February 14, 2005
Interview with Todd Cutler, CEO Eagleware-Elanix
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
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How is the third international business split?

Two thirds in Europe, one third in Asia. Our hardest trouble is in Japan because they prefer to do business with a large, strong company that has been there a long time. It creates a hurdle for us to get over. So it has been less a major area of emphasis for us.

What I think I heard is that you have 2,000 customers and anybody who needs you product already has it, although perhaps not in sufficient quantity. Where would growth come from?

We make a full range of products that go anywhere from a few thousand dollars to tools that cost more than $50,000. So we have a presence, a foundation; a lot of it would be entry level tools where people started. Moreover, if we look at our customer base, we are pretty sure that there is somewhere between 60,000 and 80,000 people actively doing the type of designs that we help them with. We have 5,000 licenses, so that still just one for every 10 designers that are out there. There is just a lot of designs going on in the high frequency domain that we operate in. So I think it's a long way from being a saturated market. There are a lot of reasons for that. I think that one of the
main ones is technology and the evolution of technology. Is it ready? Has it been ready long enough for people to make the kind of investments to take full advantage?

What percent of the 60,000 to 80,000 TAM (total addressable market) does your 2,000 companies represent?
When you say that you have sold to a company like Motorola, Nortel or Intel, you can sell and be really dominant in one location but then in another location there is almost no penetration. So if you look at it from a company standpoint and ask where are we? If you pick a company like Raytheon, at one location we may be really strong player and at 30 other locations we may have minimal presence. If we look at TAM at a company level, at the highest level, and ask what percent penetration do we have. It would be very high. I would guess 70% to 80%. That's sort of the tip of the iceberg because there are so many unaddressed facilities and operations within many of these multinational
companies. So there is a great opportunity.

I understand that the company is employee owned?

If I could backup and talk operationally about what makes us different from other EDA companies that you cover. The first one is the company was bootstrapped, internally funded; there is no outside money in it at all. We make a lot of money. We just bought Elanix from our profits. Consciously, part of the culture which I like is that you grow gradually and make money along the way. It allows us to weather storms like a couple of years ago without salary cuts and without laying off people. In fact being in a position to make investments, to bring people on board in anticipation of the recovery of the market. So making money, growing the company moderately at say 30% (not a small
number) but not trying to grow 100% or 500% every year.

The other thing is that we are owned and controlled by the employees through an ESOP. Fifty-one percent of the company is owned by a trust that represents the interest of the employees. ESOPS are something the government set up to encourage employee ownership of companies. In particular they make it attractive from a tax standpoint for the founders of companies to basically sell the company to the employees. It's a retirement plan. We are talking about ERISA (Employee Retirement Income Security
Act), Department of Labor regulated plan that allows employees to gain significant ownership of the company.

It is interesting. With 51% it means that any decisions that are made at a structural or corporate level have to be in the interest of the employees. In many cases, for example if the company were to be sold, each employee would vote his ownership shares as to whether that is what he wanted to do or not. The idea behind this was one of the big changes in the company.

It really got set up coincident when I joined the company. Some people believe in employee ownership and some people don't. The people who do think it's a good deal, start thinking this is my company and how are we spending the money. The real gain for me is not necessarily what my raise is this year but how much is this company worth. The advantage we have over the traditional way where people get options is as we all know options can go under water and be worth nothing. People may be left with nothing. The way this works, people have ownership in the company, so it is always worth something. You have x% ownership until the company goes out of business. They really have ownership
and I think that they believe in it.

You have just had an acquisition. Lots of people were involved on both sides. How did that go?

It is a little bit awkward because as you go through this, you don't want to tell the world that you are in the middle of negotiating to buy another company. So the negotiations were done with board approval and negotiators came to a letter of intent. Once that was signed, we began working through it. We more or less informed the employees. Since we were not issuing any shares (it was an all cash deal) and since we weren't changing the capital structure of the company, then just as you would do at any company there was not a requirement for a shareholder vote just a board of director decision that you want to make this capital investment. We bought the assets of the other company. It
turns out that there was no requirement to pass through any sort of vote but what we did do was to make sure the employees were informed and had a chance to comment that that was crazy or whatever before final papers were signed. So in that case it was not a pass through vote but I would say that employees knew what it was about and were supportive of it. And I think everybody was pretty pumped up about the better position we are in the market.

Bought the assets. Are the former employees of Elanix now employees of the combined company?

Yes, absolutely. There are two ways to buy a company; buy all of its stock or buy the assets. The reason that you buy the assets, which is what we did, is any residual liability. Some ex-employee of the company comes and sues. They have to sue the old company. They can not sue us. The reason is to give yourself some protection against liability that you may not know about. Not that any of that is perfect. Basically, all the employees, all the intellectual property,.. have joined over. And we are glad to have them part of the larger familiy

What is the company headcount?

Elanix is about 25% of the headcount. We are about 3 to 4 times larger than Elanix was. The addition in terms of headcount was significant but manageable.

We are about 40 people, not quite there but we hope to be there by the end of the year. The most important thing to me is the people. You hear that all the time and I believe it. It's a tight job market right now to find the kinds of people we need. Maybe there part of the secret of growing at a regular rate. You don't have to make hiring decisions that you later regret.

When you hire somebody, do they participate in the ownership of the company?

Is there some vesting period?

Yes. They immediately from day one start getting contributions in the ownership, to their ESOP account but there is a vesting period. It takes 6 years to vest fully. Each ESOP plan may be different but basically after two years you are vested 20% and after six years it goes to 100%. That's a long term plan which is what we want. It's pretty serious money put away for these guys. When they leave the company, there is a little bit of a waiting period, and then they get paid out in cash. We promise to buy all of the stock back from them. So it is not a funny money kind of thing. It
is real money.

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-- Jack Horgan, EDACafe.com Contributing Editor.

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