Incorporated: 1983
NAIC: 334119 Other Computer Peripheral Equipment Manufacturing
SIC: 3577 Computer Peripheral Equipment Nec
Fremont, California-based Network Equipment Technologies Inc. (NET) is a leading provider of voice and data communications equipment. An industry pioneer, in the first decade of the 21st century the company focused on developing so-called next-generation technology that supported the movement from more traditional platforms to ones based on Internet protocol (IP). IP is the communications protocol or method that is used for transmitting information between computers on the Internet. Voice over Internet protocol (VoIP), which allows voice communications via the Internet, is one example of the IP technology with which NET has been involved. NET's wide-ranging product lines are marketed under the NX Series (network exchange) and VX Series (voice exchange) banners. Its NX platform includes the Promina product line, while the VX platform includes the Shout product line. The company's customer base includes leading corporations such as Microsoft and Reuters, as well as government and military organizations such as the U.S. Navy and Marines, as well as the North Atlantic Treaty Organization (NATO).
A Successful Start: 1983-89
NET was established in 1983 by Bruce Smith, an engineer who earned an MBA from Harvard University. According to the February 6, 1989, issue of Forbes, while working as vice president of corporate development for Communications Satellite Corp. (Comsat), Smith generated a long memo to his employer outlining how telecommunications giant AT&T could potentially threaten Comsat's Satellite Business Systems (SBS) unit. At the time, SBS helped companies use satellite technology to bypass AT&T and save money on long-distance calls. At the heart of the threat were circuits of specially configured copper wire known as T1 lines, which were capable of handling 24 times the capacity of regular phone lines. Smith argued the day would come when AT&T would begin leasing T1 lines to business clients, allowing them to make long-distance calls for less. However, his remarks fell on deaf ears.
Competition from the likes of MCI and U.S. Sprint forced AT&T to begin leasing T1 lines in September 1983. This had a negative impact on Comsat's SBS business, which was eventually sold at a loss to MCI. Along with deregulation of the telecommunications industry, this situation led Smith to relinquish his post at Comsat and establish Network Equipment Technologies (NET) in Redwood City, California, with $25 million in venture capital from investors including Anderson & Eyre, Hambrecht & Quist, Merrill Lynch, Merrill Pickard, and Morgan Stanley & Co.
From the very start, NET's approach was to sell high-end telecommunications equipment to Fortune 1000 companies. The company began shipping actual products, some costing as much as $250,000, in September 1984. NET's first product was a multiplexer called the Integrated Digital Network Exchange (IDNX). Multiplexers are devices that route large amounts of voice and data to the right location on a network. Within two years, the company's employee base had grown to 250 people, who helped clients including American Airlines, Bank of America, Macy's of California, MCI Communications, Shearson Lehman Brothers Inc., MCI Communications, and Wells Fargo to build their own independent telecommunications networks.
NET's initial public offering took place in February 1987, generating $40 million. Of this amount, approximately $25 million was slated for capital needs and future expansion. Sales reached $47.4 million in 1987, up from $8.7 million the previous year, and the company generated its first profit ($5.1 million). By this time, NET had sold about 400 IDNX devices. Further progress was bolstered by a licensing agreement with International Business Machines Corp., which agreed to sell and service NET products.
In April 1988, NET agreed to merge with San Jose, California-based Excelan, Inc., a local area network (LAN) company. The $125 million deal, which called for Excelan to become a NET subsidiary, would have enabled the combined firms to compete with Novell, Inc., and 3Com Corp. However, when NET failed to increase its offer by an additional $35 million, Excelan shareholders pulled the plug on the merger in June.
Despite this setback, NET ended the decade on a high note when American Airlines chose the company to provide a new, private infrastructure for its Sabre reservation service, which then handled some 470,000 daily reservations. Sales soared to $136.7 million in 1989. In November, Bruce Smith hired Hewlett-Packard executive Daniel Warmenhoven to serve as president and chief operating officer.
