IDT: Surviving the storm

IDT remakes itself as a high-value supplier and emerges from the telecom meltdown stronger than it was before

by Terrence Lynch -- Movers and Shakers, 8/15/2003

IN AN UNLIKELY NATURAL disaster, the likely survivors are those who don't panic. Integrated Device Technology (IDT) is a survivor. As a major supplier to the telecommunications industry, the company was faced with the disaster of that industry's meltdown over the last three years. IDT responded by remaking itself, emphasizing engineering and engineering support, and positioning itself to succeed when recovery comes.

Greg Lang, President and CEO, IDT

Greg Lang, IDT's president and CEO since 2002, claims that the company's ability to respond judiciously to new market realities stems from the prudence of the managers that preceded him. "IDT had been a fairly conservative company in the last several years," he says. It largely stayed out of the late-1990s buying binge that left many telecom players vulnerable when the market fell. "IDT was very cautious about that, and rather than buying up a bunch of overpriced assets that didn't fit, we [were] very selective and ended up at the end of the downturn with a half-billion dollars net-of-debt in the bank," he says.

That freedom from debt gave the company room to revamp its operations through two years of net losses. IDT has streamlined its operations in several ways. It has reduced its inventory to a 10-year low. Employment has gone from more than 3,000 in fiscal 2001 to approximately 2,000 last year.

Lang sums up the strategy: "We've put a tremendous amount of energy into cleaning up our financial situation so that, even in this trough level of business today, we can be in a positive cash situation as a business while we continue to invest in the core new-product areas that we think are important to the company in the long term."

One indication that these steps are working, Lang notes, is that gross margins have gone from 26 percent in the quarter that ended in March to 42 percent in the quarter that ended in June. Increased margins make it easier to invest in R&D and to make acquisitions that make sense for the future of the company.

Two such acquisitions stand out: the mixed-signal design firm Newave (Shanghai, China) in fiscal 2002, and data-packet-processor maker Solidum (Ottawa, Ontario, Canada) in early 2003.

Newave gave IDT a gateway to the Chinese electronics market and simultaneously opened new product avenues. "We've been able to come out with world-class and market-leading telecom parts, particularly in the transceiver and line-interface-unit areas, that our competitors haven't been able to match yet," Lang explains. Newave engineers were adept at phase-locked-loop design, a technology niche that IDT hadn't previously explored. "I expect that the result of this is that the telecom and the clock-generation markets for us are going to be our largest-growing market opportunities over the next several years," Lang says.

The Solidum acquisition further illustrates IDT's long-term approach to innovation and survival. Lang notes that within the last year or two, worldwide communications passed the point where packet-based data traffic overtook the volume of circuit-based traffic. A packet network, he says, is efficient because it reuses the same pipes for multiple types of traffic. Solidum specializes in technology that has demonstrated efficient interrogation of packets for routing efficiency, security, and billing purposes at speeds up to 2 Gbits/sec--20 to 30 times faster than conventional technologies. Moreover, the new devices appear to reduce software-engineering effort in these applications by about 50 percent.

"Solidum was basically a complement to some of the core search-engine technology that we already have in place," Lang says. "Instead of being able to serve only the layer-2 through layer-4 types of searches and network routing, we are now able to serve layer 4 through layer 7 as well--all the way up to the application layer in terms of packet searches." It's a product sure to attract attention as communication volumes grow.

Perhaps more important than streamlined operations and key acquisitions, IDT has responded to the down market by changing its basic business strategy from being a commodity SRAM and digital-logic provider to delivering higher-value devices. For example, in the first quarter of fiscal 2004 (April-June 2003), the company introduced products in six different areas of telecom: an industry-best network search engine IC, a high-security integrated communications processor, a monolithic data-flow-control IC, multichannel transceivers, a family of precision clock generators, and multiport switching ICs.

The change to supplying high-value products required changes in the way the company sells its products, Lang says. "We've restructured and refocused the sales force...but we have maintained every technical resource that we had in the field," he says. "That, and refocusing them on big accounts instead of broad, commodity territory support, has really given us a much stronger selling vehicle."

One other aspect to the changes at IDT is the influence of its worldwide engineering teams. In addition to its Santa Clara headquarters and the Chinese and Canadian offices already mentioned, the company has design and manufacturing facilities in Atlanta, Dallas, Malaysia, The Philippines, and Sydney, Australia.

Although some would question the wisdom of such far-flung operations in a contracting market, Lang says they're a source of strength. In essence, they let the company seek engineering talent from a larger pool than more-insular operations would allow. "There are pitfalls to being too spread out, but once you get to critical mass and you have the strength of engineering-management talent and communications across all the multiple geographies, the design centers can be run very, very smoothly."

And that long-term outlook is part of IDT's plan. "We've been around 20 years," Lang says. "We have no intention of going away anytime soon."