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For a man in the midst of his second equity bear market as chief financial officer of

Spirent (SPT), Eric Hutchinson is remarkably calm. Even though we meet just after his firm’s advisers, UBS investment bank, have failed to place a large block of Spirent stock and hurt the share price in the process, the Leicester University graduate remains unflappable and quietly confident about Spirent’s prospects. Hutchinson has been with the firm since 1983 and took over as finance director in 2000, just in time for the tech bubble to burst. Despite a subsequent overhaul and recovery, Spirent shareholders

were still only too willing to back activist investor Sherborne when it

took a stake in summer 2006. With the help of key institutional shareholders,

Sherborne then forced out the bulk of the management team that Christmas

and installed its own man, Edward

Bramson, as executive chairman.

That Hutchinson was one of the few

senior executives to keep his job was

clearly a compliment. Following a

detailed review of Crawley-based

Spirent’s worldwide operations,

Bramson’s team swiftly rearranged

product lines, paid down debt and

ripped out £31.7 million of costs.

Hutchinson is not perturbed

Sherborne tried to

sell its 17% stake,

albeit unsuccessfully,

after the

UBS glitch, or that

Bramson is

preparing to step

down from his

executive role.

‘He needs to

move on. He will appoint a new chief

executive, become non-executive chairman

and then sell down the stake

(Sherborne’s),’ says the 52-year-old

finance director. ‘His approach is to

look for solid businesses with good

products, that are fundamentally

attractive but with some sort of problem.

He will take advantage of the

share price, fix the firm, move on and

then do it all again somewhere else.

That’s his business. He operates in

public markets so he likes to leave

upside for those he sells to so he gets

their support for his next proposition.’

Substantial progress

August’s interim results revealed how

far Spirent has come in just 18

months under Bramson’s team. Sales

rose 6%, operating profit increased

more than four-fold to £21 million and

a first dividend payment in six years

was also declared.

Spirent provides test and measurement

solutions, both hardware and

software, to the telecommunications

industry. Spirent helps its customers

bring services and products to market

more quickly by thoroughly checking

their performance and inter-operability.

The performance analysis unit sells

primarily to equipment vendors, both

wireless and wireline, while service

assurance deals with network operators.

A third unit, systems, is a leader

in electronic motors and control systems

for wheelchairs and scooters.

Cutting-edge cushion

This focus on cutting-edge products

means Spirent should not be unduly

affected if end-market demand for

telecoms services or equipment stumbles.

Only if the cycle gets so bad that

tech and telecom firms slash research

and development (R&D) spending and

jeopardise future innovation will

demand for Spirent’s products and

services slide.

‘We keep very close to developments

at the OEMs [original equipment manufacturers]

and service providers and

to all technological changes. We are on

all the standards boards and make sure

we have developed the test devices to

help, say, Cisco engineer cutting

edge products more effectively,’

Hutchinson explains.

Within the performance analysis

unit, the chartered accountant accepts

growth on the fixed-line telecoms side

‘has matured a bit’ but he politely

rebuts any suggestion the business has

gone ex-growth. ‘It is all about the next

step. Internet protocol speeds are

Shares | 30 October 2008

The Griller BIG interviews with the people who count

With steady hands Eric Hutchinson steers the test and

measurement solutions provider through the bear market rapids

Spirent stands

firm in testing

times

30

Eric Hutchinson, chief financial

officer of Spirent

Shares | 30 October 2008

BIG interviews with the people who count The Griller

going from ten gigabits per second to

40 to 100 for data transfer rates and we

are also seeing more testing of how

applications behave over the network,’

he explains.

