Adtech faces growing pains
| • | The life and times of Adtech |
By John Duchemin
Advertiser Staff Writer
It's a beautiful day in Kaimuki, sunlight glitters on the tempting sea, but inside the old Salvation Army building on Koko Head Avenue, six Mainland telecom executives hardly notice.
Eugene Tanner • The Honolulu Advertiser
They're too busy drooling over a gray box the size of an average personal computer — and stuffed with enough processing power to print the Library of Congress in a few minutes.
Against a background of newspaper clippings telling of the company's cutting-edge performance, an Adtech AX/4000 circuit board represents the latest jewel in the Hawai'i company's stable of network test systems.
The suits have never seen anything like it.
"OC-192!" sighs the president of a Florida cable company, lapsing into geek-speak.
Somebody whistles.
This is ground zero of Adtech Inc. and arguably of the entire Hawai'i technology scene.
Adtech is what Hawai'i business and government leaders have in mind when they talk about the state's high-tech potential — and the problems that could thwart that potential.
The windowless white building resembles an abandoned furniture store, but is actually Adtech's global assembly plant — one of the only places in Hawai'i where world-class computer hardware is produced.
The gray box is the latest version of an Adtech AX/4000, one of the fastest available pieces of network testing equipment.
It's been on the market for months — and none of Adtech's competitors, including the Hewlett-Packard spinoff Agilent, have released a comparable product.
A steady stream of first-to-market products has made Adtech a world leader in network testing, with more than $160 million in revenue last year, gross profit margins above 40 percent and clients including Cisco, Lucent, Sprint and Nortel.
In today's economic slowdown many of its clients are struggling, a situation that analysts say will mean slower sales at Adtech.
The company still predicts revenues above $200 million in 2001 and plans to expand into several new telecommunications fields.
If it achieves those numbers, Adtech will be continuing a four-year hot streak. Revenues have surged to current levels from $40 million in 1998.
The work force has grown from a few dozen in the mid-1990s to 330, most in Hawai'i.
Adtech's employees hope they aren't too hot for Hawai'i.
As the company tries to expand, it's running into some of the fundamental difficulties of doing business in Honolulu, including lack of space and a small pool of skilled workers.
Adtech is negotiating with the state to lease a parcel of land in Kaka'ako to build a new headquarters. A state board should decide on the lease as early as next month. Industry watchers say a decision in favor of Adtech will enhance Hawai'i's image as a site for technology.
The garage incubator
Adtech, a division of London-based multinational Spirent Communications since May 1997, started in a University of Hawai'i professor's garage in 1967 — nine years before Steve Jobs did the same thing with Apple. For decades, the company subsisted on odd jobs, such as designing a Pong remote control for local bar owners, and odder jobs — creating a tuna tracking system for the National Marine Fisheries Service.
Global commerce — Adtech's thing since the late '90s — is proving far more profitable. It has outgrown its headquarters, which are scattered across four buildings in Kaimuki, and outstripped local schools' ability to provide skilled workers.
International exposure also makes the company more directly vulnerable to economic swings — including those that led to recent layoffs and earnings shortfalls at Cisco, Lucent and other major clients.
With so many big customers under the weather, product-testing companies like Adtech will share the pain, probably for several quarters while the industry sorts itself out, says Greg Konezny, a technology analyst with U.S. Bancorp Piper Jaffray in Minnesota who specializes in the network testing sector.
"Not only are you seeing large customers going away, but there's been a real impact at the manufacturing level," Konezny says. "Companies are caught with inventories they can't sell, and they're deciding to slow things down dramatically and figure out where their business is. So the test equipment makers are certainly getting hit."
Agilent, one of Adtech's top competitors, on Friday said it would temporarily trim wages by 10 percent to cut costs and avoid layoffs. Chief Financial Officer Robert Walker says the company is a victim of a broad market decline.
Adtech officials say their company should remain profitable, but they do expect a slowdown.
"I wouldn't say we'll decline, but our growth may slow," says senior vice president Mike Gouveia, 48, a product of St. Louis High School who joined Adtech in 1973. "Our customers aren't changing their plans, but they're perhaps delaying them a quarter or two. There may be a pause, but not a complete stop."
