 1995, first as a Consultant, and then in August 1995 as General Manager, Europe, and was subsequently promoted to Chief Operating Officer in July 1996. From January 1991 to December 1995, Mr. Cotton was an Independent Consultant. In 1990, he served as Chief Executive Officer of Shandwick Europe, a public relations consulting firm. From 1988 to 1989, Mr. Cotton served as President of Thermal Scientific and as a Director of its parent company, Thermal Scientific Plc. From 1983 to 1986, he served in a variety of international marketing and operations functions for Sinclair Research. Mr. Cotton holds an Honors degree in Physics from Oxford University.

Sector: Semiconductors

TWST: Could you provide our readers with a brief overview of Virata Corporation?

Mr. Cotton: Virata Corporation delivers the semiconductors and the software that power today’s leading broadband DSL devices. Our customers include major international organizations, such as Ericsson, Netopia, Siemens and Westell, among others. These original equipment manufacturers develop and then sell their Virata-based products to service providers all over the globe, including SBC, Bell Atlantic and GTE in North America, Deutsche Telekom in Europe, and Hong Kong Telecom and Hanaro in Asia. As a result, Virata’s products are being deployed worldwide, which underlines the global nature of the DSL industry. Regarding the background of the company, Virata was founded in 1993. It was a spin-out from what was then the Olivetti Research Laboratory in Cambridge, England, and is now the AT&T Research Laboratory. Our original mandate was to build equipment for the local area network using ATM technology, which has provided the systems background that the company has leveraged. We changed our focus as a company in 1997 to deliver the underlying capabilities the company had developed — principally the ASICS, the semiconductors, and the software — to broadband equipment suppliers. Today, we are a US corporation headquartered in Santa Clara, and we maintain engineering and/or marketing offices across the US, Europe, Asia and Israel.

TWST: Who are you competing with?

Mr. Cotton: To date, our major success has been in the design and development of highly integrated communications processors for the control and management of DSL products. In this area, our major competitor has been Motorola. As we continue to introduce new products that also address the physical layer transceiver component for the different DSL flavors — whether for asymmetric DSL, which is going to be the principal solution for residential users or symmetric DSL, which will be used for the business user — companies such as Alcatel, Globespan, Texas Instruments, etc., will be viewed as our competitors as well. However, it’s important to note that a product from these companies still needs to be combined with controller-management components mentioned above, such as Virata’s Helium™ processor, to deliver a complete ADSL solution. In summary, while we have competitors for certain aspects of our technology, only Virata offers the breadth of complete, integrated solutions necessary for broadband equipment developers.

TWST: What is it that gives you an edge?

Mr. Cotton: There are two key building blocks that equipment manufacturers need, and Virata provides both. Those two key building blocks are the major semiconductors and a complete suite of software that is required to design and develop innovative DSL products. Not only are we the only company to supply both of these, but we do so on an integrated basis. This means that our semiconductors and software are designed together, which enables us to ensure that our hardware technology is optimized for performance, today and in the future. We also ensure that our software offerings provide a scalable and flexible platform to adjust as necessary to address future demands. The fact that we are highly involved in the development and delivery of both of those key building blocks gives us an absolutely unique position in this market. In some respects, we believe that we are to broadband equipment suppliers what Intel and Microsoft are to PC manufacturers: we provide the infrastructure that enables our customers to compete.

TWST: As we look out over the next year or two, what do you see going on in that marketplace?

Mr. Cotton: Until now, people have been using DSL to get fast Internet access so they can download Web pages, transfer e-mails with large attachments, or obtain information as quickly as possible. The next step — and we’re starting to see deployments in the second half of calendar 2000 — is the introduction of integrated data and voice services. In this case, I’m not referring to the simple, plain-old-telephone-system, or POTS. I’m talking about the Internet and voice, where the voice is treated as digital data and is then transported over the Internet in the same way as other forms of information. That is going to deliver very substantial benefits, both to users and to the service providers delivering those services. Let me take a step back and provide some additional background. In the past, users in a single location requiring multiple telephone numbers either needed to install multiple telephone lines, or purchase a PBX system for the telephone network, or both. Data was separated from voice calls on its own dedicated lines. With DSL, using its virtual channels capability and supported by emerging integrated access devices, or IADs, a single telephone line is able to simultaneously support and manage multiple telephone calls, fax calls, and active Internet users inside the premises. Clearly that means a number of things to the service provider, such as much more efficient use of their copper plant and the ability to provide for a wider range of services to their customers, which can result in increased revenue. From the customers’ perspective, they have the advantage of their voice traffic becoming lower in price, thus decreasing their bills while increasing the level of productivity they can enjoy through the Internet.

TWST: What’s going to drive the adoption of DSL?

