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PC-Tel: Leaner, Cleaner, and Wireless

Some might have called Marty Singer crazy. In November, 2001, Singer agreed to take over as CEO of PC-Tel, a Chicago software company that was bleeding badly. It was tumbling toward a $59 million annual operating loss on revenues sliding 58%, to less than $41 million. Despite a backlog of inventory and a management team whose focus had strayed, Singer, a member of the board of directors, felt an obligation to act as lifeguard to this drowning company. Somewhere beneath the squalor he sensed a bright future. "The business was in a bit of a mess," he says. "But there were obvious ways to cut costs and improve the focus."

Looks like he was onto something. Already, daylight is beaming down on PC-Tel (PCTI). Singer transformed what had been largely a developer of software for PC modems into a visionary telecommunications company that specializes in access technology -- software that enables a whole variety of devices to connect to the Internet. With a new mission, the company ended 2002 with operating earnings of $3.3 million, a dramatic turnaround from its huge loss the year before. Revenues jumped 19%, to $48.8 million. In the fourth quarter alone, income from operations hit $2 million, up from a loss of $7.4 million in the fourth quarter of 2001.

Not surprisingly, investors have cheered: The stock is hovering around $7, some 50% higher than its low of $4.43 in October. "It has been a pretty substantial turnaround," says B. Riley & Co. analyst Wes Cummins. "They've really streamlined the business."

MOTO-MEN. What's the secret behind PC-Tel's rebound? Chalk it up to a mixture of smart acquisitions, improved business execution, and what Singer calls "corporate hygiene." The 51-year-old CEO, a telecom veteran who has held executive posts at such industry titans as Motorola (MOT), Tellabs (TLAB), AT&T (T), and Bell Labs, has replaced former managers with a top-flight team.

Two of the top executives are also ex-Motorolans: John Schoen and Jeffrey Miller, who serve as CFO and vice-president for business development, respectively. The top product-development maven, Biju Nair, distinguished himself as an engineering whiz while working with Singer at wireless-testing company Safco. "This is a management team that has the experience to run much bigger businesses -- the size of Lucent (LU) or Nortel (NT)," Singer says.

All of the team's experience and expertise came to bear in tackling PC-Tel's problems. They spent most of last year laboring to fix a "management nightmare": Every quarter, PC-Tel had been releasing more than 80 versions of its products and seven different software drivers for its modems. That's far more than the market demanded -- and enough to deflect attention from breakthrough products. So Singer slimmed product releases to 15 and is shooting to bring the number down to single digits by the second quarter. PC-Tel now makes just one modem driver.

FEELING THE PAIN. Furthermore, at the height of the tech boom in 2000, the company had aggressively discounted its products to encourage customers to buy more. But when demand fell, PC-Tel had a lot of low-cost inventory sitting in customers' warehouses. After "three quarters of pain," Singer says, PC-Tel has slashed its inventory from 102 days' worth to 19. "We stopped reducing prices and refused to ship to some customers until their supply was entirely dried out," he says.

With the cleanup mostly done, management is now focusing on breathing new life into the company. Its biggest move came in June, 2002, when it bought CyberPixie, a Chicago wireless-access company, for $2 million. CyberPixie specializes in Wi-Fi software, which catapults PC-Tel into one of the hottest markets in telecom.

Wi-Fi -- broadband technology that allows users to connect wirelessly to the Internet at speeds 20 times faster than standard dial-up modems, is catching on faster than reality TV shows. The number of locations where Wi-Fi networks operate -- so-called hot spots like hotels, coffee houses, and airports -- is expected to grow from 12,235 to 31,000 worldwide this year.

CLEARING THE AIR. PC-Tel's new product line is designed to solve the problems that threaten to hold Wi-Fi back. One product is software that gets around the main barrier at the moment: Users can't log on to networks operated by different service providers as they move from spot to spot within a city or across the country. The inability to "roam," as users of cellular phones can, threatens the technology's growth.

Also, Wi-Fi networks can get bogged down by interference from other radiowave traffic. So PC-Tel plans to acquire technology that examines networks and helps clear interference. Among other things, such technology will allow the development of applications that boost the security of voice and data traffic-a key concern for users of Wi-Fi gear. On Mar. 12, PC-Tel used $10 million of its $112 million in cash to buy Dynamic Telecommunications, a developer of software-defined radio technology. And Singer is prowling the market for other technology that optimizes the performance of broadband networks.

PC-Tel also seeks to cure another source of Wi-Fi trouble: Different components can be hard to install. PC-Tel says retailers complain that about half of the Wi-Fi network cards they sell are returned by customers who can't figure out how to get them to work. So PC-Tel is introducing products that make installing the cards and connecting to networks a snap. Soon, it will introduce technology that will enable a homeowner to connect without having to buy and install all sorts of routers and other hardware. "If this industry is poised to take off, Wi-Fi has to be easy to use," Cummins says. "That's where PC-Tel comes in."

"BIGGER GAME." Problem-solving products such as its roaming software came to only about 1% of PC-Tel's sales in 2002. But as its products make the transition from trials at wireless carriers to commercial applications, PC-Tel estimates sales from wireless products will grow to 10% of total sales in 2003 and as much as 40% in 2004. "We want to participate in a much bigger game," says business development chief Miller.

Making a big impact won't be easy. Heavyweights like Cisco Systems (CSCO) currently dominate the Wi-Fi equipment market. And other big shots, such as chipmaker Intel (INTC), are moving swiftly into the market. At the moment, neither Cisco nor Intel focuses on software, but they easily could. In fact, a giant like Cisco could easily buy a player the size of PC-Tel to acquire its technology.

Plus, PC-Tel has other small rivals to worry about, such as iPass and BVRP Software. And there are questions about whether PC-Tel can develop relationships with the dominant Wi-Fi carriers managing the networks. Carriers such as T-Mobile and AT&T Wireless (AWE) are building separate networks, but PC-Tel has yet to strike up a partnership with either. Even if it ultimately does, big questions remain about how security and billing will be handled for users that roam between networks.

Planning for the future doesn't mean PC-Tel is neglecting its bread-and-butter business. Right now, the majority of its operation still focuses on conventional modem software. PC-Tel has several patents essential to the standards for 56k modems -- still the most widely used modem in the consumer market. The company generated $5.5 million in royalties in 2002, up from $300,000 in 2001. "We're not going to throw away our past as we move into wireless," Singer says. Now that the mess is cleaned up, PC-Tel looks well-positioned to step boldly forward. By Roger O. Crockett in Chicago

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