March Networks’ rocky road to success in China

89% jump in parent Infinova’s shares suggests a brighter future for Ottawa firm

In the 15 months since March Networks was bought by a Chinese video surveillance company, the one-time high flyer of Ottawa technology has dropped out of sight.

There was good reason for the lack of publicity: the honeymoon with Shenzhen Infinova has been rocky — but things are starting to improve.

Certainly, an 89-per-cent jump in Infinova shares since December suggests that this takeover of an Ottawa company could still turn out better than some other deals involving local champions, where jobs and opportunities were lost.

“We’ve been through a transition on many fronts that has taken time to complete,” March chief executive Peter Strom said in an interview.

While there were concerns about making the merger work, he said “things are looking pretty rosy.”

Both outfits faced challenges: Infinova lost ground to a much bigger Chinese competitor, Hikvision, when it was confidently predicting big growth from the merger.

March was still recovering from huge losses that had forced it sell for just $90 million, the equivalent of one year of sales.

With Infinova, it got a rich parent, despite lower sales, with access to investors on the big Shanghai exchange when Canadian investors were cold to March.

Strom said March has been busy building a new generation of video-surveillance gear aimed at big banking and retail clients. He said the new products are getting a positive reception. “We expect to accelerate sales and we are profitable.”

March now has 250 employees, down only slightly from the 261 at the time of the takeover. Most of the reduction came from the departure of staff responsible for shareholder relations. He said the combined company has more than 500 engineers working on new products in Ottawa, Italy and China.

The two outfits are now planning a push into the Chinese banking sector, combining March surveillance gear with Infinova’s marketing muscle.

Strom said having a Chinese parent has not shut March products out of the U.S. market, despite U.S. government actions to keep Chinese companies out of sensitive communication businesses for fears of espionage. He said U.S. banks, a key customer, have no reasons to worry that surveillance networks could be breached.

The merger is starting to show some of the expected benefits, though well short of the $200 million in sales that Infinova predicted. Combined Infinova sales jumped 113 per cent to the equivalent of $126 million in the 2012 calendar year, including about eight months of March results. Profits almost tripled to $19.6 million.

But results can be lumpy and the bottom line is far from secure. Combined sales in the March-ending quarter were just $26 million and losses jumped 61 per cent to $5.1 million. Strom said some Chinese deals generate unpredictable revenue streams.

The $14-billion video-surveillance business grabbed the spotlight by helping identify the alleged perpetrators of the Boston Marathon bombings. It is growing at an estimated 10-per-cent annual clip and is dominated by giants like Honeywell, Bosch, Hikvision and Samsung.

The market can shift with lightning speed. Consider Avigilon, a Vancouver company selling highend surveillance gear to industrial customers. The stock has quadrupled in value since launching in late 2011 just as Infinova and March were announcing their deal.

Avigilon reported sales of $32 million in the March quarter, 80-percent higher than a year earlier and profits of $2.8 million, more than 300-per-cent higher. That is the same kind of growth that made March a star a decade ago.

Strom said Avigilon and March compete in different market segments. But that can always change and March and its Chinese parent will have to be nimble.

The superstar chief executive officer of Genband, a big Texas company with more than 300 Ottawa employees, has left the stage. It wasn’t supposed to happen this way for Charlie Vogt, a one-time professional baseball prospect with the good looks that remind some of Rob Lowe. The hard-driving executive built Genband since 2004 with a string of six acquisitions centred on the $157-million deal for Nortel’s carrier-voice business in 2010. He forecast that Nortel technology would quadruple Genband sales to $800 million, setting the stage for a big stock market launch in 18 months.

The IPO never happened, but the media love affair was still in full swing early this year as Vogt announced Samsung would use Genband technology to ensure employee smartphones and tablets work on corporate networks without worries about security. A Fox Business Business host gushed “Your investors love you.”

But the private equity arm of giant JPMorganChase, which just pumped another $343 million into Genband, likely is watching the Genband experiment with more anxiety than affection. It installed David Walsh, the private equity outfits top executive, as the new CEO with Vogt’s move to a much smaller company, Harris Broadcast of Denver. Similarly, the 45 Ottawa employees who lost jobs last year are probably not members of the Vogt fan club.

Vogt left Genband with two big problems: Market demand has been slower than expected and Genband is losing ground to competitors.

It led the $3-billion global carrier-voice market with a 23 per cent share as recently as 2010. Then Huawei seized the leadership in 2011 and Alcatel-Lucent took over second place last year, according to Infonetics, a California research outfit. The technology is important because it is the magic that lets smartphone and tablet customers text, share images, watch videos and TV — and talk.

Infonetics analyst Diane Myers said Genband has had mixed success with Vogt’s acquisitions. “They have been late to the IMS (multimedia) market and we don’t see them (shortlisted for big contracts for advanced voice and multimedia deals) where most of the future growth is in this market.”

The huge installed base of Nortel gear in phone companies around the world gives Genband the lead in the older declining voice-over-internet-protocol segment. The fight will be for the upgrades to voice-over-next-generation technology.

Heads up to the 350 DRS Technologies employees in Ottawa and Carleton Place. You have a new boss and he is watching very, very closely. Giovanni De Gennaro was picked by the Italian government last week as the new chairman of Finmeccanica, a giant defence company that has counted DRS among its subsidiaries for five years. He was head of the Italian police force for seven years and more recently ran the secret services.

The Italian government, which owns 32 per cent of the outfit, decided it needed somebody with impeccable credentials after the previous chairman left suddenly this spring. He was arrested and charged with corruption in a military helicopter sale to India. There is no suggestion here anything is wrong at DRS, an operation which has been a part of the Ottawa military technology sector under the Leigh, Spar and DRS-Finmeccanica names for 52 years.

Let’s just keep it that way.