Kevin Conlon, President, Palomar Technologies

Kevin Conlon joined Palomar Technologies (Vista, Calif.) in 1997 as vice president of sales and marketing, and was promoted to president in 2001. Prior to joining Palomar, he spent 18 years in Silicon Valley, where he held a variety of management and executive positions in the semiconductor capital equipment industry. In addition to 10 years at Applied Materials in product marketing and operations management positions, he also was director of marketing for Novellus Systems and executive vice president of sales and marketing for Genus Inc. Conlon received a BSEE from the U.S. Military Academy at West Point, and an M.B.A. from Santa Clara University. Palomar Technologies designs, builds, integrates and supports automatic high-precision machinery for the assembly and test of broadband packages — often referred to as first-level interconnect in microchip manufacturing.

SI: Like everyone in our industry, you've been affected by the current sharp, long-lasting downturn. How have you been impacted?

Conlon: The business climate has been as difficult for us as for anyone else who has a portion of his business tied to telecom. If you compare our sales in 2002 to our peak in 2000, we ran about half the revenue level. From a market share perspective, however, we have done rather well. This was one of three goals that we established for the downturn: to take market share, conserve cash and continue investing in our future.

SI: How's 2003 shaping up?

Kevin Conlon (Source: Palomar Technologies)

It looks like wireless will be a stronger market than wireline. Again, I don't think that this will be a barn burner of a year, but it'll be an up year as mobile computing gains traction, such as Internet "hot spots" supported by 802.11b, for example.

While many consider us mostly a telecom player, we've diversified our business. We're now participating more in the military market, which is a legacy market that we used to play in some years ago and is presently benefiting from increased defense spending. We've increased our business efforts there because we have existing relationships with other customers from that market segment. The automotive segment has also been picking up. During the earlier part of 2002 we had a run on equipment being sold to support the disk drive business. Our technology is being used in connection with miniaturization — they're building smaller drives for consumer items such as digital cameras, etc. Sales of our products into these segments have mitigated the downturn's effects for us.

SI: How else has the downturn affected you?

Conlon: Cash conservation becomes a high priority when you're in a recessionary environment. It was important for us to diversify our booking efforts outside of telecom, to determine how to apply and sell our technologies across other markets to support our top-line sales. In terms of cost reductions, we've had several force reductions over the last year and some plant shutdowns. Beyond that, we're doing fundamental blocking and tackling to control our basic financials, such as carefully managing capital expenditures, our inventory turns, and improving our collections. Every week, my staff and I meet to discuss cash. Good cash management has given us the freedom to make strategic investments during this downturn that we might not have otherwise been able to make.

SI: What controls and cost-cutting measures are you implementing?

Conlon: The biggest have been workforce reductions, shutdowns and wage freezes. However, we opted not to cut wages. The people we need in the company once we pull out of this recession are very important for us, so we've tried to minimize the human impact of our financial sanctions. Any discretionary spending outside of head count has been sharply curtailed — travel, trade show attendance, that sort of thing.

SI: How would you describe Palomar today?

Conlon: Preparing for growth. We're focusing on two issues. Short term, one is getting through this downturn with our critical mass intact. Long term, we've taken a hard look at where we want to be in five years — what we need to do to be the leader in automation solutions for precision processes in the broadband, life sciences, defense and related industries. We've recently been successful taking market share aimed more at technology buys, not production buys, which are slow during a recession. We've maintained our investment in our direct sales force, made minimal cuts to our support infrastructure, and have expanded our presence in Asia, principally in China and Taiwan. A very successful new process development and support service business unit was launched in 2002 to maintain our edge in process applications — an industry first. We've responded quickly to market changes, with an eye toward getting through the downturn, and still get the design wins that we need to be well positioned to take advantage of the production buys when the upturn comes.

SI: Do you foresee the Asian market being of great importance to you?

Conlon: Certainly! It is obvious that China over the next 20 years will be the manufacturing center of the globe. In 2001, we put in a direct sales office in Asia that we operate out of Singapore. We've considerably increased our rep network. If you look at China, for example, it's a very big country — geographically and in terms of population. From an industry point of view, there are some four major manufacturing centers throughout the country. So we have hired multiple sales reps to represent us there, to ensure we have the right coverage of these centers. Similarly, in Taiwan, we made some changes to gain better access to the manufacturing industries there.

SI: Currently, what percentage of your manufacturing is done offshore?

Conlon: We presently manufacture everything in the U.S. Eventually, however, we may manufacture in Asia, perhaps in China to reduce cost and gain proximity to customers. Exactly when and how this might occur at Palomar is being investigated as a part of our five-year plan.

