Mory Ejabat

The Light Reading Interview

In the Spotlight: Mory Ejabat

Mory Ejabat, formerly of Lucent Technologies Inc. (NYSE: LU) and Ascend Communications, is chairman, cofounder, and CEO of startup Zhone Technologies Inc. And he doesn't think small. During the telecom turmoil, Zhone has been quietly scarfing up the orts of an industry suffering from indigestion.

Zhone is no small project. To start the company, Ejabat, along with CTO and cofounder Jeanette Symons, raised $500 million in leveraged buyout money and venture capital. Its subsequent acquisition binge has been based on a strategy of buying some legacy technology with revenue streams and combining that with next-generation technology.

Most recently the company acquired Nortel Networks Corp.'s (NYSE/Toronto: NT) DSL access equipment assets (see Zhone Acquires Nortel's Access Gear). Zhone has also bought CAG Technologies, an electronics subsystems maker; Premisys Communications, whose Integrated Multiple Access Communications Server (IMACS) provides most of Zhone’s revenues; Roundview, a group of networking software engineers; OptaPhone Systems, maker of point-to-point wireless systems; and Xybridge Technologies, a softswitch vendor that produces devices designed to replace central office circuit switches with faster packet switches (see Zhone to Acquire Xybridge).

Ejabat is widely known in the industry for his success as CEO at Ascend Communications, which he sold to Lucent in 1999 for $24 billion. He considers Rich McGinn, the former CEO of Lucent who stewarded that massive transaction, as a friend. ($24 billion? We all wish we had friends like that!) Most recently, this famous (or infamous) friendship got McGinn some increased scrutiny after he was ousted from Lucent, when it became public that McGinn had individually invested in Zhone, a Lucent competitor, when he was CEO (see McGinn Backed Lucent Competitor.Ejabat's name elicits varied reactions in the industry. Some mumble that he's all about the money, rather than the technology. Others, most notably those on Wall Street, are fine with this concept. Mory's heavy-handed management activity following Ascend's merger with Cascade Communications – before Ascend was acquired by Lucent – roiled the Cascade crew, many of whom now reside either at Sycamore Networks Inc. (Nasdaq: SCMR) or among a flotilla of Boston-area startups.

Little is known about Zhone's finances since the spring of 2001, when it pulled its filing for an initial public offering (see Zhone Zhaps IPO ). At the time of the last filing, made in December 2000, the company reported it had revenues of $60.5 million and losses of $129.6 million in 1999. At the time, Zhone still had $140 million in cash left. Ejabat claims the company has been growing revenues quarter-over-quarter since then.

Read ahead for the man's views on:

Light Reading: There are experienced Ascend managers who say we’ll never see gains like those at Ascend again. Some people name the Ascend deal as the peak of the euphoria, or the bubble. Do you see things that way?Ejabat: I would never say ‘never again.’ Will we get to returns like that again? We don’t know if it will be five years or nine years or 15 years, but we will get there. Light Reading: Do you still watch what’s going on at Lucent?

Ejabat: I’m totally detached from that. I cannot make any comment.

Light Reading: But you got a pretty good price for Ascend.Ejabat: Of course. Actually, they got a good asset with that. What they did with that or what they are doing with that, I don’t know.

Light Reading: What have been the lessons of last year?

Ejabat: Not to provide vendor financing. We started the phenomenon at Ascend, but I don’t think we’re going to that anymore.

Light Reading: You started vendor financing? What a thing to be famous for…

Ejabat: Yes.Light Reading: Apparently some people took it to a little bit of an extreme.

Ejabat: They sure did. It went way beyond where we intended.Light Reading: Are you saying that even if you become a large company and go public and you have significant revenue and profit, you will never offer vendor financing?

Ejabat: Probably not to the extent that it was done before, no.Light Reading: It seems like it was a Catch-22. Nobody wanted to do vendor financing but they all had to do it to compete. Ejabat: But we all learned that lesson.

Light Reading: There’s a serious shakeout. Of the Big Three (Cisco, Lucent, Nortel), do you think one of them will become the Big One?

Ejabat: I don’t know how to answer that question, because they all have a niche. What we end up having in the next few quarters or years, we’re going to have companies that are totally dedicated or building products focused on the major revenue producers. They are going to be specialized. You’re going to have companies that are really into routing and IP switching, you’re going to have companies that are totally dedicated to TDM switching, companies dedicated to access. You’re not going to see companies that try to do everything at the same time.

Light Reading: And you’re an access company.

Ejabat: Yes.

Light Reading: How much money do you have left?

Ejabat: We have enough money to go cash-flow positive.

Light Reading: And how long will that take?

Ejabat: Pretty soon.

Light Reading: What’s your perspective on what’s going on with financing and the difficulty startups are having raising capital?

Ejabat: If you look at the past couple years, anybody with a business plan had a built-in need for two years of financing. Those are the companies that are not getting funding. Venture guys still have lots of money – they haven’t committed it all, but they do invest in companies that are innovative and providing something that is useful and provides performance and reduced cost.

Light Reading: You have some visibility into the capital spending problem. What exactly is going on there? How much of capital spending is being spent on legacy vs next-generation technology?

Ejabat: What we see is that not much is being spent on the core. We see some money is being spent on keeping the existing equipment and expanding it. They put money in the areas that would allow them to acquire more customers and make more money on the same line – for example, ADSL with voice.

Light Reading: The telecom market’s in the toilet. What will push this market forward?

Ejabat: There is trouble in the sale of wholesale bandwidth in the backbone. In the meantime, [carriers] are spending money on small offices, medium offices, and residential in the broadband. They are changing their investment from core broadband to access broadband. Lots of telcos are doing that. They have to fill up these pipes in the backbone.

Light Reading: Yes, the last mile seems to be a big chokepoint right now. What are the big hurdles to cross to get there?

Ejabat: A couple of things. The equipment that’s going to be in the access has to be multiprotocol. The challenge with that is to get the telephone companies to combine all of this legacy and new equipment together. That’s why access has been a problem. The telephone companies want to move off the old system and move to the new system.

Light Reading: Are you making any progress there?

Ejabat: Our next-generation product can resolve that problem. In the same network you can have next-generation packet or TDM.

Light Reading: You guys are a patchwork of acquisitions at this point, and you’re still private. Could you explain what’s going on with your revenues in various product lines?

Ejabat: Our revenues are growing quarter over quarter. We haven’t had a down quarter yet since we started. Some of our legacy products are going down, but our new products are taking off. It allows us to have quarter-over-quarter growth.

Light Reading: You pulled your IPO. What is your timeframe for refiling?

Ejabat: We are waiting to see how the market reacts to new IPOs.

Light Reading: You still want to go public?

Ejabat: Of course we do. We just don’t know what the timing is.

Light Reading: What’s your hottest product?

Ejabat: Our hottest product is our architecture. [Ed: Safe answer, eh?]

Light Reading: C’mon. Which products are really moving?

Tim Donovan (Zhone’s Director of Communications): We have introduced a number of products but have not announced them. We’re making them available to customers under NDA, being deployed and in production.

Light Reading: You’re saying that you’re selling products now that haven’t been announced?

Donovan: That is correct. Because we want to make sure they’re broadly deployed at the time we announce them.

Light Reading: How many customers do you have total?

Ejabat: We’ve made a lot of acquisitions. That’s a tough question to answer.

Light Reading: More than a dozen?

Ejabat: Yes.

— R. Scott Raynovich, US Editor, Light Reading
http://www.lightreading.com