Through this, Adtech must still come up with new products. Short product cycles in the network industry mean last year's Cadillac is next year's Kia. Adtech does Cadillacs — an AX/4000 can cost more than $100,000. The company is working on a next generation product that is four times faster to preserve its lead over hungry competitors.
"As you grow, that target on your back starts to get wider and wider — everyone would like a piece of our business," said Gouveia. "It's like with sharks: If you stop swimming, you die."
Subdued presence
Until a recent spate of publicity, Adtech remained an obscure oddity to most of Honolulu. When the company moved into the Salvation Army building a year ago, local residents continued for months to leave boxes of hand-me-downs on the front porch, and neighbors asked worriedly about the strangers walking around in blue anti-static lab coats.
But now the word is out.
Adtech's success has made it the Julia Roberts of the Hawai'i technology community, which has few other celebrities to back its quest to diversify an economy now primarily dependent on tourism.
The state named Adtech Exporter of the Year in 2000, and officials from Gov. Ben Cayetano on down routinely praise the company for bringing high-quality jobs to Hawai'i.
"Everyone used to say, 'Oh, do you guys do advertising?'" says Adtech President Tareq Hoque, 35, as he prepares to don a rarely-worn aloha shirt for a Friday afternoon publicity photo shoot. "Now, finally, people at least know that we're a technology company."
Adtech is arguably the most influential Hawai'i technology company, says Jeanne Schultz, chairwoman of the Hawai'i Technology Trade Association and head of marketing for the Estate of James Campbell.
"Their success, particularly when the Hawai'i economy was down and the technology community was largely invisible, makes them part of the foundation of the tech industry here," Schultz says. "Lately, they've taken a much more visible role, and have really supported the whole idea of technology in Hawai'i."
This also means Adtech's moves often come under public scrutiny. The company's desire to move to state land in Kaka'ako has become a political issue. The state generally supports Adtech's proposal to build a 200,000- to 250,000-square-foot headquarters near Honolulu Harbor.
Community groups, however, have demanded a voice in the proceedings, and state Sen. Rod Tam, chairman of the Economic Development and Technology Committee, is stumping for a legislative hearing, alleging that the state is giving Adtech a sweetheart deal.
"The bottom line is, I don't want any deals under the table, or behind closed doors," says the senator, whose district includes Kaka'ako.
Hoque tells Tam to "bring it on," saying the company has been "100 percent above-board" and would end up paying a premium for the Kaka'ako lease.
Hoque, a former Wall Street i-banker with an MIT education, confesses to some frustration over the snail's pace of the lease negotiations, which have gone on since last year. "I'm learning more about real estate development than I ever wanted to," he says.
Stress-tests data systems
Hoque would vastly prefer to obsess over the AX/4000. The box is designed by Adtech engineers after close collaboration with top customers. The most important chips come from partners, including Intel, Xilinx and Altera. The basic parts come from subcontractors in California, and it's all shipped here for assembly.
You'll never buy an AX/4000 for your den, but it's sexy to network nerds. It stress-tests high-speed data systems, which these days can ferry billions of electronic bits of information per second.
The latest AX/4000 can simulate, monitor and analyze the traffic of an entire OC-192 network, which can transmit 10 billion bits per second — enough bandwidth for 179,000 56K modems running at full capacity.
Anyone who wants to install an OC-192 network has to test it with Adtech equipment, because no one else has a comparable product.
In business circles, that kind of worldwide lock on a market is more exciting than a 360-degree reverse slam dunk.
"Adtech is not only frequently the first to the market with products that cutting-edge companies need, but they produce extremely high-quality equipment that works very accurately," says Wayne Rash, editor of events for InternetWeek, which uses Adtech equipment to conduct "shoot-outs" of the latest products at the University of Hawai'i.
"What's more, they're very nimble, they can turn on a dime, and that helps them run circles around some of their bigger competitors," Rash says.