SI: Does the intellectual property situation in China concern you at all?

Conlon: Absolutely! The laws regarding protection of IP aren't as rigorously enforced there as they are here. This is a hurdle we must get over as we investigate the possibility of manufacturing over there.

SI: Is there anything you're planning to change in the company?

Conlon: Recently, we acquired the Fiber Automation Division of Axsys Technologies. This was significant for us because it added a critical piece in the manufacturing process chain that we didn't have before, and more than doubles our served market in wireline. It rounds out our product portfolio so that we can compete head-on with some of the major players. Now we have some of the best technology available for fiber align and attach, and manufacture in two locations: Vista, Calif., and Pittsburgh, Pa.

SI: How have the needs of your customers changed?

Conlon: As a result of the downturn, more and more they're demanding from their suppliers a total solution. They aren't interested in talking only about hardware — they also want the processes and support. This is becoming an increasingly acute need because many companies have substantially downsized. Many of their skilled engineers are no longer there. This is why they're becoming increasingly reliant on a smaller number of critical suppliers for process support. And in the equipment business, many companies have been damaged during the downturn, to the point where they've become irrelevant. So customers are placing increasing demands on getting process solutions as well as hardware from their stronger suppliers.

SI: Looking ahead, what do you consider your next growth areas, and how are you planning for them?

Conlon: Long term, the broadband markets will fuel much of our growth. We also plan to continue to expand our presence in the military market, and we're working on automating processes in the life sciences area — medical devices, biotechnology, pharmaceutical manufacturing and so forth. We find that the technology for mass-producing some of the products manufactured in these areas is not very sophisticated by semiconductor industry standards, or even those of the telecom industry. There's an opportunity for us to take our core competencies with respect to precision automation and manufacturing, and apply them to these industries. If you consider the aging of the baby boomers and the demands that this is going to put on the life sciences industry, there's a real opportunity there. We're already involved in the medical devices area, and are looking for ways to expand in this sector.

SI: You seem to have a well-defined growth plan. Is growth getting more difficult?

Conlon: Definitely! The wild spending days of the late 1990s are history and likely to remain so, for a while at least. I don't expect to see as large of a growth spike as we've had in the past. However, if you look at the overall global economy, you'll find certain areas that support fairly attractive growth. Being private, and of the size that we are, we can move very rapidly and change direction much quicker than many of our competitors. We don't treat change as our enemy — we've made it our competitive advantage. Our capability to embrace change quickly has us well positioned to capitalize on new opportunities.

SI: Does it seem that your growth will be principally organic, or will it be through acquisitions?

Conlon: Both. For now, our recent acquisition should give us the growth platform that we need for the next two to three years or so. Like others, we're always looking for strategic opportunities, particularly as selling prices for companies are depressed. But one must be careful, because most acquisitions are unsuccessful. You must be sure you're acquiring for the right reasons, not just to get a "good deal." You must be sure your customers will directly benefit from it, and that you can make it profitable.

SI: Which trends should we be paying more attention to right now?

Conlon: The biggest investment and technology driver now in our markets is the mobile Internet — making the Internet available to mobile computing devices such as laptops, PDAs, cellphones, etc. This technology shift has large implications for what happens on the wireless side of the business. With semiconductors, this will directly impact products like communications ICs. It's changing the way we approach packaging.

SI: Hopefully we'll see the end of the downturn this year. However, we still haven't climbed out of it, and already people are predicting when the next one might hit. Is there anything we can do to soften these extreme cycles?

Conlon: These cycles are always going to be with us. The question is how to mitigate their magnitude and duration. I have often thought what we might have done, as a company, to get out in front of the current downcycle. Just to be able to ship product and meet the demand, we had to add to our infrastructure. Then the demand dropped sharply and we had to react to that by downsizing more than once. The lesson we learned is that, when another of these cycles comes, we must react much faster than we did. Conversely, when the upcycle comes, quick reaction to it is also essential. In anticipation of things getting better, we've spent considerable time strengthening our infrastructure — we became ISO 9001-certified earlier this year, and we expect to put a state-of-the-art ERP system in place so that, when things pick up, we won't have to add as many people to our infrastructure in order to grow. We expect to continue spending an average of 15% on R&D to develop new products — this is crucial to take advantage of the next upcycle.

SI: What would you change in the industry?

Conlon: The way supply reacts to demand. As an industry, we don't do a good job of inventory control. No demand curve goes upward forever. In good times businesses tend to order too much, and the excess inventory triggers the downcycles. Only time will tell if we're getting smarter.