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Spirent Makes Deeper Cuts

Ray Le Maistre
4/27/2007

Spirent Communications plc is implementing a new restructuring strategy that will see its annual operating costs cut by £21.5 million (US$42.9 million) starting next year, it announced today. (See Spirent Reviews Business.)

Cost-cutting programs are nothing new at the test vendor, which has slimmed down on a number of occasions during the past few years as it has repositioned itself as a telecom-focused company. (See Spirent Cuts More Jobs, Spirent Cuts Back OSS Group, and Testing's Tasty Tidbits.)

The new revamp is the first phase of a broader companywide review, instigated by the company's new board, that began earlier this year. Since that process began, the new chairman, Edward Bramson, has taken over the running of the company, having ousted the CEO. (See Spirent Faces Further Upheaval , Spirent Suffers Boardroom Coup , and Spirent Spikes CEO .)

The second phase, details of which are not due to be unveiled until October, will include a review of "balance sheet structure and other matters." That "Strategic Review" could result in Spirent's exit from the OSS (telecom service assurance software) sector.

The aim of the first phase, or "Operating Review," is to "improve profitability at current sales levels," and "refocus attention on Performance Analysis," the largest of the company's three divisions.

To achieve its goals, Spirent is slimming down the Performance Analysis division, which makes lab test equipment for equipment vendors and carriers, by cutting an unspecified number of staff and reducing the number of manufacturing facilities and R&D sites. The company is also restructuring its group business functions so that "corporate overheads will be reduced significantly."

The restructuring will take place this year, resulting in a one-time charge in 2007 of £15 million ($29.9 million), so that the full annual savings of £21.5 million can be "fully realised" in 2008.

Investors liked the news, as Spirent's share price jumped 5.5 pence, more than 8 percent, to 72.25 pence ($1.45) on the London Stock Exchange Friday morning, its highest value in more than two years.

Growth potential
Spirent's new board believes that, in the Performance Analysis division, "there are significant opportunities for growth in broadband revenues, wireless products and in Spirent TestCenter sales." (See Spirent Updates TestCenter.)

That division, now run by former Lucent executive Rob Piconi, generated an operating profit of £10.5 million ($21 million) from revenues of £192.2 million ($384 million) last year, more than 70 percent of the company's 2006 revenues of £271.6 million ($542 million). (See Piconi Packs His Bags.)

Spirent beefed up that business last year with a number of niche acquisitions. (See Spirent Buys Test Partner, Spirent Buys VOIP Test Firm, and Spirent Buys Wireless Test Firm.)

The Service Assurance division, however, recorded an operating loss of £1.2 million ($2.4 million) from revenues of £43.6 ($87 million), while the Systems division, a non-telecom unit that makes power drives for medical and industrial vehicles, reported an operating profit of £4.7 million ($9.4 million) from sales of £35.8 million ($71.6 million).

The new structure should result in better profitability "when sales increase," the company noted. However, Spirent doesn't expect its numbers to improve in 2007. Citing "market conditions," Spirent says the Performance Analysis division will perform better in dollar terms, but, given the current exchange rate, revenues in pounds sterling are expected to be lower for the year, while revenues from both Service Assurance and Systems are expected to decline.

The focus on Performance Analysis in this review calls into question the future of the other two divisions. Analysts have thought for some time that Service Assurance is a candidate for a trade sale, and that its customer base of North American Tier 1 carriers, which as of January this year includes Canada's Telus Corp. (NYSE: TU; Toronto: T), would likely attract a buyer.

The Systems division, though, may be retained for its still profitable cashflow.

Spirent had not returned our calls as this article was published.

— Ray Le Maistre, International News Editor, Light Reading

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