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TMF Interview With PairGain Technologies Inc. President and CEO Michael Pascoe

April 30, 199

With Brian Graney (TMF Panic)

PairGain Technologies (Nasdaq: PAIR), based in Tustin, California, is a provider of digital subscriber line (DSL) networking systems and access products to telecommunications carriers. With the growth of the Internet increasing the need for bandwidth and broadband access, PairGain has seen its annual revenues jump from $59.5 million in 1994 to $283 million in 1998. We spoke with president and CEO Michael Pascoe about the company's new products and prospects for growth in the broadband communications market.

TMF: What is PairGain's vision for the communications market of tomorrow and what is your company trying to do in that space?

Pascoe: Our vision is very much in line with what you're reading today and that is the move more and more toward a data-centric world. It doesn't take away from the fact that voice is still very much the dominant revenue source for the carriers. However, moving forward the role of data will become without a doubt predominant. So we intend to play in that space. We intend to support the evolution, if you will, from a voice-centric to a data-centric environment out there.

"Our vision is very much in line with what you're reading today and that is the move more and more toward a data-centric world."
We also recognize that our role is very much in the access side, and more specifically broadband access. And as we look at the driving applications that are driving the services that the carriers are offering, they are more and more being driven by broadband application requirements -- whether it be for the Web itself or ERP [enterprise resource planning] software or e-commerce applications or more of a general use of the network itself or whether it be for video or image transfer or whatever. The actual applications are driving the need for broadband and that's clearly where PairGain is positioning itself. It's a combination of a move toward more of a data-centric world and the driving up of the bandwidth needs of the access world.

TMF: You talked about bandwidth. The main two technologies going head to head are DSL -- which is basically what your company is all about -- and then also broadband cable. One brokerage report put DSL users at about 40,000 and broadband cable at about 600,000. Are these figures accurate and why is DSL technology still lagging behind cable modems?

Pascoe: I think the figures may not be 100% accurate, but the ballparks are correct. I believe the primary reason for this lag in DSL has to do with the technology being accepted in the market place and that is happening as we speak. Most of the carriers -- incumbent carriers and more and more the emerging or CLEC [competitive local exchange] carriers -- are moving toward offering DSL services. In our opinion, the growth going forward of DSL will be quite dramatic and we will certainly see over the next few years the DSL numbers being in line with the modem numbers and, without a doubt, overtaking them.

TMF: Do you think both of these competing technologies can exist five years from now or will there only be one winner?

Pascoe: No, there will definitely be competition. The cable companies are going to be players and the carriers are clearly players and are going to become very large players in this space. There's room for both of them. I do believe the carriers will be the more successful over time, even though they are at this point, as you stated, in the lower market position.

TMF: America Online (NYSE: AOL) has recently signed some DSL agreements with some of your clients, such as SBC (NYSE: SBC) and Bell Atlantic (NYSE: BEL). Will you see any direct benefits from those agreements?

Pascoe: Sure. The whole world of working in the portal environment and creating relationships with companies that provide these portals is a very healthy step for us. It's certainly going to help the carriers themselves become successful providing those types of services and of course their plan is to use DSL. That speaks to the opportunity that we hold.

TMF: What's your take on the general telecom/datacom convergence that's been taking place over the last couple of years? How does PairGain fit into that trend?

Pascoe: Well, PairGain is very much focused on the access and our background, our strength is DSL -- HDSL specifically. We're the number one player in HDSL [high bit rate digital subscriber line] in the world today. That comes from an awful lot of work with the copper loop and maximizing its utilization, given that the copper loop is still the predominant access vehicle and will be for an awful long time. The opportunity for PairGain to be a key player in leveraging that loop with carriers is what we intend to take advantage of.

"So we have, if you will, the core products in place to be successful in the evolving voice data market."
As the world moves more and more toward data services including voice over data, voice as data if you will, that will still require people to get that [data] from residences or from businesses into the network itself. That access point is what we speak to, and we're very good at. So PairGain moving forward will be very much the broadband access supplier in that industry, in that market place.

TMF: DSL products have seen their average selling prices decline continuously, almost like the market for PCs and CPUs. How do you plan to keep profits up or grow them in the future under those kinds of market conditions?

Pascoe: In actual fact, the issue is not just to be a supplier of DSL paths, in which you are right -- there is serious price competition there. [We want to] become much more of a value-added supplier. That allows us to address the much more complete picture that the carriers are looking for, such as supplying support of and managing policy control of the network itself.

