Scientific-Atlanta, Inc.

founded: 1951

Contact Information:

headquarters: 5030 sugarloaf pkwy.
lawrenceville, ga 30044 phone: (770)903-5000 fax: (770)236-6777 url: http://www.scientificatlanta.com

OVERVIEW

Scientific-Atlanta is the second largest U.S. manufacturer of the set-top boxes used with cable television and cable-based online services, such as high-speed Internet access. A member of the Standard & Poor's 500, Scientific-Atlanta also manufactures cable modems and broadcasting transmission and distribution equipment. Customers include cable operators, broadcasters, and telephone operators. The firm's three largest clients—Adelphia; AOL Time Warner (owner of Time Warner Cable) and Charter Communications-account for nearly 60 percent of sales.

COMPANY FINANCES

Scientific-America's sales reached $1.2 billion in 1999, grew to $1.7 billion in 2000, and surpassed the $2 billion mark the following year. In 2001, sales jumped another 46.5 percent, reaching $2.51 billion. Net income also skyrocketed between 1999 and 2001, growing more than threefold from $102.3 million to $333.7 million. The firm's earnings per share grew from 64 cents to $1.99 over the same time period. Weakening economic conditions began to undercut sales during the first half of fiscal 2002. As a result, the firm's stock price, which had neared record highs early in 2001, began to tumble. In March of 2002, stock hovered at roughly $22 per share.

In the late 1990s and early 2000s, Scientific-Atlanta began to gain ground on arch rival Motorola. In the first half of 2001, Scientific-Atlanta had secured a 37 percent share of the digital set-top box market. Although this still lagged behind the 58 percent share held by Motorola, it was higher than the 30 percent market share Scientific-Atlanta held in the late 1990s.

ANALYSTS' OPINIONS

Analysts started to downgrade Scientific-Atlanta stock in mid-2001. Digital set-top box growth had slowed as the North American economy worsened, and Scientific-Atlanta's shipments began to decline. According to an October 2001 article in Broadcasting & Cable, Scientific-Atlanta's stock, "a hot pick on Wall Street just nine months ago, has been battered this summer, largely by a serious slowdown in the growth of digital TV sales by cable operators." The firm began to trim operating costs in October of 2001, which prompted some analysts to look more favorably upon its outlook. However, when digital set-top box shipments remained low, analysts again downgraded the stock, and prices continued to fall.

Some believed that the firm would be well positioned for growth once the economy improved. Scientific-Atlanta's newest set-top box was considered better equipped to handle interactive services, a potential growth market for cable operators and equipment makers, than those of its rivals. According to Wachovia Securities Analyst George Hunt, as quoted in Broadcasting & Cable, Scientific-Atlanta is "the best technology company in the cable television space."

HISTORY

Six Georgia Institute of Technology professors created Scientific-Atlanta on October 31, 1951, with plans to sell an instrument that recorded antennae patterns. The young firm began to manufacture electronic testing equipment for the space and defense industries in the 1960s. By the early 1970s, products included telephone testing devices, as well as various electronic implements designed specifically for federal government use. Sales totaled $16 million a year.

Sidney Topol left Raytheon Co. to become president of Scientific-Atlanta in 1971. He focused the firm on telecommunications products, and in 1973, Scientific-Atlanta unveiled a portable satellite station at a large communications convention, and shortly thereafter, Scientific-Atlanta began to market its portable satellite stations to the fledgling cable television industry. The satellite allowed cable television operators to transmit their programming to a large number of stations in different locations. Growth in the cable industry intensified in the mid- to late 1970s, and sales at Scientific-Atlanta began to soar, reaching $45 million. The firm held a 66 percent share of the cable television satellite stations market during the 1970s. The firm also began to make and market other cable television system devices, as well as products not related to the cable industry, such as testing and measuring devices for telecommunications and industrial industries. In 1978, Scientific-Atlanta paid $17.4 million for Spectral Dynamics Corp., a maker of laboratory implements with operations throughout Europe. The following year, the firm bought automatic testing devices maker Adar Associates Inc.

By 1980, Scientific-Atlanta was the largest cable satellite stations supplier in the world. Early in the decade, the firm paid $5.5 million for coaxial cable manufacturer Systems Communications Cable, Inc. Quality control issues with set-top boxes (units placed on top of television sets to receive cable channel broadcasts) began to plague the firm; in 1982, these problems resulted in Scientific-Atlanta's first quarterly loss in 13 years. Scientific-Atlanta eventually stopped making set-top boxes in its U.S. plants; instead, the firm hired Matsushita, an electronics company based in Japan, to handle the manufacturing. Early in the 1980s, growth in the U.S. cable television industry began to slow, and demand for cable-related equipment weakened. In 1984, leading cable broadcasters Home Box Office (HBO) and Showtime chose MA/Com, Inc. over Scientific-Atlanta to develop signal scrambling equipment that would prevent homeowners without cable subscriptions from gaining access to cable transmission via satellite dishes. Attempts to diversify into other markets failed, prompting Topol, by then chairman, to hire an outside consultant, William E. Johnson, to restructure operations.

Johnson decided that Scientific-Atlanta had grown too rapidly. He sold off several assets and narrowed the firm's focus to a few promising markets, such as satellite communications networks. To boost its foothold in this fledgling industry, Scientific-Atlanta acquired Advanced Communications Engineering. At the same time, cable television began to catch on in Europe, which helped bolster the firm's sales. In an effort to keep pace with rivals, Scientific-Atlanta began to allocate more resources for research and development. The firm cut costs by laying off 1,000 workers, and eliminating pay increases. Scientific-Atlanta also eliminated 75 percent of its senior-level management, hoping to revitalize its corporate culture and streamline operations. Productivity increased, and earnings in 1989 reached $36 million.