Disaster and Recovery: 1990-99
Things took a turn for the worse at NET during the early 1990s, according to the July-August 1991 issue of California Business. In July 1990 the company's board asked Smith to resign as CEO, and NET's chief financial officer stepped down. Warmenhoven remained on board as president and CEO, guiding NET through one of the darkest periods in its history. The bad times resulted from a variety of factors, including major orders that failed to materialize, increased competition, and the effects of an economic recession that put the brakes on spending by top customers. In the wake of these setbacks, Warmenhoven attempted to turn the situation around with a restructuring plan that included a workforce reduction and expense cuts. Research and development spending doubled in 1990, as the company accelerated efforts to roll out new products.
Shortly after he was named chairman in January 1991, Warmenhoven trimmed 15 percent of the company's employee base. Positive developments eventually began to occur. One of NET's new products received a warm reception, and more than 75 new customers came on board. Backed by a new management team, Warmenhoven proceeded to guide the company into calmer seas. After losing $38.9 million on sales of $66.8 million in 1991, the company lost $14.5 million on sales of $102.6 million in 1992.
By 1993, NET was back in the black, netting $4.7 million on sales of $119.6 million. Warmenhoven left NET in late 1993, and former Harris Corporation executive John Arnold temporarily assumed the role of CEO. Joseph Francesconi, an executive from Sunnyvale, California-based Amdahl Corp., was hired as CEO in 1994. He continued to implement cost-saving measures at the company, including the elimination of redundant jobs, as well as unprofitable programs and divisions.
Conditions continued improving at NET into late 1994 as the company secured agreements related to new long-distance phone networks that were being constructed in Columbia and China. In addition, Federated Department Stores was added to NET's client roster. In early 1995, pharmaceutical giant Glaxo hired the company to help build a communications network in the United Kingdom. Finally, in August of the following year, Hans A. Wolf succeeded John B. Arnold as company chairman, upon the latter's retirement.
After operating in Redwood City, California, for 15 years, in 1997 NET announced plans to relocate its headquarters to a 17.5-acre site in Fremont, California. The new campus in Ardenwood Corporate Park included a manufacturing facility, as well as two other buildings to house the company's offices and research and development arm. The buildings, which spanned a collective 280,000 square feet, surrounded an open-air amphitheater and were adjacent to acreage that would accommodate 200,000 square feet of additional space if further expansion was needed.
Heading into the late 1990s, NET experienced more leadership changes. Citing personal reasons, Joseph Francesconi announced his resignation in January 1999. He remained at the helm until the company was able to hire Hubert "Bert" Whyte as his successor in June. Prior to joining NET, Whyte served as president and CEO of Advanced Computer Communications, which he led through a $290 million acquisition by telecommunications giant Ericsson.
Like his two predecessors, Whyte continued to implement changes in an effort to reduce expenses. In July, a reorganization plan was unveiled that called for a 7 percent reduction of the company's employee base, as well as a reorganization of its sales and marketing departments. The plan, which Whyte claimed would make NET more market-focused, was spearheaded by a new top management team.
Heading into the latter part of 1999, NET bolstered efforts to grow its Asian business. In August the company inked three deals--with the Zhejiang Province PTA, the City of Chonging PTA, and the Province of Shandong PTA--pertaining to digital data networks in China. In November an alliance was formed with Toyo Communication Co. Ltd. to further expansion in Japan. Specifically, the two companies teamed up to create a Japanese interface for NET's Promina 800 and Promina 4000 products.
Toward an IP Future: 2000-07
NET kicked off the new millennium by acquiring San Jose, California-based FlowWise, Inc., in a $16 million cash deal. The addition of FlowWise complemented NET's offerings in the wide-area network realm by adding Internet protocol (IP) capabilities.
Following the FlowWise deal, the new millennium brought new changes at NET. In January the company trimmed 300 positions from its employee base as part of a continuing quest to lower costs. In addition, it announced plans to reorganize into two units, including one focused on broadband Internet equipment.
Revenues for 2000 fell to $225.7 million, down from $263.8 million in 1999, and the company recorded a $40.1 million net loss, which was worse than the $7.0 million loss it incurred the previous year. By this time NET had 25,000 of its systems in place with approximately 1,750 customers in 75 countries across the globe.