So you are not just providing a DSL path, you are also determining the Layer 3 information and how to route that path through the network. Doing that at the access point makes the network much more efficient by providing that capability. Similarly, [we are] working into the carriers' back office and helping them with a whole range of what I call professional services, whether it be service destination, development, and deployment, or perhaps even supporting the financial side for the emerging carriers. These kinds of activities allow us to provide a lot more value than solely at a DSL level.

TMF: On a different topic, has last month's hoax involving PairGain shares changed your mind about the future of the Internet in any way?

Pascoe: No, it clearly showed the exposure that the Internet has to poor use as well as good use. And while it was a disappointment, it certainly didn't change our mind about the medium's potential.

TMF: It didn't destroy any confidence in the Internet, especially since the growth of your products is really fueled by the Internet?

Pascoe: If you take one approach, you can show the Internet has become very much a mainstay vehicle for communications and in that particular case, it's not the type of communication that you're happy with. But it does show the power of the Internet and, quite frankly, you can twist it around to show how important the Internet is to us. It certainly doesn't remove the importance of the Internet. It actually highlights how important it can be.

TMF: What have been some of your major initiatives since coming on board as CEO last year and how are those initiatives progressing?

Pascoe: As with any company, you have to look at the strengths and weaknesses of it and try to enlarge or enhance those strengths. And clearly our strengths are in our knowledge of the loop and the development of chips that allow us to address very cost-effectively the needs of our customers. The plan, of course, is to continue to leverage that expertise into stronger products and a greater range of products.

In terms of where I saw need for improvement, that had to do with what we were talking about and enhancing our ability to provide value to the customers beyond strictly the product. Addressing that need is important to us. Similarly [important] is the opportunity for us to enhance our international market place. I believe the opportunity for PairGain in the international market is very significant. We need to address that with the initiatives of key people and key programs that will raise our percentage of the market for our products internationally.

"...we believe that the predominant residential and business broadband access service will be through DSL."
And there are certain things that we've tried to do in looking at the potential for partnerships. When we look around we see, for example, potential partnerships where we can work with other companies [that can] help us enhance our products and our product selection to our customers. We'll continue to look into ways to work with other companies, whether it be through partnerships or even acquisitions. One of the clear opportunities for PairGain is the ability to look at ways to enhance our product line. With a significant or very strong financial balance sheet, we can do that through a number of vehicles.

I guess another very important direction that I've seen is the introduction and launch of our Avidia platform. I do believe that platform is the key to PairGain moving forward in terms of staking out a very strong value-added broadband access position. Recognizing that the carriers around the world are moving towards IP [Internet protocol] and packet and cell fabrics in their networks, the Avidia product allows us to play in that space by providing a multi-service ATM [asynchronous transfer mode] end-switch that supports a whole host of services for IP.

So we have, if you will, the core products in place to be successful in the evolving voice data market. Our products, specifically the Avidia product line, are gearing toward that. One of the key initiatives moving on is to make sure we are successful in the launch of that product and support of that product.

TMF: Regarding Intel's (Nasdaq: INTC) planned acquisition of Level One Communications (Nasdaq: LEVL), which you work with on HDSL chipsets, how is that going to affect PairGain and the xDSL market overall?

Pascoe: Well, anytime Intel steps into a space it's healthy for the market, perhaps not for Intel's competitors, but very healthy for the market. We see Intel's move as further confirmation of the importance of DSL and it helps to drive the success of DSL in the loop. When you look at the ability to drive DSL chipsets' pricing down, that itself creates an environment that speaks to DSL usage. Of course, that's good for PairGain.

TMF: Finally, where will Pairgain and the xDSL industry be in five years, if you can actually project that far ahead?

Pascoe: Well, five years is a long time in this industry. I tend to talk in two or three years in long-range planning. However, I believe that five years from now the environment will be significantly changed. And that should come as no surprise given the Internet is sort of driving all of these activities. We will certainly see DSL service offerings widespread.

There will of course be alternatives, such as cable modems. However, we believe that the predominant residential and business broadband access service will be through DSL. With our strong existing product line, our very strong subscriber product line, and our HDSL products combined with our ATM switch, we believe we will be one of the dominant players in that industry in terms of suppliers of DSL carrier equipment.

TMF: I'd like to thank you again. I appreciate it, Mr. Pascoe.

Pascoe: OK, thank you.

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