Avocent Corporation

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Avocent Corporation

4991 Corporate Drive
Huntsville, Alabama 35805
U.S.A.
Telephone: (256) 430-4000
Toll Free: (866) 286-2368
Fax: (256) 430-4030
Web site: http://www.avocent.com

Public Company
Incorporated: 2000
Employees: 719
Sales: $304.2 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: AVCT
NAIC: 334119 Other Computer Peripheral Equipment Manufacturing

Avocent Corporation, based in Huntsville, Alabama, is the world's largest KVM (keyboard, video, and mouse) switch manufacturer. The switches, both analog and digital, are used to manage multiple computer servers. Rather than connecting a monitor, keyboard, and mouse to each server, system administrators can use a KVM switch to monitor a large number of computers, local and remote, from a single console, thus saving space, time, and money while providing better system management. Although most of the switches require a wired connection, Avocent also offers a wireless product that provides switching and A/V broadcasting capabilities between monitors, keyboards, mice, and audio devices up to 100 feet indoors. Avocent's switches and services are sold around the world. Major customers include Dell, Gateway, Hewlett-Packard, Intel, and Microsoft. Avocent is a public company trading on the NASDAQ.

Roots of the Company Dating to 1981

Avocent was formed in 2000 through the merger of Cybex Computer Products Corporation and Apex Inc., the two largest KVM switch companies in the world. The older of the two was Cybex, which was cofounded in Huntsville in 1981 by Remigius G. Shatas. After earning a degree in mathematics from the University of Alabama in Huntsville in 1973, Shatas went to work in the space industry in Huntsville as a computer operator and later as a programmer at SCI Systems, Inc. Due to cutbacks in the space program he lost his position and had to take a programming job at a grommet factory 50 miles away, where he often had to work overnight in order not to interfere with daytime production runs, providing him with plenty of time on the road to think about striking out on his own. Finally, at age 29 he and some other programmers formed a consulting business. He developed his first product as a way to meet his own needs. Shatas was contracted to install computers at the Marshall Space Flight Center but the units were too big for the desk. Despite being told by engineers that it was impossible to locate the computer anywhere but on the desk, he came in one Saturday morning determined to find a way to hook up a computer to a monitor and keyboard 150 feet away. From that idea, several years later, would emerge the company's first product, the Extender.

Shatas's company was incorporated as Cybex Computer Products Corp. in 1981, but it was far from an immediate success. Two of the founders quit, but in 1982 a key employee, Robert Asprey, joined the company. He earned an engineering degree from New Mexico State University and served as manager of Management Information Systems at Teledyne Brown Engineering. Asprey formed a solid partnership with Shatas, possessing the engineering talent to make Shatas's ideas work. Shatas also was acting as the company's chief executive officer, but realized that administration was not his strong suit. In 1984 he recruited a friend, Steve Thornton, to serve on the Cybex board. Thornton was the best manager Shatas had known at his previous employer, had risen to the rank of vice-president, and was now looking to move on. When asked to join the board, Thornton suggested that Shatas hire him to run the company.

When Thornton took over as CEO Cybex was attempting to become involved in the development of specialized software, but by 1986 the field was overcrowded and Cybex began to focus on hardware accessories. In that year the company introduced the Extender, which Asprey then improved upon, extending its range to 600 feet and adding peripheral support features. A major turning point for Cybex occurred when a nuclear power plant contacted the company, asking if it could find a way for one operator with a single keyboard and monitor to switch between two computers separated by 25 feet. The result was the company's first switching product, named the Commander. In 1989 Shatas and Asprey teamed up to invent the AutoBoot Commander, the first KVM switch that could boot up all the attached servers following a power outage.

In KVM switches Cybex had found a niche in the computer field and devoted all of its resources to exploiting it. Cybex enjoyed steady growth in the 1990s. Revenues improved from $8.5 million in 1993 to more than $12.8 million in 1994, while net income grew from $925,000 to $1.4 million. In 1995 Cybex went public, netting $32.6 million in an initial offering of stock. With some of this money the company was able to establish a European subsidiary, located in Ireland. Revenues topped the $25 million mark in 1996 and reached $82.2 million in 1999; net income grew to $12.4 million in 1999. Although a number of competitors had emerged in the KVM switch field, Cybex's greatest rival was Apex Inc.

Launching Apex in 1992

The man behind the foundation of Apex was Kevin J. Hafer. After high school he learned electronics in the U.S. Navy, and upon his discharge used this experience to become a computer technician. He became a manager at Harris Corp., a major electronics company, then in 1990 was named general manager at Apex Computer, a Seattle-area computer services company. One of his jobs at Apex was to maintain servers at Microsoft Corporation. Each server was connected to a separate monitor and keyboard, requiring employees to move from server to server to administer Microsoft's internal network. Like many others, Hafer realized that a more logical approach would have all of the servers available to a single keyboard, mouse, and monitor. In 1992 he convinced Apex's owner, Sterling Crum, to start a dedicated division to serve the network-management field. With a handful of engineers Hafer developed software that allowed one KVM console to monitor a multitude of servers. Because the switches freed servers from monitors and keyboards, they could now be stacked, leading to the development of integrated server cabinets with built-in KVM switches.

