ECI Telecom Ltd.

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ECI Telecom Ltd.

30 Hasivim Street
Petah Tikva 49133
Israel
(972) 3-926-6503
Fax: (972) 3-926-6300
Web site: http://www.ecitele.com

Public Company
Incorporated: 1961 as Electronics Corp. of Israel Ltd.
Employees: 2572
Sales: US$451.54 (1995)
Stock Exchanges: NASDAQ
SICs: 3661 Telephone and Telegraph Apparatus

ECI Telecom Ltd. is a leading developer and manufacturer of telephone transmission equipment. Its products provide companies around the world with cost-effective solutions to the ongoing dilemma of ever-increasing demand for transmission capacity. ECI’s digital circuit multiplication equipment (“DCME”) products increase the efficiency of long-distance telecommunications links via satellite, undersea fiber optic cable, microwave and coaxial cable. These products generated the vast majority of ECI’s sales until the early 1990s, when diversifications begun in the 1980s started to constitute a significant proportion of the business. These included access network products, which boost the efficiency and effectiveness of local telephone lines to accommodate integrated services digital network (ISDN) while postponing expensive infrastructure upgrades. In anticipation of a global upgrade to fiber optic cable, ECI prepared an array of specialized equipment, including Syncom and wide area networking products. With a boost from its 1993 acquisition of America’s Telematics International Inc., ECI’s sales and profit grew dramatically during the first five years of the 1990s. Revenues increased over 500 percent, from $74 million in 1990 to over $450 million in 1995, while net income skyrocketed from $3 million to $87.9 million. ECI is an affiliate of the Clal Group, a top Israeli conglomerate.

Post-World War II Background and Origins

The United Nations’ 1947 partition of Palestine into separate Jewish and Arab states and the declaration of an independent Israel in 1948 spawned two trends relevant to the creation and development of ECI. Intermittent military clashes between the two states imbued Israelis with a fierce sense of patriotism and self-preservation, impulses which found partial release in the establishment of many institutions of higher education and research. Israel was soon distinguished by the world’s highest ratio of scientists, engineers, and Ph.D.s per capita. Many in the country’s “brain trust” were employed by the government to do military research.

Like many of Israel’s leading high-tech firms, ECI evolved out of the country’s robust defense industry. It was founded as Electronics Corp. of Israel Ltd. in 1961 to manufacture electronic equipment for the Israeli military. ECI developed a specialization in telephone transmission products, which manipulate the signals carried on telephone lines. Military applications of ECI’s research included voice-scrambling equipment for the Israeli Air Force.

New management, including many of the company’s 1990s-era executives, steered the company away from the defense industry and toward civilian constituencies in the 1970s. This too echoed national trends, which saw high-technology equipment evolve into one of Israel’s most important exports. Early product groups focused on long-distance multiplexing: simultaneous transmission of multiple telephone messages over one physical line. One device took advantage of the fact that phone lines were strung in pairs—one line sent signals one way, while the other conducted the return signal—and each was actually only in use about half the time during the course of a typical conversation. ECI developed time assignment speech interpolation (TASI) technology that tracked the beginning and end of each segment of conversation and wedged the elements of a different conversation into the spaces in between. Launched in 1979, this device increased the potential usage of longdistance analog lines by a factor of two. ECI’s product beat even Bell Laboratory’s (now Lucent Technologies) entry to market. It was used especially on international undersea cables, where efficiency was a paramount concern.

Digitization Spurs Product Development in 1980s

The digitization of telephone switching that began in the 1970s foreshadowed a decline in demand for TASI but challenged telephone equipment manufacturers to develop complimentary devices. Digital telephone switches convert sounds into binary code for more efficient, computer-managed transmission and then translate them back into sounds at the receiving end. Digital circuit multiplexing equipment (DCME) developed by ECI and others bundle these digitized signals for maximum efficiency during transmission, thereby allowing standard long-distance phone lines to carry more information than was originally intended.

As it had in the area of analog multiplexing, ECI faced competition from industry giants like Alcatel of France and American Telephone & Telegraph. But the relatively small size of this niche—US$100 million in a multibillion dollar global market—meant that it was largely overlooked by the top competitors. ECI’s ability and inclination to target research and development funds to this sector and its eagerness to embrace international industry standards gave it other competitive advantages over its king-sized rivals. By the end of the decade, ECI had captured over two-thirds of this market. In a 1992 Money magazine article, fund manager Robert Zuccaro of Target Investors asserted that “Most global phone companies have become ECI customers in recent years after failing as competitors.”

Led by the bellwether DTX-240, which could multiply the capacity of a long-distance channel by up to eight times, DCME operations generated nearly four-fifths of ECI’s revenues through the end of the decade. And while they were strictly a niche product in the context of the overall telephone equipment industry, DCME devices commanded an impressive 60 percent gross margin. From 1985—when the company formally shortened its name to the acronym ECI Telecom—to 1990, sales increased at an average rate of over 30 percent per year, totalling US$74.5 million in 1990. Net income amounted to $15 million that year.

Although technological progress in the telephone equipment industry continued apace, ECI’s DCMEs enjoyed a longer-than expected run. For while the products’ initial target clients were large carriers in developed countries—Deutsche Bundespost Telekom and British Telecom, for example—they found new life in emerging markets like China, the Philippines, and Brazil. In fact, ECI continued to introduce upgrades of this device through the mid-1990s, including the DTX-360, a model that increased circuit capacity tenfold. So while DCME’s contribution to ECI’s overall sales had shrunk to about one-third by the mid-1990s, it remained the company’s most profitable and largest revenue generator.

