Of all the companies that got burned in the Bubble Years, Marconi plc (Nasdaq/London: MONI), the large incumbent European equipment vendor based in the U.K., may take the biscuit. It managed to blow through a huge pile of cash in its efforts to become a leading vendor in optical networking – and came away with very little to show for it.

The turning point came in July 2001, when Marconi shocked investors with a profit warning, having, up 'til then, declared itself immune to the recession (see Marconi Stock Tanks). The following September, Lord Simpson was given the boot, and one of his lieutenants, Mike Parton, was brought in to replace him as CEO (see Heads Roll at Marconi and Marconi Gets New CEO, Chairman).

In the past 18 months, Parton has identified core businesses for Marconi and sold off almost everything else. He's also negotiated a financial restructuring deal with banks and bondholders. Under this deal, existing shareholders will get virtually nothing, and the new Marconi – to be called Marconi Corp. rather than Marconi PLC – will get a fresh start. It won't be saddled with the huge debts that some of its competitors still have.

These proposals were submitted to the High Court of England and Wales earlier this week, and Marconi hopes to get the go-ahead from the court and creditors by the end of May (see Marconi Details Restructuring).

While at the CeBIT tradeshow in Hannover, Germany, last week, Parton talked to Light Reading about Marconi's strategy.

Details of the financial restructuring were off-limits because they hadn't been announced at that time, and Parton studiously avoided giving any guidance. All the same, he had plenty to say (and a few things to snort about). Read ahead to hear him expound on:

— Peter Heywood, Founding Editor, Light Reading

Light Reading: What's the big message you'd like me to take away from this interview?

Parton: Before the bursting of the bubble, our space was more about technology. It was, "have you got this widget, have you got that widget, how fast is this, how slow is that." That was the whole assessment of the company’s viability and future.

Things have changed. Now we're days away from completing our financial restructuring and having a viable business going forward, with a strong balance sheet [which was announced Tuesday – see Marconi Details Restructuring]. What is it that’s allowed us to do this? It’s the inherent strength of our customer base. Over a very, very traumatic 18 months, we haven’t lost a single customer.

The point I’m making is that success going forward is not just about sexy widgets. It’s about having a sustainable customer base and sustainable relationships. When you’ve got those, you can bring the technology to market in a way to leverage those strengths.

Light Reading: In order to do this, don’t you need a vision that encompasses the whole network of products that your customers might want to buy?

Parton: No. I don’t agree with that. When we started to restructure the business, we looked at a couple of premises.

One of them was that unless you can support your customers on a global basis, you’re going to be a bit player. Not true. Our customers are going back to operating on a regional or national basis. So therefore, you can have a very sustainable model by being strong regionally – and we’re very strong in Italy, very strong in Germany, very strong in the U.K.

The other premise was that our customer was going to want someone who’s going to come in and sell them a whole network end-to-end. The only people that have ever really needed that were startup operators, and they’ve largely disappeared. The incumbents and the regional incumbents figure things out for themselves. They will suck information from all of us and come to their own view. Once they’ve got that view, you can, we believe, build a very sustainable long-term business model based on being excellent in some areas – where you’ve just got to be better than everybody else.

Light Reading: In Marconi’s case, what are those areas?

Parton: The transmission business, our access hub, and our service business, in the ETSI area [non North American markets].This is what we’ve been saying for 18 months [with a few hiccups – see Marconi's SDH Blitz Highlights Strategy and Marconi Modifies SDH Stance].

Light Reading: What about the BXR? [The BXR-48000, Marconi’s multiservice switch]

Parton: We need to see that get some traction in the U.S. market.

Light Reading: And so far it hasn’t?

Parton: We have sold it to the U.S. Federal Government [see Marconi Gets a Boost and Marconi Wins Fed Switch Contract].

We see the U.S. Federal Government as the biggest potential market at the moment. There’s quite a few very large tenders out for ATM products, and the BXR will fit into service provider markets as they want to build out a new core for their existing ATM networks. Light Reading: Ah yes, I'd heard a monster government contract might be in the offing...

Parton: We’ve structured the business around the revenues that we can see. We do not need a monster contract to bail the business out. The business today is profitable, cash generative, and we’re still investing in the product going forward. The Federal Government could give us a really big upside on its own, and we are trying to see how we can get into incumbents, ILECs.

Light Reading: So, what are the prospects of Marconi improving its share in multiservice switches?

Parton: The multiservice switch market isn’t a very big market anyhow – but you're missing the point.

Light Reading: Why, thank you.

Parton: If we stand back and look at today’s world compared to the pre-bubble world, life’s not about where do you keep getting revenue from. Life’s about: How do you improve your bottom line? You can take the quarterly results of our competitors and look at the revenue trajectories. But if you then ignore the bottom line, you’re missing the whole point. Some of these people are still losing more money than they lost a year ago. That’s the issue, not where we’re going to get revenue growth from in the next 12 months.

It’s going to be about the guys that come through this quickly, are trading profitably, have got their debts sorted out, have long-term committed relationships with customers with deep pockets, and have technology to support that. It’s not about widgets, bits, bytes, and technology.

Look at BT’s latest quarterly results. The top line was up two percent. Earnings per share were up 71 percent. That tells you everything.