Mr. Cotton: DSL technology has been around for a number of years — trials have been going on since the late 1980s and through the 1990s — but there are two things that really kicked DSL into existence: the emergence of competition from the cable companies and from the competitive local exchange carriers, or CLECs. Both of those factors have been very important in getting the incumbent local exchange carriers in the US, and the traditional PTTs elsewhere in the world, to view the evolution of DSL more strategically and begin to roll it out into the mainstream market. I believe that, as with all new services, it has taken a little time for the service providers and the customers to get to a point where they both feel comfortable with the costs associated with these new services. We are getting to the point now where DSL service pricing is becoming more reasonable. As costs come down over time, as you suggested, the market will further widen. Another key factor encouraging the adoption of DSL is a user’s positive experience with it, which creates powerful momentum through word-of-mouth that DSL is a must-have capability.

TWST: When will the seeming conflict between the phone companies and the other service providers begin to abate so that service can be more readily rolled out?

Mr. Cotton: While DSL is a global entity, the conflict you mention is primarily an American issue. Let me explain. There are over 1 billion telephone connections worldwide today, and of those 1 billion, the US probably represents about 20%. Clearly the US market has been the fastest to get off the ground and is always incredibly important in new technology markets by providing the experience and the models that can be emulated elsewhere in the world. I think the two key issues that exist within the US — the collocation rights and the transition from carrier provisioning of services on the users’ premises to self-installations — which are impacting the DSL industry right now, are being addressed. The recent investment by Verizon in Northpoint and the OpenDSL initiative, of which Virata is a supporter and technology provider, will provide guidance as to how these issues will be resolved.

TWST: As we look out over the next two or three years, where do you see the biggest opportunity for the company?

Mr. Cotton: It comes in two areas. First of all, our footprint within the market is continuing to expand. As I mentioned earlier, we started by delivering the controller-management devices that can be used with any flavor of DSL, whether asymmetric, symmetric, or VDSL — our Hydrogen™, Helium™, and Lithium™ devices are targeted at this market. We have continued to evolve our product line with the introduction earlier this year of our Beryllium™ processor, which integrates the ADSL physical layer with the controller-management layer. This delivers substantially improved performance and dramatically lower costs. We also recently completed the acquisition of Excess Bandwidth Corporation, which develops symmetric DSL capabilities. The addition of these capabilities will further expand our market footprint. For example, while we initially focused on customer premises equipment, we are moving into the central office area as well through the Excess Bandwidth acquisition. As the market widens, we will continue to align ourselves with the emerging trends and aim to stay ahead of the competition in terms of price, functionality, performance and feature set. Another trend that will help propel us forward is the extension of the range of services made available to customers. As I mentioned earlier, we are a leading developer of technology involved in combining data and voice into one solution. We acquired D2 Technologies, Inc. in February of this year, which provided us with access to essential voice and advanced telephony software and related capabilities. We have integrated these capabilities into our communications processor family, and we’re the first in the market with such a highly integrated set of technology offerings for the DSL market. These capabilities are marketed as the Azurite™ chip set. Further out on the horizon, we’re going to see the next stage in services integration, which we believe will include the delivery of video services. This will involve the combination of business-type video conferencing and closed-circuit television requirements, as well as consumer access to television programming through the service provider. Virata expects to be a key player in introducing the technologies and products required for our equipment customers to enable service providers to continue to expand the range of services they are able to offer.

TWST: Are more acquisitions in store?

Mr. Cotton: We’ve actually made five acquisitions to date, dating back to 1998 when we acquired RSA Communications, which provided us with our ADSL physical layer capabilities. The acquisition of D2 Technologies, completed in February of this year, provided us with the voice and advanced telephony capabilities required to develop next-generation broadband equipment. We acquired Inverness Systems, Ltd. in April, which rounded out our software offerings in the advanced routing and MPLS (multi-protocol label switching) areas, which we believe will be very important in the future. Just in the last month, we completed the acquisitions of Excess Bandwidth and a company called Agranat Systems, Incorporated. Agranat Systems has developed Web-server techniques, which we believe will be widely used by service providers and users to set up DSL services and enable the upgrade of those services over time. Agranat is also a leading developer of universal plug-and-play or UPnP, which will make it easy to snap in new appliances in local area networks. UPnP will enable users to have, for example, their telephones, PalmPilots, PCs and televisions all on the same network, with a minimum amount of configuration required by the user. This is just one example of the level of capability we will be providing, which we believe will enable the realization of the vision of the future that everyone talks about: the fully networked and Internet-enabled home and office. This market is moving incredibly fast and demands for technology are equally moving very quickly. We believe that we will continue to develop a majority of our technology in-house. Today we have well over 200 engineers and more than 350 employees in all — we will certainly continue to explore the possibility of acquiring companies that have developed an expertise in areas or technologies that we believe are consistent with our business plan and strategy. However, we do not currently have any agreements or negotiations under way with respect to material acquisitions.

TWST: As we look out over the next two or three years, what kind of internal growth rate should investors anticipate?

Mr. Cotton: That’s the question everyone is asking and the hardest to answer. I think it’s important to look at the markets we compete in and the potential growth of those markets. At the time of our initial public offering in November 1999, we had only 110 employees and anticipated revenues for calendar 2000 in the order of $23 million. Today we have approximately 350 employees and in our last fiscal quarter, ending in June, we actually achieved revenues of $27.7 million. So you can see that Virata has expanded very rapidly. Now, while we do not expect this level of percentage-growth to be maintained in the future, we are an ambitious company and have every intention of continuing to grow as an organization. One of the areas that is helping us with that growth, apart from our investment in engineering, is our investment in sales and marketing. From our initial team of 15 salespersons in November 1999, our sales staff is now approaching 60 people located strategically across the globe. Since our IPO, we have also grown our customer base substantially, more than tripling its size to over 100 customers. This should give you some idea of the pace of growth we have experienced within the organization, as well as our ambition to maintain a leadership role in this growing market.