Access Multiplexers Debut in 1980s

Foreseeing the eventual obsolescence of DCME and seeking to diversify accordingly, ECI teamed up with one of its most important clients, Germany’s Deutsche Bundespost Telekom, to develop a device that would increase the efficiency of local telephone lines. Sold by ECI under the trade name DIGILOOP, the resulting “pair gain” devices capacitated the existing copper pairs of wires to emulate digital lines and therefore carry two voice telephone calls on one line. Known in the industry as “access multiplexers,” these devices appealed to two different constituencies for different reasons. Common carriers in emerging markets could effectively double the capacity of their local networks, i.e., they could offer service to two separate customers on one physical line. In 1992, ECI won a prestigious contract with Deutsche Telekom to bring the communications infrastructure of the former East Germany up to par with West Germany via DIGILOOP devices.

Telecos in mature markets could offer the increased capacity to their customers as a premium feature—discrete “lines” for faxing or Internet access—without expensive fiber optic upgrades to each customer. When combined with high bit rate digital subscriber line (HDSL) technology also developed and sold by ECI, access multiplexing held out the possibility of allowing phone companies to offer cable television service as well. (In fact, ECI played both sides of this intermedia competition. In 1994, it acquired a 30 percent stake in Israel’s Telegate, a startup concerned with the development of technology that would allow cable television companies to offer phone services over coaxial cable lines.)

Company Perspectives:

ECl Telecom Ltd. is dedicated to the business of global networking. Our vision is to provide innovative, managed network solutions that enable network operators and service providers to increase capacity, improve quality, maximize current infrastructure, expand revenues and deliver the services that their customers demand.

Throughout the years we have been the first to deploy commercially powerful new technologies, giving our customers a competitive edge.

ECI Telecom Ltd.’s products are in use in over 110 countries on five continents. Serving most of the major international service providers, our products offer integrated voice, data, fax and video capabilities through four major product groups: Digital Circuit Multiplication Equipment; Access Products; Synchronous Digital Hierarchy; Wide Area Network.

Access devices grew to become ECI’s hottest product line (in terms of sales), with revenues increasing 88 percent from 1993 to 1994 alone. By 1995, they vied DCMEs as the company’s largest revenue generator, contributing 32 percent of sales. And notwithstanding this dramatic growth rate, this segment still held out plenty of potential; industry analysts expected the US$4 billion 1994 global market for access products to more than double by 1997. Unlike the DCME segment, however, ECI faced a great deal of competition in the access market, a factor that dampened profit margins in this division.

Meeting the Challenges of the Fiber Optic Era

In partnership with longtime customer Deutsche Telekom, ECI began researching and developing transmission management products for fiber optic networks and their next-generation asynchronous transfer mode (ATM) switches in 1988. The fiber optic cables expanded bandwidth by a ratio of ten-to-one over copper, and the ATM switches merged voice, data, and video transmissions. Products in this new category of equipment used Europe’s synchronous digital hierarchy (SDH, also known as synchronous optical network or SONET in the U.S.) standards to enhance the capacity and efficiency of fiber optic lines. SDH/SONET devices maximize the potential of the increased capacity inherent in fiber optic line by assigning bandwidth to customers on an as-needed basis. This differs from the current standard, which assigns a particular amount of bandwidth to each client whether it is being used or not. SDH/SONET therefore holds out the promise of increased usefulness and efficiency for telecos and their customers alike. ECI was among the first companies to achieve a working prototype of an SDH system.

Although the technological refinement of SDH/SONET technologies continued throughout the 1990s, ECI had SDH contracts with customers in Europe, the Middle East, and perhaps most notably China by 1994. By mid-decade SDH products, sold under the trade name Syncom, constituted over 10 percent of ECI’s annual sales. With an anticipated annual growth rate of over 60 percent per year, the global SDH market was expected to become one of ECI’s key divisions.

In an ongoing effort to diversify its product offerings and geographic reach, ECI acquired Telematics International Inc., an American firm, in 1993. Whereas ECI had long emphasized the voice and video segments of telephone transmission, Telematics specialized in data products, especially those for automatic teller machines (ATMs), local area networks (LANs), and wide area networks (WANs). Telematics developed and manufactured devices that package computer data in the same way that ECI’s products package voice and video. And while ECI’s geographic strengths lay in Europe and China, Telematics enjoyed a solid reputation in the Americas. Renamed ECI Telematics in 1995, this acquisition added about US$80 million in annual sales to ECI’s balance sheet.

ECI’s revenues and net income rose in concert with its burgeoning product line and geographic reach in the early 1990s. Sales more than sextupled, from US$74.5 million in 1990 to over US$451 million in 1995. Net earnings nearly kept the pace, multiplying from US$15 million to approximately US$88 million during the same period. These strides are certainly commendable—and have not gone unnoticed by the investment community—but perhaps more importantly, ECI has begun to transform itself from a niche player in the telecommunications equipment industry to a “global integrated network manager.” Its strengths in China, where it was first to install SDH equipment should prove vital to this quest.

Principal Subsidiaries

ECI Telesystems Ltd.; Compression Telecommunications Corp. (U.S.A.); Telegate; ECI Telecom Inc. (U.S.A.); ECI Telecom China; ECI Telematics International Inc. (U.S.A.); ECI Telecom (HK) Ltd. (Hong Kong); ECI Telecom GmbH (Germany); ECI Telematics International Ltd. (United Kingdom); ECI Telecom (UK) Ltd. (United Kingdom); ECI Telecom Americas Inc. (U.S.A.); Encoton Ltd. (26%).