None of the early Adtech crew had any idea they'd end up here. As the 1980s closed, Adtech was the national leader in slide-projector control systems, which were becoming more obsolete than the Flintstones. The Internet was well beyond the horizon — but Adtech executives, who were already working on a satellite network simulator for American Satellite Co., saw the potential, says Kathryn Weldon, 61, the company's chief operating officer and wife of founder Ned.
Their foresight paid off in 1993, when Adtech shamed Japan's Nippon Telephone & Telegraph into giving it a $170,000 contract to design a network testing system. NTT had advertised its request publicly, according to government rules, but tailored it specifically so that Hewlett-Packard, a longtime NTT partner, would get the contract.
Adtech went for it anyway. NTT sent Adtech a friendly letter saying "no way" in courteous words. Adtech sent NTT a friendly letter saying its actions were "suspiciously discriminatory."
NTT was aghast, Kathryn Weldon said. "They sent back an apologetic letter, and a few weeks later, we had a contract," she said.
In the next five months — all the time NTT allowed — Adtech employees worked around the clock to design the system, called the AX/3000, from scratch.
Time was so tight, Adtech had to beg for minutes with Federal Express on the deadline day, Kathryn Weldon says.
The system didn't fail, NTT was reasonably satisfied, and suddenly Adtech was a player. They had a product, a big-name client and some money, which they used to design the first AX/4000 in the mid-1990s.
Now, the AX/4000 is king for a day.
It won 2000 Product of the Year from Network Magazine, Best of Show for the Networld+Interop 2000 conference and Best of the Best for 1999 from InternetWeek. Every bit of data sent over the Internet will probably pass through a machine tested with an AX/4000 or a sister product.
The next generation
The AX/4000's early success caught the eye of Spirent Communications, which bought the company in 1997, paying the Weldons $51 million up front and up to $25 million in incentives.
A new generation is managing Adtech's expansion. Ned Weldon retired in December 1999, and Kathryn says she will soon join him.
Old-schoolers like Gouveia, a loyalist since the tuna-tracking days, still occupy key positions — but they are supported by Hoque, 35, who is married to the Weldons' daughter; Mari Yonesaki, 35, a Palolo Valley native and 14-year employee newly promoted to director of operations; and Ed Nakamoto, 34, an MIT and Stanford-educated Hilo native who is director of hardware engineering.
Under Hoque, the company wants to move beyond its traditional land-line network niche and is creating products for wireless, optical and convergent-technology networks — each of which could render Adtech's bread-and-butter land-line market obsolete.
That's where the new employees come in — and the need for a new facility. Adtech's R&D labs are crammed into a cubicle farm above Kuni Dry Goods on 10th Avenue. Space is so tight, a hiring freeze has been in effect for months.
Hoque says the company remains committed to Hawai'i — most of the employees have local ties. The company has coped with a severe local labor shortage by luring kama'aina back from the Mainland.
Without a bigger headquarters, however, Adtech faces some tough choices, Gouveia says.
"It's not practical to just pick up and move," Gouveia says. "Probably we'd keep what we have here, and just grow elsewhere."
"Elsewhere" is clearly not the old Salvation Army building, where the telecom executives, in town for the Pacific Telecommunications Council annual meeting, are leaving.
One pulls out a digital camera to take souvenir pictures of an OC-192 circuit board. Stacked for shipment nearby are a few dozen AX/4000s, representing several million dollars' worth of equipment.
Those boxes are the ultimate reminder that this is not your mother's Adtech. Back in the old days, the Weldons thought they were rich if they grossed $400,000 in a year.
Now, their company has a life of its own; Ned, still a UH electrical engineering professor, is doing an international lecture tour; Kathryn looks forward to retiring to their Kahala house, which they bought in 1968.
"This has been a huge change — we've gone from a small-scale mentality, where we struggled through 20 very, very tough years just trying to make payroll, to this bureaucratic big-company mentality, where you have to impose rules just to have order," Kathryn Weldon says. "But this company's in good young hands, so it's time to move on."
John Duchemin can be reached by calling 525-8062 or by e-mail at jduchemin@honoluluadvertiser.com.
