When American psychology professor Abraham Maslow created a visual aid in the form of a pyramid to underscore his now-famous Hierarchy of Needs theory about the stages of growth in human development, he portrayed the most basic and fundamental of needs as physiological ones. Food, water and sleep were shown at the base of the pyramid, just slightly more important than the need for safety.
But when the Tohoku earthquake (and subsequent tsunami) hit Japan last March, the line between the two blurred.
With traditional communications networks down, finding out who was most in need of food and water depended upon communications systems that were robust enough to deliver in an environment that was entirely inhospitable. British Columbia’s Norsat (TSX:NII) has been dealing with these type of situations for decades. But whether or not Norsat would still be around to help was a matter of debate back in 2006. The company had made big bets on big contracts that often didn’t materialize and found itself top heavy and bleeding red ink.
But under long-time employee Amiee Chan, who became CEO that year, the company now sits on solid ground. With Chan at the helm, the company’s fortunes have improved enough to acquire coveted long time peer Sinclair Technologies. A revitalized Norsat now looks to move its business into markets with more breadth, and has already begun to target high-end commercial customers.
Cantech Letter’s Nick Waddell sat down with Chan for a one-on-one at Norsat’s headquarters in Richmond, BC.
Amiee, you were an employee of Norsat before you became the boss here. Can you give us some background on how that happened?
Sure. I started my career with a company called MPR Teltech. They were part of BC Tel at the time, the research arm. In 1996 or so they spun off all their divisions because they weren’t getting the tax breaks from the government anymore for doing R&D. So they spun one division which Norsat eventually took over. I was actually a co-op student at MPR Telech and I became and engineer, when Norsat bought us I was an engineer. I moved my way up by becoming an engineering manager, then director of engineering at Norsat. I left Norsat for a couple years, they were in a little bit of trouble. But I came back and became VP of engineering and operations. I became CEO in 2006.
Can you describe where Norsat was at that time?
Prior to my becoming CEO Norsat had various strategies. It was more of a “go big or go home” strategy where they focused on one or two very large military customers with very, very large contracts. As a result, Norsat had hired a lot of “C” level executives in the United States. We became very top heavy. Very large travel budgets. It was very difficult, because we were pursuing very large contracts which sometimes are actually never awarded. But we bet the farm on them and we got into a lot of financial trouble in 2006. The board decided Norsat had to change its strategy, so in 2006 I came on as CEO. The first thing I did was go after the low hanging fruit. A lot more small customers. A pipeline with more breadth to it. As a result we were able to grow our revenue, while at the same time begin to generate a profit. That really help turn things around for Norsat. We were starting, once, again, to make bill payments on time. We built more credibility with our suppliers and with our customers. We also stopped the layoffs. When I joined Norsat I think we were about 450 people and by the time I became CEO we were only 42.
Did you have concerns coming from an engineering background about the business side of things, or did that come naturally to you?
That came fairly naturally to me, I have always had business inclinations. I actually have an MBA from Simon Fraser. I had done my pHD in engineering from UBC, in satellite communications. My thesis paper at SFU actually combined these interests, it was on how to start a portable terminals business. And that’s how I started a new business unit at Norsat.
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The satellite business is something you know a lot about. As we move past 2006, has the satellite business become less important to Norsat?
It’s not so much less important. When I became CEO we really had to look at our mission and our vision and figure out where we provided value. Where I see Norsat providing value is in any communications where our customers are going to be mobile in remote places around the world. Sometimes satellite is the best technology for them. But other times it can be a combination of LTE, Wi-FI, it could be anything. What we specialize in is using a mixture of technologies so our customers can get email when they are in Alaska, the Sahara Desert, in Iraq or Afghanistan or in a disaster recovery situation such as in Haiti and Japan. Wherever we find communications non-existent or damaged or just not reliable, this is where we can come in.
Crisis situations such as Japan are really in your wheelhouse…
They are. I always go back to Mazlo’s Hierarchy of Needs. We are finding today that communications are right up there with food and water. In crisis situations people first need communications to coordinate all their efforts. Much of the time when an earthquake or tsunami hits the fibre-optics aren’t working, the cell phone service is not there and yet you have people coming in from all over the world to help and that effort needs to be coordinated. The faster you can get communications going, the more lives you can save.
I guess Japan really put that to the test.
Yes, and the same thing happened in Haiti. Our customers were able to get communications going within hours after the incident. They were able to land, with our equipment, and provide either a broadcast service to show the rest of the world what has happened or the military might bring equipment in to begin to coordinate the communications.
You’re starting to have some nicely profitable quarters, 2010 was profitable overall. You have stopped the bleeding, now what’s it going to take to bring you back to the glory days?
We believe there’s a lot of organic growth in our current businesses, combined with Sinclair’s businesses, who we recently purchased. What we take for granted today in the Western world; you are in your car and you have internet, you go home you have internet, everywhere in between you have internet, this is not the norm. There are billions of people who aren’t connected today, they don’t know what Google is. And so we trying to capture the opportunity to get all those people connected. We think there a a lot of growth there. Aside from the organic growth, we think there can be inorganic growth for us. We are looking to acquire three to five companies between now and 2015. But We’re not looking not to consolidate the space. We have a differentiated product, we have a customer base that’s quite technology savvy. We’re looking to expand our product offering to those customers and to add new markets and new market verticals. We want to add customers in the resource sector. In mining, oil and gas they are operating in remote environments all the time. They are looking for connectivity too.
