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To say that the telecommunications industry, and in particular the wireless segment, faced
a very difficult year is an understatement. We are not satisfied with our results, but
considering the market and economic environment we look on fiscal 2002 as a year of
accomplishment. I would like to step back and try to candidly answer some important questions.
1. What happened to the wireless communications industry?
Investors lost patience with the industry's strategy of growing network infrastructure
and subscribers without a short-term payback. The industry has had
one primary objective: aggressively grow subscribers by offering ubiquitous,
feature-rich coverage at a very low price. Today the "build it, grow it, and profits
will come" strategy is over; investors want financial results, profits and cash flow,
NOW! Until this happens, capital will not be easily available and the necessary
infrastructure build-out will be slow.
2. When will the industry turn around?
There is huge pent-up demand for wireless communications services--voice,
data, and video--and relatively low user penetration. There is not overcapacity;
the dropped calls we all experience are evidence of this. Beyond mobile wireless,
the need for fixed wireless "last mile" connectivity (from the fiber in the street
to the building or home, and from building to building on the campus) and for
in-building wireless systems is dramatic. The adoption of wireless as a way to
communicate from mobile and fixed locations has just begun.
For us to begin to see robust industry growth, we feel four fundamental things
must change: 1) Subscriber services must become profitable to the carriers and
providers in the short run. Cost of subscriber acquisition, which includes phone
subsidies, must be reduced and subscribers must "pay as they go" for the services
they use; 2) The capital cost per user of the network infrastructure, the "grid",
must be reduced; 3) Carriers and service providers must focus aggressively on
their operating activities and costs. Inventory carrying costs and write-offs and
operating costs must be dramatically reduced; 4) 3G and user-friendly data
applications and services must become an industry-wide reality.
3. Why did TESSCO outperform the industry?
In last year's letter I stated, "Going forward, our goal is simple:
grow earnings and return on equity regardless of market conditions. We have the
value proposition, balance sheet strength and operational capability to achieve this
goal. All efforts will be focused on driving productivity and market share . . . ."
This year we achieved operating productivity improvements, which allowed us
to continue to invest in growth capacity. Total expenses, including interest and
other expenses, remained essentially flat, while we significantly invested in our
sales, marketing, information technology and distribution capacity to drive and
fulfill future growth.
Also, we believe we increased our market share, as indicated by our modest
decline in revenues relative to the significant declines of other industry participants.
We achieved these results because of our dedicated, committed and talented
team, value proposition, diversified mix of both products and customers and
disciplined focus and execution of our plans.
4. What are TESSCO's expectations, objectives and initiatives
for this fiscal year?
We expect continued uncertainty throughout the balance of calendar year
2002 with no real consistent industry growth before early 2003. However, it is
important to recognize that there is a large embedded base of network infrastructure
and subscribers. This large market, consisting of base station sites
needing repair, maintenance and enhancement and subscriber handsets needing
accessories and repair, represents TESSCO's primary opportunity. Our continued
growth is dependent upon gaining a bigger piece of this existing market.
Our goal for fiscal year 2003 is GROWTH! We will strive to grow our capabilities,
talents, solutions offerings, customers, revenues and profits, regardless of market
conditions. We will grow sales and profits through continuous improvement in
market share and productivity.
5. How will TESSCO increase its market share?
To grow market share, we will develop, at a faster rate, TESSCO® brand
product plus supply chain solutions customized for the broad markets we serve.
These solutions leverage our Knowledge, Configuration, Delivery and Control
(KCDC™) engine, and provide our customers what they need, when and where
they need it, reducing the costs and risks of inventories. Our KCDC™ engine gives
customers decentralized decision-making under the control of central policies.
Many of our solutions include web-based e-business and supply chain innovations
that make it easier and less costly for our customers to do business. We will
seek to a) achieve a higher share of current product categories purchased by our
customers, b) expand the product categories purchased by our customers, and
c) continue to acquire and sell more customers on a monthly basis. While we
focus on organic growth, we will continue to search for acquisitions that integrate
with our core strategy, expand our customer and/or product base and leverage
our operating platform.
To build market share in the western United States, Canada and Mexico, we
expanded our presence and capacity by acquiring a new facility in Reno, Nevada.
This expanded logistics center, which should be in operation by the fall, will
replace our current leased facility. It will be used to configure and fulfill infrastructure
solutions, provide capacity and disaster backup for our Maryland-based
Global Logistics Center and provide a platform for the growth of our market
development and sales teams.
Our marketing initiatives can be summarized as follows:
- Network infrastructure . . . integrating the base site logistics.
Our core offering for PCS, cellular, and land mobile radio will be
enhanced by expanding site support and telco interface products.
