I'll have what David Milne is having

by Kate Pritchard - Thursday, 30th August 2007

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David Milne strides into the room. It’s 2pm and he’s bang on time for our interview. He’s a striking figure: tall (6ft), austere, with silver hair and dark, thick eyebrows. Milne sits down and frowns at his watch. “I’ve got to meet the financial analysts at three,” he says apologetically. For added pressure, there’s the small matter of an appearance on Scotland Today later that evening. We’d better make this snappy.

It’s no wonder everyone wants a piece of Milne. The chief executive of Wolfson Microelectronics – winner of the 2006 Entrepreneur of the Year and Company of the Year awards – has transformed a university spin-out into a FTSE 250 electronics powerhouse, supplying microchips to the likes of Apple, Canon, HP, Microsoft, Sony and Toshiba. Last year, the company generated a whopping $166.6m in revenue, with pre-tax profits of $38.7m.

Sales in the fi rst half of 2006 jumped by half. Milne is one of a rare breed of academics who has turned theory into commercial success. He was completing his physics doctorate at Bristol University in 1973 when Edinburgh University’s Wolfson Institute asked him to head up their microelectronics research. It was a chance to return to his home city of Edinburgh and to follow his father, an economics professor at Newcastle University, into academia. Milne seized the opportunity.

But he gradually started to feel frustrated by the confines of his academic remit and the Institute’s status as a research outfi t: “We were quite successful in our own way, but a lot of the value we were creating was ending up elsewhere,” he says. In 1984, he renamed the unit Wolfson Microelectronics. A year later, with colleague Jim Reid, he spun it out and ran the company as an independent microchips design house.

The big turning point came a decade later, in 1995, when Milne made the decision to transform Wolfson’s business model. Instead of designing specifi c products for each customer, it would design its own proprietary mixed-signal chips that it could sell to a variety of clients. Milne wanted to innovate and lead the market, rather than be dictated by it. “It was a big jump,” he admits. “Consultants told us that it was a terrible idea. But we went against their advice and did it anyway.”

He tapped into the growing market of consumer electronics and he struck gold. Things were taking off with the growth in portable computer games and personal music players. In 2000, the company signed up Microsoft as a customer and that sparked a domino effect. The other major electronics manufacturers followed suit.

Milne gestures to a table at the far end of the boardroom. It’s stacked with digital devices: an Xbox computer console, an iPod Nano, a Samsung MP3 player, a PlayStation Portable and a sprinkling of mobile phones and digital cameras. All run on Wolfson chips. “Almost any gadget that makes a noise has our chips inside,” he says. Pretty impressive for a company born in an Edinburgh laboratory.

Stoking the creative fires

But Milne’s success boils down to far more than simply spotting a growth market. He’s kept margins high by outsourcing the actual production of the microchips to Asia, leaving his company free to concentrate on the design and development of new products. “It’s an evolving market and we have to be innovative,” he says.

“We spend around 14 per cent of revenues on R&D. We will survive only if we have better products than the competition.” The company is maintaining that edge: it added 20 new products to its portfolio of 90 in the fi rst half of 2006 alone. Wolfson has also invested heavily in recruiting and retaining the best talent.

Over half of its 310 employees are engineers. The company keeps them skilled with regular training courses, and even nontechnical staff must attend seminars by external semiconductor specialists so they understand the fundamentals of the industry. Keen to support what Milne calls the “pipeline”, the company also funds a £1m PhD programme at Edinburgh University.

With sales growing fast and the business making money, a stock market fl otation was the obvious way for the company to get more money. “We originally considered listing in 2000 but the dotcom crash had tainted the whole of the technology sector and the public markets weren’t open to new fl otations. So we waited.

We spent the next few years developing the company even further and, in retrospect, that worked in our favour. We had a much more secure footing when we did float,” Milne says. Wolfson was valued at more than £260m when it fl oated at an offer price of 210p in October 2003.

It was the market’s fi rst technology fl otation for two years and the IPO was over subscribed. It also brought a rare glow to Scotland’s beleaguered hitech industry: Wolfson is the country’s only IT company in the FTSE 250.

So naturally, a lot of eyes are trained on Wolfson’s performance, watching for the fi rst sign of weakness. They saw it last October. Demand dipped and Wolfson issued a profi ts warning, cutting its 2006 revenue forecasts from $220-225m to $204-209m. The market reacted badly. Shares crashed and $200m was wiped off its valuation in just one day.

Milne is sanguine: “Investors tend to come from a different background and they don’t always understand the dynamics of the company,” he says. “The semiconductor industry is very vibrant. You can

The business is, to an extent, reliant on the rollout of new gadgets and subsequent bursts of enthusiasm from consumers. Last year, sales in microchips were boosted by the Xbox, iPod Nano and the Play Station Portable. This year promised the PlayStation 3 – but Sony has delayed its launch after manufacturing and distribution setbacks.

The optimist

Milne doesn’t let these blips panic him. He points out that the company remains a growth stock: “Our third quarter this year was our second-largest quarter ever. Revenues were up 40 per cent to $58m and pre-tax profi ts were up 43 per cent to $16.5m. In Q4 the fi gures will be fl at to slightly down.

But we’re still retaining high profi tability. It’s not doom and gloom within the company by any means.” This optimism is typical of Milne, who’s needed gut instinct and self-reliance to grow the business.

“In Scotland, there’s not a lot of experience of growing hi-tech companies from scratch,” he says. “There were very few people here to whom I could turn for advice. I think there is also a bit of a myth that the university continues to be a great source of support to start-up companies.”

He says that his other big challenge was to fi nd funding. Up until the fl oat, Wolfson had raised only £15m – “much less than you’d get in the States,” according to Milne.

“You have to persuade the venture capitalists of the strength of your story; engineering companies tend to be cautious by nature in singing their praises and are automatically regarded as high risk. But the lack of funding taught us some good disciplines in terms of money management.

"We did have too little on occasions and that stifl ed our growth but better that than to have too much money and waste it. In my experience, you don’t truly focus on the business until you’ve run out of cash!”

Graduation time

Unusually for a company headquartered in Edinburgh, Wolfson does next to no business in Scotland, or in Europe for that matter. Around 90 per cent of its sales come from Asia. “We have the rather perverse benefi t of being based in a small country. There’s virtually no market for our business here so we were forced to look elsewhere. We had no other option but to immediately structure Wolfson as an international player.”

But Milne’s never really left his academic nature behind. He even characterises the stages of Wolfson’s growth in terms of the education system: its early years as a spin-out were like nursery, changing the company’s strategy took it to infant school, and fl otation was like entering secondary school.

“Each time you move up a level, you feel very uneasy and it takes a while to settle down. One stage isn’t necessarily harder than the next – there are just different issues to deal with.” And at every level, a much bigger empire to control. By the time Wolfson listed, Milne found the business so complicated that he split it up into different units and gave each one responsibility for profi t and loss. “You have to learn to delegate, to step back and look at the wider picture,” he says.

Now at 64, Milne is starting to think about taking an even bigger step back – into retirement. He’ll be giving up his role as chief executive at the end of February and handing the baton to former Intel executive Dave Shrigley. Milne will remain on Wolfson’s board as a non-exec director. Most of his time, though, he plans to devote to his three children and his passion for the great outdoors – climbing in particular.

“I’ll still keep a keen interest in the business, there’s no question about that. But I’m not planning on starting up any new ventures! I’m looking forward to a slightly slower pace of life,” he says, as he dashes off to his next meeting.

generate a lot of growth and profi tability. But it is also fi ercely cyclical. There are periods when the market slows down and that can have a negative, knock-on effect on the value of the company.”

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