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By ROBERT TRIGAUX
© St. Petersburg Times, published January 24, 2000
CLEARWATER -- Gerry Chastelet should be one rich and happy guy.
Since taking the reins at Digital Lightwave Inc. a year ago, the company has moved to jazzy new headquarters in Clearwater and its shares have skyrocketed an astounding 2,600 percent. That dazzling stock performance made Digital Lightwave the Tampa Bay area's hottest publicly traded corporation and one of Nasdaq's most successful stocks in 1999. It also made chief executive Chastelet into a millionaire (on paper) many times over.
A stock that traded as low as $2.50 and as high as $75 last year is still in the stratosphere. Shares closed Friday at $58.621/2. Each of Digital Lightwave's 185 employees owns shares in the company.
Thank the Internet craze. Digital Lightwave makes testing equipment that troubleshoots fiber optic networks -- the backbone of the growing Internet that carries massive volumes of data. The company's customer list reads like a Who's Who of the New Economy.
So why is Gerry wary?
Because young Digital Lightwave, a company that eked out its first tiny profit of $100,000 last summer, is suddenly in the unforgiving spotlight of a Wall Street fixated on Internet-related companies. And because Digital Lightwave has become a darling, of sorts, of the national media. Earlier this month, the company was the high-profile focus of the Wall Street Journal's front page lead story that in effect asked: Just how overvalued are these crazy, high tech Internet stocks?
With expectations and a stock price so high, what can Digital Lightwave do for an encore in 2000?
On a Monday morning two weeks ago, Chastelet and chief financial officer Steve Grant are seated in a spacious conference room on the third floor of Digital Lightwave's swank headquarters building. It's the same morning that the Journal published its front page story about the company and the difficulty of valuing high-tech stocks.
Not surprisingly, the two executives seem a bit startled their small company was chosen by the nation's premier business newspaper as the poster child for the debate about overpriced tech stocks. Grant holds a wireless Palm organizer so he can check Digital Lightwave's stock price throughout the day, even during a previously scheduled interview.
On that day, company shares opened at an impressive $62.75, but the Journal story seems to have hit a nerve with investors. The stock trickles south.
Digital Lightwave's three-story building sits northwest of the St. Petersburg-Clearwater Airport, just past the turnoff to the Bayside Bridge. The company's payroll is laden with engineers. The best research and development engineers are kept like royalty. After a St. Petersburg Times photographer takes a shot of an engineer at work in a lab, a company official pleads that the photo not appear in the newspaper. The fewer competitors that know this well-regarded engineer works here, the better.
Engineers not working in the second-story labs are in sales, pitching Digital Lightwave's principal product, a portable "network information computer," or NIC, that lets heavyweight clients such as Lucent Technologies, GTE, Nortel Networks, MCI and Cisco Systems test and monitor their fiber optic networks in the field.
A NIC looks like a well-built laptop computer. In the first nine months of 1999, the company shipped 810 units. At an average price last fall of $46,000, that's more than $35-million in sales from one product.
The devices are assembled in the manufacturing facility on Digital Lightwave's first floor. The company runs three shifts, five days a week. Because NICs often are used under rough conditions in the field, each unit is shaken, heated and chilled in a test chamber before leaving the company.
Back on the third floor, Chastelet dims the conference room lights and launches into his analyst presentation. He knows his stuff. He'll need to. He and Grant are heading to New York that week to tell Digital Lightwave's story at Needham & Co.'s second annual growth conference held at the Palace Hotel. (As it turned out, Digital Lightwave's presentation to invited investors was standing room only.)
Grant checks his Palm organizer again. The stock is down 14 percent so far, to $54. Poof! There goes a quarter-billion of the company's market value. Later that Monday, the shares will steady and close at $53.25.
Chastelet explains that Digital Lightwave is just scraping the surface of an enormous market for its products. As fiber optic networks grow -- and they will, Chastelet says, to handle the endless demand for faster data speeds, or bandwidth, for the Internet -- so will the need for monitoring devices to keep optical networks bug-free.