With Microsoft as its primary customer, Apex was spun off as Apex PC Solutions Inc. in early 1993. In May 1994 it added Compaq as a customer and subsequently discontinued its computer maintenance service business to focus on KVM switches and server cabinets. Revenues grew from $7.3 million in 1994 to $33.6 million in 1996; income during this period improved from $1 million to $3.6 million. In February 1997 Apex went public, netting $28.4 million in an initial offering of stock, and later in the year the company netted $30.3 million in a secondary offering. Sales continued to grow at a strong clip, totaling $55.4 million in 1997 and $75.6 million in 1998, while income reached $10.5 million in 1997 and $15.7 million in 1998. With strong sales to original equipment manufacturers, Apex at this stage controlled a large share of the KVM switch market and had not yet begun to tap into the market of servers already installed in the field. Because its name caused some confusion in the marketplace about its products and services, the company in July 1999 shortened its name from Apex PC Solutions to Apex Inc. For the year, Apex would experience even stronger growth, with sales totaling $107.3 million and net income $21.2 million.

Cybex and Apex were the only two publicly traded companies in the KVM switch business and took turns as the leader in market share. Sometimes they even took customers from one another, such as Cybex winning Hewlett-Packard's business late in 1999. But each had particular strengths, Apex with original equipment makers such as Dell and Gateway, and Cybex with its overseas business, which accounted for 30 percent of revenues. In 2000 the rivals decided they would be better off joining forces, creating a larger company able to pursue opportunities that neither would be able to exploit on their own. In March 2000 a merger was announced. Under terms of the deal, which was accounted for as a purchase by Apex, Apex shareholders received a 55 percent stake in the combined company, to be named Avocent Corporation. But the new company would be located in Huntsville and Thornton would become president, chief executive officer, and chairman. Hafer, on the other hand, would walk away once the merger was consummated. The six-person board would be equally divided between Apex and Cybex appointments.

Avocent's expectation was that it would be able to offer broader network management solutions and target new and emerging fields, such as management systems used by application service providers and operators of "server farms." In general, Avocent was well positioned to benefit from a growing movement toward server-based computing. A major advance for the company took place in November 2000 with the introduction of the first digital switches, regarded as a significant advance over analog switches, which sometimes experienced distortion problems and were slower than the new devices. Moreover, digital switches were cheaper to manufacture, while at the same time fetched higher prices.

Avocent quickly took steps to strengthen its position in the marketplace through acquisitions. In November 2000 it agreed to buy Sunrise, Florida-based Equinox Systems for $57 million in cash. The addition of Equinox expanded Avocent's digital console management products to the Unix platform. Equinox also was strong in products and software that supported serial device connectivity, serving ISPs (Internet service providers) and ASPs (application service providers), two of the fastest growing markets for server management solutions.

Company Perspectives:

Avocent's field proven KVM switching and connectivity solutions provide smarter access and simpler manageability for "real world" IT environments.

Naming John R. Cooper CEO in 2002

After closing on the acquisition of Equinox in January 2001, Avocent would suffer through a difficult year, as a downturn in the economy caused many companies to postpone technology purchases. Conditions improved in 2002 and Avocent began to enjoy some strong sales for its digital switches. In March 2002 Thornton stepped down as Avocent's president and CEO, turning over the posts to John R. Cooper, although he remained chairman of the board. Cooper had been on Avocent's board from the beginning and before that had served on the Cybex board of directors. Previously he had served as chief financial officer of ADTRAN, Inc., maker of telecommunications products. Also of note in 2002, Avocent acquired 2C Computing Inc. for $22.8 million in cash. 2C was founded by Shatas and Asprey in 1999 to develop switching technology for desktop PCs. In 2002 Avocent recorded revenues of $260.6 million and net income of $10.7 million.

In 2003 Avocent paid $7 million to acquire Soronti Inc., a Draper, Utah-based company that made an adapter that allowed IT managers to access older analog KVM switches remotely. Later in the year, Avocent agreed to acquire Crystal Link Technologies for $1.3 million in cash and stock. Based in Escondido, California, Crystal Link was a wireless technology firm, the addition of which was expected to help Avocent make its systems wireless, thus potentially eliminating a multitude of cabling needed to connect KVM switches to servers. Avocent completed its largest acquisition in April 2004, another deal intended to add to its technology, with the $100 million cash and stock purchase of OSA Technologies, which developed embedded management firmware and software for Intelligent Platform Management Interface (IPMI) products. OSA was less than four years old, founded by former Intel employees, but it was well advanced in creating products for IPMI—a specification created by heavyweights Intel, Hewlett-Packard, NEC, and Dell—which held out the promise of replacing cards that cost $500 to $700 with silicon chips as cheap as $5 to provide remote server management. Dell was already committed to incorporating OSA's technology into its next generation of servers, a key factor in Avocent's desire to acquire the young San Jose, California-based company.

Avocent was committed to acquiring technology and expertise that would allow it to maintain a leadership position in its field. As the market for server management products increased, there was a strong likelihood that stronger competition would crop up. As technology spending began to increase at Fortune 1000 companies, Avocent saw its revenues jump to $304.2 million in 2003 and net income surpass $38.6 million. When the global economy improved, technology spending would increase even further, leading to more spending on servers and an increased need for Avocent's products and services. Clearly Avocent was determined to position itself for strong long-term growth while choking off competition before it could threaten its dominant position.