In May, NET acquired networking solutions provider Convergence Equipment Co. from Global Communication Technologies, Inc., in a $1.5 million cash deal that brought more IP technology to NET, in the form of an IP telephony platform. At this time, NET began doing business as net.com as part of a strategy focused on broadband technology. In addition, the company unveiled its Service Creation Manager (SCREAM) product line. According to a May 30, 2000, PR Newswire release, SCREAM was "based on open, non-proprietary architecture" and gave "service providers the tools they need to leverage broadband networks into competitive advantages."
NET ended 2000 with the divesture of its Federal Service Business to CACI International, Inc., which the company said was part of a service creation strategy. Commenting on the move in a December 6, 2000, PR Newswire release, Bert Whyte explained: "We are receiving strong endorsement that our message of service creation for service providers is beginning to be heard. The negative market reaction to those carriers focused exclusively on building bandwidth in lieu of developing value-added services for competitive differentiation is yet another indication that we are on the right track. In order to remain focused, it is incumbent upon us to direct all of our energy to delivering our product strategy, while ensuring that our strong government customer base is well served."
Difficult market conditions had a negative impact on NET's sales during the early years of the new century. Revenues fell to $145.7 million in 2001, and the company recorded a net loss of $19.4 million. However, the year was not without progress, as NET settled a trade secret misappropriation lawsuit it had filed against CoSine Communications, Inc., in late 2000. In addition, Internet Telephony recognized NET's SCREAM platform with its Product of the Year Award.
NET's focus on VoIP technology increased as the company headed into the middle of the decade. By 2003 the company had forged a co-marketing agreement with software provider Digiquant to develop a VoIP solution with advanced billing features for applications such as wholesale voice communications, calling cards, and electronic toll payment systems. In early 2005 NET announced that France's SCT Telecom had rolled out its SHOUTIP VoIP platform to small and midsized business customers. Several months later, NET revealed plans to further showcase the capabilities of Shout VoIP by joining the Microsoft Partner Solutions Center, a technical program aimed at testing new communications products and services.
In July 2005, another top-level leadership change occurred when President and CEO Bert Whyte was succeeded by C. Nicholas Keating, who had served on the company's board since 2001 and had worked as a NET vice-president from 1987 to 1993. A Fulbright Scholar to Mexico, Keating also served as president and CEO of IP Infusion, Inc., from 2000 to 2004.
Keating was at the helm of NET as the company forged a number of important alliances. These included the renewal of a strategic partnership with Singapore-based Datacraft in April 2006, which had allowed the company to make inroads in the Chinese market since 1994. In January 2007, NET also established a strategic co-marketing alliance with Lisle, Illinois-based Intrinsic Technologies to roll out unified communications and messaging systems that enabled employees to communicate regardless of the device or network involved.
In mid-2007 NET expanded an existing partnership with chipset developer Bay Microsystems to include the development of processing technology for high-speed networking. The partnership, dubbed a "strategic advance" by CEO Keating, was expected to bolster NET's ability to serve federal government clients in areas such as secure data transfer, real-time intelligence gathering, data backup and recovery, and business continuity.
Approaching the 21st century's second decade, NET seemed prepared to maintain its position in the constantly changing market for networking technology.
Principal Competitors
Alcatel-Lucent; Cisco Systems, Inc.; Nortel Networks Corporation.
Further Reading
Carlsen, Clifford, "Redwood City Firm Signs Pact with Big Blue," San Francisco Business Times, June 22, 1987.
Halstead, Richard, "High-Tech Phone Company Wants to Call Up Investors," San Francisco Business Journal, November 3, 1986.
Meeks, Fleming, "I Can Get It for You Wholesale," Forbes, February 6, 1989.
"NET Announces Broadband Product Strategy and New Identity--'net.com,'" PR Newswire, May 30, 2000.
"net.com Completes Divesture of Federal Service Business," PR Newswire, December 6, 2000.
"Network Equipment Technologies and Bay Microsystems Extend Collaboration," Wireless News, July 20, 2007.
"Network Equipment Technologies Changes Name to net.com," Telecomworldwire, June 1, 2000.
Rothman, Matt, "Cool in a Crisis; Anatomy of a Turnaround: Bringing NET Back from the Brink," California Business, July-August 1991.
— Paul R. Greenland
