Ziatech Back from the Embedded Grave

9/25/2002 - Performance Technologies announced that they had acquired Intel's Embedded Intel Architecture Division (EID) that had formerly been known as Ziatech, for an aggregate cash consideration of US$ 3.8 million. The transaction is expected to be finalized on or before October 1, 2002. Although the deal appears, at first blush, to be a "slam dunk" score for Performance Technologies, Venture Development Corporation (VDC) has identified several issues that must be addressed in order for Performance Technologies to realize the combined companies' potential in high performance embedded systems for datacom, telecom and other mission critical embedded applications.

Performance Technologies, Inc.
Founded in 1981, Performance Technologies (PT) is a publicly traded supplier of hardware and software networking and communications products for WAN and LAN environments. VDC projects PT's year 2002 revenues to be approximately US$ 26 million, down from the US$ 36.5 million cited in 2001 SEC reports. The company has been profitable every quarter since going public.

The firm has expended considerable effort in the development of the PTMC (PCI Telecom Mezzanine Card) architecture, embodied in the PICMG 2.15 standard, and of Packet Switching Backplane technology, the first switch fabric backplane interconnect to have significant market impact. The latter is the subject of PICMG standard 2.16. Performance Technologies operates a printed circuit board surface mount technology line, located at its facility in Rochester, NY, where they manufacture board level products. Exhibit 1 provides details of Performance Technologies expected performance in year 2002, as forecast by VDC.

Performance's previous strategic direction included a discontinuation of VME products in favor of CompactPCI, PICMG 2.16 and PMC products. They also plan to transition their board products from PCI to PCI-X.

Ziatech: The Source for High Performance CompactPCI
Ziatech (San Luis Obispo, CA) was founded in 1976 by a gentleman named Bert Forbes. Ziatech operated as a closely held, private company until August of 2000, when it was purchased by Intel Corporation for US$ 241 million in cash. Although not a wildly profitable concern, Ziatech built an excellent reputation as a supplier of high-end embedded computing products and systems. The company was creative and highly responsive to customer needs. Ziatech also struggled with some persistent challenges, including: high prices and uneven lead times. In addition to being the inventors of CompactPCI, Ziatech had also invented STD-32, a 32-bit extension to the original 8/16-bit STD bus, in 1989. (Just prior to the Intel acquisition, Ziatech had announced that they planned to exit the STD-32 market by year 2006.)

The primary source of revenue for Ziatech is CompactPCI single board computers (SBCs). In year 1999, merchant computer boards represented approximately 65% of the firm's total revenues. Exhibit 2, below, provides some details about the Ziatech operation, both for year 2000 (during which they were acquired by Intel), and for year 2002, as an operating unit of Intel EID.

A significant share of Ziatech's merchant computer boards have been outsourced and shifted overseas. This strategy was executed during the Intel EID period. The company maintains significant engineering, test, final assembly and advanced integration capabilities in California.

Revenue Down 65% in Two Years! What happened?
It has been a long, strange trip for Ziatech from 2000-2002. Ziatech went from being an independent company, known as the technology leader in an exploding CompactPCI market, to one of many components of the Intel Ventures portfolio, and one of the smallest operations in the US$ 1 billion embedded division of the world's ultimate technology bellwether. For nearly a year, Ziatech and Intel executives debated the future of Intel EID, Ziatech, branding, CompactPCI, next-generation embedded systems architectures, fully integrated systems business possibilities, the telecom/datacom market, other embedded markets, and a host of other issues large and small.

The combined effects of this complex agenda caused Ziatech to atrophy. And while the markets were not kind, neither were the parenting skills of Intel EID as regards its creative and free-spirited adopted child.

The initial strategy made sense. Telecom and datacom were exploding. CompactPCI was fast becoming the architecture of choice for high availability platforms in next generation networks. Intel needed its silicon to be the heart of those new systems. Ziatech could provide a strong channel-to-market for Intel silicon, and a solid platform on which to build new board-level and integrated systems capabilities at Intel EID.

It never happened. A short list of factors that contributed to Ziatech's contraction, includes:

Additional Caveats and Comments
Systems Integration In a recent interview with VDC personnel, Performance Technologies stated that they planned to develop their systems integration capabilities, and Ziatech does bring some experience in this respect to the table. However, in today's marketplace, systems integration is not simply a matter of stuffing boards into a box. The firm must define what they will provide in terms of integration, and develop not only a solid roadmap but skilled project management methodology as well.

Mechanical/Electrical Engineering Key differentiators, which can mean the difference between success and failure, comprise custom capabilities in both mechanical and electrical subsystem design and manufacture. These issues must be addressed immediately; a false start can only damage long-term potential.

Boards and Systems PT indicated an intention to bring some of Ziatech's board manufacture in-house to their facility in Rochester. We suspect that their surface mount line may, at present, be underutilized. If so, this appears on the surface to be a sound move. However, systems integration will still be performed in San Luis Obispo. There is a great deal of risk in separating board and systems manufacture by such a large distance.

Outsourcing versus Manufacture A great deal of the SBC market comprises low-end boards, such as PCI single processor Pentium 2/3 units. These comprise commodity products, and cannot be manufactured competitively in the United States. If the firm plans to offer this type of product, these must be outsourced to the Far East, which carries an additional set of risks in terms of supplier instability, design and quality control issues. Again, a sound roadmap must be developed.

STD-32 and Military/Aerospace Although STD-32 may represent a "cash cow," Ziatech's earlier and well-publicized decision to phase out these products may have already minimized this opportunity. Regaining market share may require a substantial marketing effort, which carries with it the risk that the Ziatech unit will become perceived as specializing in this architecture and/or its legacy markets. A lower profile may be preferable.

PCI and CompactPCI are Different Businesses Although Ziatech has a great deal of experience in CompactPCI, most of Performance's marketing experience lies with PCI. CompactPCI is an entirely different animal, and many market segments still consider this technology to be experimental. Therefore, PT must develop a separate marketing strategy for these products, and a well-trained sales force to support it.

Real Experience Means Wins Today's embedded marketplace puts a great deal of emphasis on the suitability of products for specific applications, which is as it should be. However, this means that customers won't simply go to a catalog or web site and order a bunch of stuff. Applications Engineers and sales people must be well armed with case studies of design wins specific to the relevant applications segment, and be able to speak in the vernacular of that segment. This is particularly true in the systems integration field. Customization experience and capability is also vital.

The Bottom Line
The financial risk in this deal appears minimal. The potential for strategic distraction and operating confusion are considerable. Our bet: Performance Technologies' penchant for profitability and Ziatech's technical talent will create a lot of opportunity for growth in profitable revenues, market share and shareholder equity.

About VDC
VDC has 30 years of experience in providing market research, strategic analysis, and consulting services to technology companies worldwide. VDC has been analyzing the embedded systems industry since 1982. Our initial focus on embedded single board computers used in industrial automation, telecommunications, and military/aerospace applications has been expanded to cover the market for commercial embedded operating systems, software development tools and related products.

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