Hutchinson does accept top line

growth on the wireline side is likely to

be ‘steady’. On the face of it wireless

telecommunications offers better

prospects, as mobile communications

networks move beyond third-generation

(3G) technology and on to 3.5G

and 4G. However, the finance director

remains realistic in his expectations,

even as he expertly rattles off the

acronyms that refer to a wide array of

mobile technology standards (see

Shares 15 May for details)

‘The next phase is 3.5G for CDMA

handsets in the US and Asia, with the

emergence of new handset manufacturers,

and then handset data rates on

W-CDMA, with a move to 3.5G ahead of

4G,’ says Hutchinson. ‘We do have a

WiMax testing solution but I am not

sure we will sell many of them. We

have LTE too but it’s very early. We

have to be sensible on timing – I

remember a 1987 demonstration

of music downloading

and it didn’t work.’

Feet on the ground

Such a realistic approach is

welcome as Spirent operates

in rapidly moving markets

and technology stocks

all too often disappoint

when product hype runs

amok. Hutchinson’s experiences

in the tech crash on

2000-03 will clearly ensure

he will not get carried away

and do his best to make

sure investors do not forget

themselves either. Even so he does permit

himself a gleam of enthusiasm

when discussing global positioning systems

(GPS). ‘GPS is very exciting,’ he

asserts. ‘We are the world’s numberone

supplier of GPS emulation equipment.

It’s a market that’s constantly

growing and seeing more and

more applications.’

Performance analysis has come a

long way under the restructuring plan

launched by Bramson: gross margin

rose 400 basis points to 72%, operating

profits quadrupled to £18.5 million in

the first half while sales rose 9%. But

Hutchinson feels there is more to do.

‘Gross margin has increased and we

have a target of 78%. Then we’ll have

the ability to invest over 20% of sales

in R&D so we can innovate. If we hit

those sort of ratios then we will make

good operating margins and have good

operational leverage on the upside –

but also on the downside.’

Spirent’s performance analysis unit

is driven by telecom equipment vendors’

R&D spending but the company

also keeps a close eye on telecom operator

capital expenditure, the key driver

for the service assurance unit.

Talk of capex cuts at major US operators

Verizon and AT&T is a concern but

Hutchinson is aware of such matters

and argues the appropriate action is

already being taken. ‘There are always

parts of the market that are hot. Now

it’s wireless data, so if we are positioned

properly in the good areas we can still

make at least modest progress.’

A 4% decline in interim sales at service

assurance could have been worse

and Hutchinson is on his guard. Major

telecoms equipment vendors will be

scouring the operator capex data too

and some have already noted cutbacks.

I point out Corning, Ciena, Nokia,

Alcatel-Lucent and Tellabs have all

gently steered earnings guidance down

during the second half of this year.

‘They have slightly edged it down, I

agree,’ says Hutchinson calmly. ‘But

it’s not like past downturns when the

corrections were dramatic, and we are

seeing a whole new set of customers

appear in Asia and China’.

Control and resilience

Spirent’s guidance of 5% sales growth

for the full year from performance

analysis seems suitably conservative,

as it implies growth of just 1% in the

second half. This careful control of the

business also extends to the balance

sheet, where Spirent has been transformed

from a firm that had to renegotiate

its banking covenants in 2002 into

one with net cash.

‘We had gearing until February 2006

and we came out of that at the right

time,’ says Hutchinson with obvious

relief as the credit crunch continues to

bite. ‘We will now basically run the firm

on a cash-neutral basis.

We will not gear back up

and add financial leverage

to operational leverage as

we have come through

hard times and do not

want to jeopardise that.’

A £50 million tender

offer at 74.5p was proposed

subsequent to our

meeting but then abandoned

as the share price

fell below 60p. A new £25

million tender priced at a

minimum amount of 36p

and maximum of 60p has

been launched instead

and Spirent will use its cashflow to pay

further dividends. ‘The dividend is five

times covered and we would like to follow

a progressive dividend policy,’

smiles Hutchinson. ‘We will increase

the dividend as earnings increase and

we will keep cover fairly high’.

The perceived overhang caused by

Sherborne’s stake has dogged the

stock and could do so for a while yet.

But once this has been cleared,

Hutchinson’s calm confidence, plus

the firm’s shareholder-friendly cash

plans and increasingly attractive valuation,

all bode well for the future.