Additionally, we will greatly increase our fixed wireless broadband and
homeland security solutions. These product offerings are integrated with
TESSCO supply chain solutions, allowing customers to receive a configured
delivery to the point of construction or installation to reduce inventory
storage, write-offs and handling costs.
- Mobile devices and accessories . . . keeping users and subscribers on the air.
Commercial dealer, value added reseller (VAR) and retail programs are
being expanded to provide a) new revenue opportunities, b) higher "sell
through", c) lower inventories and write-offs, and d) higher end-customer
satisfaction. These product offerings are combined with direct-to-store
delivery and automatic replenishment to lower supply chain costs.
Retail in-store merchandising solutions will be leveraged by providing
"affinity" toll-free sales hotlines and online stores. TESSCO's current
private label Web sites are designed to be deployed with other carriers
and agents to present and sell handsets and airtime contracts. Carrier
programs are focused on lowering the costs of subscriber acquisition and
support, and increasing their lifetime value.
- Test and Maintenance . . . keeping engineers and technicians productive.
We are expanding our offering of components, test equipment, shop
supplies and tools to support the repair and maintenance of base site
infrastructure and subscriber devices. Direct-to-technician database
marketing will expand our reach into this large market.
6. How will TESSCO achieve greater productivity?
To increase productivity we will continue our disciplined methodology,
collaboration and rigorous project management. We are striving to eliminate
"local-departmental optimization" to achieve productive throughput of the total
TESSCO system.
Our planned productivity improvement initiatives are numerous. Some are:
- Endless pursuit of the elimination of what TESSCO calls "DEW buckets"--
areas creating Defects, Errors and Waste--that drain productivity.
- Implementation of flexible fulfillment capacity systems that will allow
productive responses to swings in order input and customer delivery
requirements.
- Improve "demand-side" forecasting methodology and systems to raise
order completion with lower inventories and write-offs. We are now developing
build-to-order capabilities as well as enhanced forecasting and
purchasing systems, which utilize the measurement of user consumption,
in addition to purchase history.
- Integrated coordination of our three facilities to drive complete, on-time and
error free delivery to customers with lower total freight and operating costs.
- Lower the costs of customer and vendor transactions and raise the return
on inventories and accounts receivable.
- Utilize e-business systems to drive higher productivity of our team members.
- Continue to enhance the features and adoption of TESSCO.com®.
Revenues from orders placed on TESSCO.com® now account for 19% of
our total revenues. Customers using the site purchase more often, and
have fewer order entry errors, and lower transaction and service costs.
- Utilize more aggressive database marketing to drive sales effectiveness
and productivity.
- Generate new revenues from our Wireless Product Knowledge System
(WPKS™), industry standard Solutions Guide, Wireless Journal® and
Transmitter® publications, and Product and Brand Development services.
- Leverage our Nevada presence to drive market share in the western
United States, Canada and Mexico.
7. How is TESSCO positioned for the future? How and why can
TESSCO achieve its goals?
Our foundation for growth is in place. Our team members, management
methodology, intense customer focus, value proposition, operating platform and
e-business capabilities position us for revenue and earnings growth. TESSCO
team members, at all levels, are committed to innovation, excellence and results.
We have built a culture and reputation of delivering superior customer service, with
a goal of ever-improving productivity. Our people are committed to building long-term
revenue and earnings growth, regardless of market conditions. We strive for
performance through dedication and relentless attention to the details of our
simple and unified strategies.
The current state of our markets is helping us demonstrate to our customers
the benefits of deploying our fundamental value proposition: delivering what you
need, when and where you need it®. Our customers are beginning to understand
that, for them, inventory is not an asset--it is a liability!
8. What are TESSCO's future goals?
We are focused on a fundamental industry with outstanding long-term growth
characteristics--communications--making it possible for people to communicate
their business, joys and hopes, wants and needs, thoughts and ideas, through an
ever-improving choice of media. We want to be The Vital Link®: the primary supply
partner to the companies and individuals that are designing, building, running,
maintaining and using the technology systems that are the backbone of the wireless
communications industry, and the primary distribution partner to the world
class manufacturers of the products that make wireless work.
The boom and bust period of the past 10 years has reinforced the strength of
our convictions as we move forward. Our passion and our goal is to continue to
build an enduring corporation, an institution, with a culture and commitment to
serve customers and manufacturers, and build shareowner value. We will
continue, but at an accelerated pace, to focus on the combination and match of
driving marketing innovation and operational excellence. We will continue our
journey of building on our successes, brick by brick, to grow revenues, profits and
shareowner value.
In closing, I want to thank you . . . our shareowners . . . our customers and
manufacturers . . . our Board of Directors and team members . . . for your support
and commitment to our vision.
Sincerely,
Robert B. Barnhill, Jr.
Chairman, President and Chief Executive Officer
Barnhill@TESSCO.com
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