Pinnacle Shaken at the Top

Pinnacle Systems President and CEO J. Kim Fennell has resigned, and the company's board of directors has appointed Charles J. Vaughan, a current board member, to replace him until a successor is named. The company says a board-directed search for a successor is under way.

"He took responsibility for the results," says Ajay Chopra, president, Pinnacle Systems broadcast and professional division. "He's a great guy, and I enjoyed working with him, but, unfortunately, the last three quarters' results have been below market expectations."

Fennell's resignation came on the first workday following the Oct. 31 earnings conference call for the company's fiscal first quarter 2004. Net sales by the supplier of video-editing software had increased 3% over a year ago, from $68.57 million to $70.92 million. But pro forma non-GAAP net loss for the quarter was $8.39 million, or 13¢ per share, vs. income of $4.19 million a year ago. On the earnings call, Fennell pointed to a drop in U.S. consumer business, saying the company fell short of net revenue numbers and significantly missed its profit target. Sales in the broadcast and professional division were $34.28 million, down from $35 million last year but still hitting estimates.

"Out of the $34.3 million in revenue in our broadcast and professional division this past quarter, over $28 million was specifically in broadcast," Fennell said, according to a transcript of the earnings call provided by "Out of the $28 million, roughly 50% was in network solutions."

The success in the broadcast and professional division couldn't offset difficulties in the consumer division, particularly here in the U.S. One of the problems Pinnacle ran into was that the steps taken by retailers to make it easier for consumers to take advantage of rebate programs drove the number of rebates up substantially.

"Rebate rates were typically around 30%, but now they're around 85%. Frankly, as managers, we should have known that would happen," Chopra explains. "We knew it was happening in the retail channel, but we just didn't predict it accurately enough."

As a result, quarterly cost of sales jumped from $31 million last year to $37 million, and costs related to sales, marketing and service rose from $19 million to $25 million.

Fennell joined Pinnacle in June 2002 as part of the company's search for someone who could lead it into its next level of business. He had previously worked at Octel, Unisys and Rolm. But he entered Pinnacle at a challenging juncture: The company was not only dealing with difficulties in the global economy but also was shifting its business, relying less on hardware incorporated into third-party products like Avid's or Discreet's and more on introducing its own products.

"I do believe the tough past is behind us, and we're going to show real improvement in the next few quarters," says Chopra. "We're sitting on $100 million cash, have no debt, and our broadcast side is stronger than ever, and our consumer business will be very strong."

Vaughan is well versed in all aspects of Pinnacle's operations. He was the lead investor at the company's founding in 1986 and has been on the board since then. He has been a partner of VLCO Investments, a private investment firm he founded in 1985.

"Deliberate speed for me is the word," says Vaughan in regard to the CEO hunt. "I can't see it happening in three months, and I can't see it going much longer than that either."