TWST: Are you able to find the people you need?

Mr. Cotton: It’s interesting to look at the constitution of the increase of personnel from 110 to the current 350. About half of the increase is a result of organic growth and the other half as a result of our acquisitions. Certainly an important aspect of our approach to acquiring technology is acquiring the people with the expertise who have developed that technology. We believe that in this market, acquisitions present a valuable resource for the skilled people that we will require in order to sustain our target growth rates. As I previously mentioned, we’ve also been very successful at organic growth as well. It probably has to do with the fact that we have engineering and/or sales and marketing operations in each of the key markets — from Silicon Valley to the East Coast in North Carolina and Massachusetts, as well as in England, Asia and Israel.

TWST: Where’s the risk?

Mr. Cotton: What some see as risk, I see as opportunity. In my opinion, there are very few technology markets that you can identify where the potential volume and growth rates are so enormous. The upgrade of an infrastructure that already exists, and the billion connections requiring equipment at both ends of those connections represents an extremely large market. While there have been some “hiccups” in the recent past with service providers having difficulties in keeping up with the rate of demand for service deployments, I believe these will be resolved, through industry initiatives like OpenDSL. Virata is planning to deliver solutions that address these service challenges, which will create another area of success for the company, our customers and investors. In summary, we believe that we have executed our strategy extremely well, both as a private company, and as a public company. We have positioned ourselves strongly in the marketplace through our own internal development, as well as through prudent strategic acquisitions, and we believe that we will continue to deliver the right products at the right time for our customers. These opportunities — not risks — will lead us and our customers to a successful future.

TWST: Is there a risk of new competition coming in?

Mr. Cotton: As with any large market, there are always competitors. I think the ones that are around today are going to be the key competitors going forward. It’s going to be difficult, as you stated, for new companies to come in and get traction in today’s market primarily because they will be challenged to provide all the necessary software required by broadband equipment developers. This is an area where Virata excels. While many of our competitors are semiconductor companies, we’re delivering a systems solution to customers combining semiconductors and an integrated suite of communications software. I expect that some of our competitors will seek to emulate that capability through acquisition of software businesses. But we’ve been doing this for seven years now and the level of experience that we’ve achieved is extremely high. Accordingly, we believe that the biggest barrier for a competitor will be equaling the 350 man-years of investment that we’ve made in our software development. While there are some smaller companies which have gone public this year and there are others on the horizon, we do not believe that any offer as complete a solution as we do. Instead of new entrants, I think we’re going to see further consolidation in the market going forward.

TWST: How do you feel about the value that the market is currently putting on your company?

Mr. Cotton: While I cannot comment on current Wall Street valuations, I think it’s important to recognize the market we’re in and its potential growth and the achievements we have already made as a company. I will note that we recently raised more than $450 million in a follow-on offering and have already far exceeded the initial expectations of Wall Street analysts for calendar 2000.

TWST: What two or three reasons would you give investors to buy your stock?

Mr. Cotton: First of all, look at the size of the market. We believe that the potential going forward is enormous. Second, Virata is in the unique position of providing the market with both the key building blocks: the semiconductors and the software that equipment manufacturers need for designing and developing broadband equipment. Third, take a look at our track record as a company and the growth that we’ve attained so far. Finally, we have a strong customer base that includes market leaders such as Ericsson, Netopia, Siemens and Westell, and we continue to add new customers regularly. All of the above reasons clearly point to the fact that Virata is in a very strong position for internal and external growth.

TWST: Thank you. (TM)

CHARLES COTTON
 CEO
 Virata Corporation
 2933 Bunker Hill Lane
 Suite 201
 Santa Clara, CA 95054
 (408) 566-1000
 (408) 980-8250 - FAX
 www.virata.com

Each Executive who is the featured subject of a TWST Interview is offered the opportunity to include an Investors Brief or other highlight material to be provided and sponsored by and for the company. This Interview with Charles Cotton, CEO of Virata Corporation, is accompanied by an Investors Brief containing corporate information.

To ask a question of this or any other publicly traded company, visit QAWire.com


Copyright 2000 The Wall Street Transcript Corporation
All Rights Reserved

The Wall Street Transcript (TWST) interviews are published verbatim, and TWST does not in any way endorse or guarantee the accuracy of any information or opinions expressed herein and all opinions are subject to change without notice. Nothing herein constitutes a solicitation to buy or sell any securities. TWST interviews with CEOs may include include "forward-looking statements", which are based on factors that involve risks and uncertainties. Actual results may differ materially from those expressed or implied. TWST shall have no liability whatsoever for any trading losses arising out of use of this information. Copyright 2000 Wall Street Transcript Corporation. All Rights Reserved.