Cabletron Changes Channel in Sales Strategy

Cabletron Changes Channel in Sales Strategy

Cabletron Systems Inc.'s government division will be the company's growth leader if the new president and chief executive of the struggling networking products company gets his way.

Don Reed, who left New York-based Nynex Corp. for Cabletron in August, said the government unit based at the company's headquarters in Rochester, N.H., should grow by 25 percent to 35 percent annually, making it the fastest growing segment of his company.

"We could go to 40 percent if we do things really well," he said. Last year, the growth rate for government business was about 37 percent.

Reed is pushing a cultural makeover at the company, which includes strategic acquisitions, greater controls on operations and a new sales model that favors the channel over direct sales to reach end users.

"He has definitely identified the right strategy," said Stephen Koffler, a research analyst with the investment firm Donaldson Lufkin & Jenrette, New York. "The question is, can he make improvements in time to revive the company."

Koffler said Reed has about a year to put in place changes that will let the company compete with Cisco Systems Inc., San Jose, Calif., the networking hardware leader.

Cabletron has fallen on hard times because the company's business model and practices did not keep up with changes in the marketplace, Reed said. Problems appeared in June when Cabletron failed for the first time in 60 quarters to reach projected earnings. The company missed projections again in November.

In Cabletron's most recent quarter, ended Nov. 30, Cabletron revenues dropped to $331.8 million, an 8 percent decline from sales of $361.6 million in the same quarter a year earlier. Net income was $19.9 million, compared to $67.7 million.

Because it relied on poor forecasting methods, the company expected to make the quarter up until about two days before ended, Reed said.

Cabletron photo Don Reed, Cabletron's president and chief executive

The networking industry is no longer focused on hot, new products, Reed said. In large accounts such as with government agencies, marketing must be directed more at chief information officers and chief technology officers rather than the personnel doing actual installations of networking equipment, he said.

"They are far less interested in the product and are much more interested in us putting together the right solution for them with whatever products we have," Reed said. "It is a much different sales model."

One problem the company must overcome is a culture where growth projections and sales relied on the instincts of management personnel rather than proven forecasting techniques, Reed said.

"We just didn't have the processes in place to succeed in a tight marketplace," Reed said.

"Don Reed is what the company has lacked, quality leadership," said Robert Thornburg, an analyst with market research firm D.A. Davidson & Co., Great Falls, Mont. Reed replaced Robert Levine, who helped found the company in 1983. He retired in August.

Currently, only 10 percent of commercial revenues come through third parties, he said. The goal is for 60 percent by 2002.

Unlike the rest of the company, Cabletron's government sales of networking products are almost exclusively through partners such as value-added resellers and systems integrators. The company is on several indefinite-delivery, indefinite-quantity contracts with the likes of Electronic Data Systems Corp., Plano, Texas; Unisys Corp., Blue Bell, Pa.; Wang Laboratories Inc., Billerica, Mass; and TRW Inc., Cleveland. Agencies Cabletron has penetrated include the Defense Department, NASA and the Treasury Department.

Federal government revenues represented about $260 million of the company's $1.4 billion 1997 revenues, according to Reed.

At Nynex, Reed most recently was director of government affairs and helped put together Nynex's merger with Bell Atlantic Corp., Philadelphia. Before that, he had been president and chief executive of Nynex in New England.

To lead Cabletron's rebound, Reed also is looking for strategic acquisitions that expand its technology services and offerings. In January, the company purchased Yago Systems Inc., Sunnyvale, Calif., valued at $213 million.

Last November, it bought Digital Network Products, Maynard, Mass., for $430 million. The Digital acquisition brought new products and distribution channels; the Yago deal brings a new switcher/router technology.