Payroll cuts to help Tropic weather storm

Almost as a testament to Canada’s unruly communications sector, Tropic Networks Inc. has capped a tumultuous 2002 with layoffs, a change in direction and – despite everything else – increased venture capital funding that the company says puts it in a strong position for the new year.

The Ottawa-based equipment maker, focused on the metropolitan area network (MAN) space, in December announced plans to chop 25 per cent of its workforce. Approximately 40 people have lost their jobs with the start-up firm.

The payroll purge coincides with a new direction for Tropic, according to the company’s vice-president of marketing and business development. Whereas it planned to roll out Ethernet switching services for its optical transport platform, the TRX-24000, Tropic for the moment will focus on the product’s dense wave division multiplexing (DWDM) capabilities, said Rob Lane.

“We’ve taken a decision to really park the Ethernet side of the business, primarily because we’ve seen a slowdown in Ethernet switching applications. Clearly as a start-up, you have to focus on where you get your early wins. We’re focussing on DWDM.”

Lane said Tropic is simply following the market, which is less bullish about Ethernet than it was a couple of years ago, when numerous start-up communications firms bought into the technology. Many of those were competitive local exchange carriers (CLECs) that faltered and left the Ethernet market flat, he pointed out.

“I think a lot of the noise was coming from new carriers. Because the newer carriers were coming in with these new services (like native Ethernet), the larger carriers started to feel under pressure to address the space as well.

“Clearly, some of the smaller carriers have gone away and the pressure on the larger carriers is no longer as strong as it was. That’s why there’s been a slowdown to some extent. Some of the competitive pressure has gone away.”

At press time, Lane said it was too soon to disclose Tropic’s customer wins.

“We’ve been through a number of trials, including a live trial. The product’s been signed off for purchase and we’re closing the customer.…There are a number of customers in that situation.”

Roberta Fox, an analyst with Fox Group Consulting in Markham, Ont., said Tropic’s prospects lie outside of North America. In Canada and the U.S., carriers are holding back on facilities spends, but elsewhere network operators are buying new equipment.

“The only place where facilities are still being built is on the international front, like South America,” she said, suggesting that Tropic should look far afield for future clients.

Closer to home, Lane said Tropic is talking with its backers to make sure the firm is buoyed through trying times.

“We’re making very good progress on achieving an extension on our financing, US$20 million.…We’ve been very fortunate that we haven’t had to go out into the broader market, which certainly helps. That funding will help take us to cash flow positive.”

Since its inception in 2000, Tropic has seen its share of ups and downs. The company that summer announced it was “up and running at the speed of light” with plans to market a unique MAN device, and US$10 million in the bank. The TRX-24000, Tropic’s all-optical platform, came with wavelength management capabilities that offered the control network operators expect from optical-electrical-optical (OEO) systems, as well as the efficiency of “all-O.”

But the firm went into stealth mode from September 2001 to May 2002. According to Stephen Beamish, Tropic’s director of market development, the move was prudent.

“It was a cautious decision to go under the radar, stay stealth,” he said during a visit at Network World Canada‘s offices in Toronto last year, “until we were ready to come out with the product announcements.”

Prior to the company-wide silent treatment, Tropic secured US$60 million in funding. But some of that money, announced in February 2001, came from Enron Broadband Services, the networking side of the beleaguered energy giant.

Enron in 2001 filed for bankruptcy protection after the truth behind its fortune -involving shredded documents and funny fund handling – landed the firm an investigation with the U.S. Securities and Exchange Commission (SEC).

But Enron’s woes barely touched Tropic, Beamish said.

“The money was in the bank. It had no effect, so we maintained the $60 million.”

In October 2001, Tropic let go 25 staff members, said Ed Dziadzio, the firm’s director of product marketing, during the interview at Network World Canada‘s offices.

“That was really a proactive move,” he said, explaining Tropic’s mindset at the time: “We’re in the economic conditions we’re in, we have funding, let’s make sure it lasts. That adjustment (the layoffs) helps us make sure we can carry through well into 2003.”

Lane echoed that outlook when he talked about the latest cuts. He suggested Tropic would return to Ethernet when the time is right. Meanwhile, watch for customer-win announcements early this year, he said.

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