I want to talk about your recent deal with the First Nations in BC for emergency services. Could that act as a sort of pilot project that might be replicated in other areas around the world?
Absolutely. We actually started with communications for remote villages in Africa. We had an initiative back in 2009 where we had a pilot project that connected small homes and villages, schools and hospitals using Wi-MAX. So we are using a very similar technology with the First Nations in BC. We are bringing satellite into a community and we are connecting from that satellite dish to the homes using Wi-MAX or ruggedized Wi-Fi, depending upon the application. Today we are connecting seventeen communities in BC, providing them with e-education, e-health services, video conferencing. We just had them here for training a couple of months back. The response was just amazing. They were so happy with the technology.
They were completely unconnected?
Well, prior to this program they were actually writing the government and telling them that the the lack of connectivity was so dire in some communities that people were dying because they can’t get a call out to an ambulance. They have children that want to be educated, but they don’t want to relocate from the community into a larger urban area. We have the technology capable of solving these problems, it just the opportunity to expose them to it.
You wonder whether if there were better communications with the outside world in Attawapiskat there would have been early warning signals before things got to an absolutely horrible state.
Yes. But it’s more than just technology. It’s a social fabric. This technology helps to build a network, build trust, relationships. It facilitates communication.
Let’s talk about the levels of penetration for this technology. There’s still a lot of market share to be had, isn’t there?
Other than the really big cities, coverage can be a problem. Even if you drive a few miles outside of those places there are parts where you can’t get coverage. There are so many communities that have to at best rely on one of the major cellular networks to come, and that can take years. If We can help provide coverage in Iraq, Afghanistan and Africa, then we can definitely do this at home. The adoption curve of cellphones, -there are many people in the world who don’t have a bank account or a permanent address, but have a cell phone- that curve is beginning to happen with data.
That’s what struck me about some of your recent sales, they seem like early adopters, not mature market sales. I’m thinking of NATO, for instance.
Most technology adoption starts with the military. They identify a need and have big dollars to throw at the problem. We began by selling t o the US military, and now we sell to fifteen militaries around the world. In the last few years there has been a lot of political instability around the world which supported the R&D. We have this great product, now we want to take it down the technology curve. We are staring to look at high-end commercial customers such as utilities, transportation, oil and gas. They have fairly deep pockets and an extreme need for communications in remote environments.
Would you characterize your 2012 as one in which you will try to move to the broader part of that curve?
Yes. We know that US military spending was really great for the last few years, and we see that softening. At the same time we have expanded to other militaries around the world, some of whom may be less affected by the war in the Middle East. We want to spread outside of that niche. We started with the broadcasters, then governments, and we want to tackle markets like mining, forestry and oil and gas. Sinclair has a lot of customers in the commercial space, and they have a really good reputation, like Norsat. It’s known for quality and reliability and we saw them in multiple places that we were in, like the Olympic Games or the G20 Summit, where Sinclair antennas were used. The BP oil spill, Sinclair antennas and filters were there as well. We felt it fit into what we wanted to do, which is to expand our product segments in commercial markets. We also really liked their customers.
Could you provide me with a specific example is which you are improving communications? Tell me what is being used now and how Norsat’s solution is better.
OK. Take fishing vessels. A lot of maritime vessels have been using IMARSAT. You’ve probably seen the satellite phones that charge like twenty bucks a minute. Those were fine ten years ago, you’ve got to have one on your vessel in case you are in stormy seas, you might need to make that emergency call. But today, we can equip that vessel with V-SAT terminals which have gyro sensors that can rotate and find the satellite and track it and you can be connected all the time.
What’s the price difference?
It depends. If you are going to use that INMARSAT phone all the time, you are charged by the minute. It can get pretty expensive. And the connectivity is akin to phone line access. It’s like dialup. The hardware can be expensive as well. Our solution is cheaper on the hardware end and obviously cheaper to use in the long run.
So you’ll be moving into many different markets with the Sinclair acquisition. How long have you been eyeballing them?
Well we know them very well. We knew their engineers by name. We were actually talking to them two years ago, but the timing wasn’t right. But last year all the stars aligned. We had the money in the bank and we also good a really great loan from HSBC.
It’s a good time to do debt financings, isn’t it?
Yeah, I thought rather than selling shares and diluting our stock at this price I thought that was the best way to go for our shareholders. And we can pay it off fairly quickly because Sinclair is profitable, we’re profitable. I think we will pay it off within four years.
Was that a good feeling, being able to go out and do something aggressive, business wise? You have played a lot of defense for a while…
One of the things I always say is “never waste a good recession”. Had this been the tech boom days, companies we would like to acquire would be ten times the price. So we might as well pick up a few while there’s a good recession out there.