Digital Lightwave's next step is to sell its products, not as stand-alone portables, but as technology embedded within fiber optic networks. The company plans to sell its products overseas, where fiber optic standards are different, but the technology is no less in demand.
Wall Street seems to be listening. When Digital Lightwave on Tuesday announced a new portable product capable of testing fiber optic networks operating at much faster data speeds, the stock jumped above $60 for the first time since the Wall Street Journal story.
At 53, Chastelet is no stranger to the high-stakes, high-tech scene. Before joining Digital Lightwave, he worked in Raleigh, N.C., as chief executive of Wandel & Goltermann Technologies, another telecom testing company that was in need of a turnaround. He also worked at Gandalf Systems Corp., Network Systems Corp. and even at the Tampa Bay area's own Paradyne Corp. before it stumbled and was bought in 1989 by AT&T. He began his career as an electrical engineer at IBM.
Chastelet acknowledges Digital Lightwave is a company blessed with good technology and some luck. While thousands of small companies with promise are ignored by Wall Street, Digital Lightwave managed to catch the eye of an analyst in October when it reported a second straight quarter of improving earnings. After a favorable first report, a stock that was drifting along at $8 a share closed out 1999 at $64. Two more analysts have picked up Digital Lightwave and are helping to sustain its market momentum.
But analysts, such as Robert W. Baird's Ted Moreau, who cover Digital Lightwave acknowledge the company's stock price defies reason under traditional valuation methods. Said analyst David Kang of Cruttenden Roth in Newport Beach, Calif.: "It's ridiculous." But no less crazy than hundreds of other high-tech ventures.
Next Monday, Digital Lightwave will announce financial results for the fourth quarter of 1999. Analysts expect a strong performance, setting the stage for an anticipated near-doubling of annual revenues in 2000 to $72-million.
A few years ago, Digital Lightwave's future looked a lot less rosy.
The company, founded in 1991 by Dr. Bryan Zwan, a former Massachusetts Institute of Technology researcher, got off to a slow start. Zwan's personal ties to the Church of Scientology soon marked Digital Lightwave as a Scientology-affiliated business. That did not sit well with many company employees, and it may have put off some potential customers.
After the company went public in 1997, Grant joined as its CFO. He soon found problems in how aggressively sales had been booked and decided to restate the company's financial performance -- downward.
"We toughened our audit procedures and installed very conservative safeguards," Grant said.
But in the meantime, Digital Lightwave faced a wave of class-action lawsuits by shareholders. Most have been settled, though at least one suit remains on appeal. Last summer, the company agreed to an injunction to end an investigation by the Securities and Exchange Commission of the circumstances surrounding the company's restatement of earnings. A final agreement with the SEC is pending. The company faces other litigation as well.
"We're moving toward a resolution," Chastelet said. As evidence, he points to the positive comments appearing on Web message boards with Digital Lightwave as their topic, compared with the complaints of a year ago. "Shareholders are talking more about performance now," he said.
Digital Lightwave is trying to make a clean start. All of its executives are new, except for 42-year-old Grant. None are Scientologists, Chastelet points out. The company also relocated from Cleveland Street in downtown Clearwater near the Church of Scientology to its new offices off Roosevelt Boulevard. The company wanted better quarters, but the added distance from downtown does not hurt.
Finally, in July, the company replaced Zwan as chairman, giving the title to Chastelet, who remains CEO and president. The move ended Zwan's employment with the company and severed his day-to-day role with the company he founded.
Zwan remains a director and, significantly, the controlling shareholder of Digital Lightwave. With a 70 percent stake, Zwan's holdings in Digital Lightwave -- courtesy of the remarkable appreciation of the company's stock -- hover close to $1-billion.
Chastelet says Zwan's departure from management is typical of young tech companies that outgrow their founders and require professional managers. And while eager not to alienate anyone -- especially the majority shareholder of the company he runs -- Chastelet does want to send a clear message to investors and the Tampa Bay community:
"Digital Lightwave is not a Scientology company."