In the l990s, Scientific-Atlanta continued to focus on staying abreast of cutting edge technologies in an effort to grow its market share. Despite new product releases in 1991, sales fell 20 percent, due to reduced spending throughout the cable industry and a weak North American economy. Earnings tumbled to $l.l million. Demand for set-top boxes began to grow as the economy improved, and Scientific-Atlanta and General Instrument (later part of Motorola) emerged as the two leaders of the set-top box industry, which was worth $3 billion by 1999.

Digital technology began to replace analog technology in the cable industry in the mid-1990s. As a result, firms like General Instrument and Scientific-Atlanta began to develop digital set-top boxes. General Instrument introduced the first commercially viable digital settop box in 1996. Three years later, Scientific-Atlanta unveiled the Explorer 2000, a box that was considered technologically superior to rival products. In 2001, America Online Inc. and Scientific-Atlanta began working together on making AOL TV compatible with Explorer 2000 boxes.

STRATEGY

When Sidney Topol, a proponent of strategic planning, joined Scientific-Atlanta in the early 1970s, he put in place a long-term plan designed to increase the firm's profitability. First, he decided to divest all money-losing operations, particularly those outside of Scientific-Atlanta's area of expertise. He focused the firm on new markets he believed offered substantial growth potential and the opportunity to manufacture low-cost, high-volume products. To increase the firm's competitiveness, he expanded research and development and marketing budgets. Rather than targeting certain markets based on products Scientific-Atlanta had already developed, Topol decided to concentrate on pinpointing growth markets and then developing products for those markets. Believing that the cable television industry was poised for substantial growth, Topol steered Scientific-Atlanta's development of the satellites that eventually became the backbone of the cable industry. By 1980, due to Topol's successful implementation of his strategy, Scientific-Atlanta had become the largest cable satellite stations supplier in the world.

FAST FACTS: About Scientific-Atlanta, Inc.

Ownership: Scientific-Atlanta is a public company traded on the New York Stock Exchange.

Ticker Symbol: SFA

Officers: James F. McDonald, Chmn., Pres., and CEO; Conrad J. Wredberg Jr., SPV and COO; Wallace G. Haislip, SVP, CFO, and Treas.

Employees: 8,000

Principal Subsidiary Companies: Scientific-Atlanta operates offices in 70 countries across the globe.

Chief Competitors: Scientific-Atlantic's chief rival in the set-top box industry is Motorola Inc. Other competitors include Pioneer Electronic Corp., Samsung Co. Ltd., and Sony Corp.

In the 1990s, Scientific-Atlanta again used the strategy of developing a product to target a specific growth market: interactive cable services. In the cable industry, digital technology was first embraced for its ability to offer a clearer picture, crisper sound, and a greater number of channels. Eventually, firms began to examine ways to use digital technology to offer interactive services such as high-speed Internet connections and video-on-demand. Believing that these interactive services would emerge as a huge growth market, Scientific-Atlanta began developing technology toward that end as early as 1993. This strategy resulted in the release of the Explorer 2000, the first set-top box able capable of handle high-speed Internet access, email, electronic commerce, video-on-demand, and other interactive services. If interactive services in the early 2000s become the high growth market some analysts anticipate, Scientific-Atlanta will have a product ready to serve that market.

INFLUENCES

When William E. Johnson took over in the mid-1980s, he determined that Scientific-Atlanta had grown too rapidly and become involved in too many new technologies. Too many layers of management had burdened operations and added unnecessary costs. At the same time, competition had intensified, undercutting sales. These problems prompted Johnson to embark up a full-scale restructuring that included the sale of seven business units and the elimination of 75 percent of senior management positions.

PRODUCTS

While set-top boxes account for the majority of Scientific-Atlanta's revenues, the firm also sells broadband access products, such as digital head end equipment, cable modems, trunk stations, amplifiers, and digital compression devices. Via its SciCare unit, Scientific-Atlanta offers network installation and related services.

CHRONOLOGY: Key Dates for Scientific-Atlanta Inc.

1951:

Scientific-Atlanta is founded

1971:

Sidney Topol takes over as president

1973:

Scientific-Atlanta unveils its portable satellite station

1980:

Scientific-Atlanta is the world's largest supplier of portable satellite stations for the cable industry

1999:

Scientific-Atlanta releases the Explorer 2000 digital set-top box

SCIENTIFIC-ATLANTA'S FIRST DIGITAL SET-TOP BOX

In the early-1990s, Scientific-Atlanta began working to develop a digital set-top box. The resulting product, completed in the mid-1990s, cost roughly $3,000 to make. Although the box made use of cutting edge technology, it proved far too expensive to release to the general public and was considered ahead of its time.

CORPORATE CITIZENSHIP

Scientific-Atlanta makes donations every year to organizations like nature conservancies and botanical gardens, zoos and humane societies, and chambers of commerce.

SOURCES OF INFORMATION

Bibliography

grotticelli, michael. "battle of the set-top boxes." broadcasting & cable, 11 june 2001.

haley, kathy. "gaining ground." broadcasting & cable, 29 october 2001.

"scientific-atlanta." international directory of company histories. detroit: gale research, 1992.

scientific-atlanta inc. home page, 2002. available at http://www.scientificatlanta.com.

upbin, bruce. "my box can beat your box." forbes, 8 february 1999.

For an annual report:

on the internet at: http://www.scientificatlanta.com/investors/ar_2001.pdf

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. scientific-atlanta, inc.'s primary sic code is:

3663 radio & tv broadcasting & communications equipment also investigate companies by their north american industrial classification system codes, also known as naics codes. scientific-atlanta, inc.'s primary naics code is:

334220 radio and television broadcasting and wireless communications equipment manufacturing