Light Reading: It might tell you everything, but not us. Please explain further.

Parton: What it tells me is that there isn’t a lot of new money coming into this industry because our customers’ revenues are going up by 2 percent but they’re providing a very good return to their investors because their earnings per share is up 71 percent. How are they doing it? By making their business more efficient – and not spending, and getting their debts down so they’ve got low interest payments.

That’s the phase this industry is going through. We’ve been through the bits and bytes and the techno-babble phase. Technology is still really important, but it’s not the be-all and end-all.

The point I’m trying to make here is that we haven’t got any one business that's suddenly a big bet. All of the areas we operate in are areas in which we can survive with the levels of expenditure that we can see today and where we have expertise.

Light Reading: Your softswitch stuff is a bit of a bet, isn’t it? The softswitch market is in a terrible state. The market halved last year, and there’s no clear winners yet.

Parton: We might have spent a few million pounds of R&D into our softswitch, but it’s not going to turn into a bet-the-business type of issue.

Light Reading: System X [the Class 5 telephone switch developed by Marconi's predecessors 20-odd years ago] is coming to the end of its life, isn’t it?

Parton: You'll have to ask BT about that [BT was the only significant customer]. It’s at the end of its life as far as our revenues goes. We have very little revenue from System X today.

Light Reading: Does the fact that BT has a lot of System X in its network give you an inside track with your voice-over-IP stuff? [its softswitch developments – see Marconi's First Softswitch Sale]

Parton: If you take the money that BT spent on System X, for every billion pounds it spent, 60 percent of it went into the concentrators and line cards; 20 percent went into the switches, and 20 percent went into the software. So the softswitch is only going to replace 20 percent, not the whole of System X.

A lot of the value is going to come from replacement line cards, which is the access hub, DSLAM-type market, and BT – because they will not have proprietary interfaces – will have more than one vendor in that space. It already has Fujitsu and Alcatel, and it will take new vendors into that space.

The switch itself is replaced by the router, and the softswitch is going to replace the [System X] software.

So, it may give us an advantage in terms of who BT will buy its softswitch from, but there are three markets to go after, not just one. One of them, the router market, we won’t be able to compete in. The access hub – which is 60 percent of the revenues – we will be able to compete in, and compete very effectively. And yes, there may be some advantages in that we supply the access hubs and the softswitches as well.

Light Reading: I’ve heard the access hub isn’t selling too well.

Parton: [Snorts] The access hub is selling very well. We have many customers for it. I see the access hub having the potential to drive revenue growth in Marconi going forward. It’s very, very competitive. It really is a next-generation access device. The old DSLAMs are just completely knocked into touch.

That’s what I was trying to say. Sixty percent of [the equivalent of] System X revenues go on this thing.

Light Reading: It sounds as though there isn’t a huge nest egg of money waiting for some proprietary technology as there was with telephone switches. The equivalent money today will be dispersed among lots of equipment vendors in small amounts, won't it?

Parton: That’s right. And if you were a network operator, you’d make sure that happened, wouldn’t you? You’re going to have any number of people supplying the access hubs.

Light Reading: What's starting to happen in the telephone switch market is akin to what happened to mainframes 20 years ago, isn't it? I guess you could say that Marconi is somewhat akin to ICL [the U.K.'s local mainframe manufacturer]. Are you going to end up like ICL, as a systems integrator?

[Ed note: Parton held financial positions at ICL between 1977 and 1980.]Parton: [Another snort] No. Not necessarily. Our services business is 40 percent of our revenue, and I would expect to see this grow. But I don’t see it in that way at all.

We had one or two customers for System X. We can have multiple customers, with a lower market share, for the access hub. We’ve already got more access hub customers than we’ve got System X customers, and we’ve only just launched the damn thing.

We have a softswitch, but I don’t think people are going to make decisions [to buy it en masse] for a couple of years. With the hubs, we can go worldwide – or at least in the ETSI world – to try and get a share of this market.

Light Reading: So, you're expecting big things from your access hub and services. What about the rest of your business?

Parton: What we’re seeing in the marketplace is that people really aren’t deploying DWDM much more.

Light Reading: I suppose you’re talking about long-haul DWDM. What about metro DWDM?

Parton: My view is that the business case for metro DWDM is still not proven. People are putting in higher-bandwidth SDH, or Sonet in the U.S. The metro DWDM market is certainly not a very big market today, is it?

Light Reading: Nortel, ADVA, Ciena seem to be making hay in that area.

Parton: What are Ciena’s revenues? $40 million a quarter. These are very small numbers.

Light Reading: What about SDH then?Parton: We see solid growth in SDH. The latest numbers coming out will show us level number one, with Alcatel. It’s a large market. We’re not going to get great growth rates. But the fact that the DWDM rollout is slower than people thought will give longer life to the SDH market.

Light Reading: Won’t next-generation SDH/Sonet generate growth?

Parton: It will provide some growth but nothing spectacular.

Light Reading: One last question: Who is Marconi's CTO?

Parton: Tricia Dooley. She heads all of our engineering.

Light Reading: She reports to you?

Parton: She reports to Mike Donovan, who’s the chief operating officer, and she is on the executive committee of the company. She’s one of the top nine people in the company. She will be listed as one of the executive committee when we issue our prospectus shortly.