The Light Reading Interview

In the Spotlight: Gordon Stitt, president, CEO, and chairman, Extreme Networks

In the often staid world of networking, any company that embraces bathroom humor, encases its products in deep purple plastic, and keeps a bottle of tequila in its conference room might be labeled a bit extreme.

Of course, when the company calls itself Extreme Networks Inc. (Nasdaq: EXTR), all the above fits right in.

At the helm of this operation is longtime networking veteran Gordon Stitt, who in a previous life was a founder of Network Peripherals, a pioneer in the field of network switching. Five years ago, Stitt, along with Stephen Haddock and Herb Schneider (also Network Peripherals veterans), started Extreme, betting that Ethernet switches could do the work of routers, more quickly and at a lower cost.

So far, the company's plan has been a success, as Extreme claims to have sold product to support 3 million Ethernet ports, making it a leader in the Layer 3 switch market. But as Extreme looks to expand into new markets -- especially those outside its large-enterprise comfort zone -- Stitt might be wise to keep the salt and limes nearby.

Competitively, Extreme faces challenges from above and below. Its main foe is Cisco Systems Inc. (Nasdaq: CSCO), which Extreme says it sees head-to-head in 80 percent of its potential deals -- something like playing the Yankees four days out of five. Extreme, with just 1,000 or so employees, knows it can't be Cisco, so it must find other ways to compete with the giant.

On the startup side, Extreme has competition from Foundry Networks Inc. (Nasdaq: FDRY) and Riverstone Networks (Nasdaq: RSTN), though it faces them with confidence. Extreme's swagger is reinforced by internal marketing messages in the company's men's room – where plastic urinal screens have the words "Foundry Networks" printed on them, and a poster above the urinal proclaims: "Riverstone Networks – You're Soaking in it." (The poster also contains some product-comparison stats, as well as a warning: "Don't fall in.")

Extreme's corporate sense of humor could come in handy in the near future, as the company tries to push into tougher-sell markets (like the metro service-provider arena) while weathering the public-market meltdown.

Fiscally, Extreme will stick to its guns in not offering vendor financing, instead looking for deep-pocketed customers who are fully funded. Internally, Extreme shows restraint by eschewing fancy espresso machines in favor of a popcorn wagon in its kitchen – more in line with what one employee calls the "cold pizza and diet coke" culture of a company named after its founder's love for extreme skiing.

The 44-year-old Stitt, who isn't afraid to wear a deep purple, logoed, button-down shirt to an interview, says he's still excited by the promise of high-speed networking, a rush that makes his job more fun than anything else he could imagine.

Read on as Gordon Stitt explains his extreme thinking on:

Acquisitions and Wall Street
Strategic investment and the funding crunch
Standards, the market, and the competition
Ethernet, wineries, and the futureLight Reading: Extreme just purchased a company...

Gordon Stitt: Optranet Inc. (see Extreme Comes Clean).

Light Reading: How's that going? Is that equipment already being put into the field?

Stitt: Some of the equipment is in trials. Optranet, which we acquired in January, is a company that we made an investment in some time ago. They had actually built [VDSL] blades for our Alpine product and had those in trials in December.

Light Reading: Are acquisitions going to be a big part of your strategy, going forward? Optranet seems like it may have been something you helped incubate. I'm curious as to why it was brought back inside, and whether you're looking at other outside companies.

Stitt: The Optranet deal is a company that we did make an investment in, along with venture capitalists. And there's another company that we've also made an investment in.

[editor's note: in the time since this interview, Extreme acquired WebStacks (see Extreme Acquires Webstacks ), the second company in which it had invested. ]

We have made some small acquisitions along the way. We're pretty comfortable doing that. Certainly in the current climate there are a lot of companies that are having a more difficult time raising capital, in terms of second and third rounds as the markets have gotten tight, and that certainly makes some acquisitions more attractive.

Light Reading: Is that what happened in the Optranet case?

Stitt: No, that was really a different situation, where there was an area we wanted to go into, and we didn't feel that we had the expertise to do it. And then they were successful in developing the technology, so we decided to go in and make that part of Extreme.

Light Reading: Are storage-area networks a future opportunity for you?

Stitt: It's something we're certainly very interested in; we haven't announced any particular product.

Light Reading: Does Extreme have to do a lot of Ethernet evangelizing? Are some of the product-acceptance barriers more psychological than technical?

Stitt: You need to demonstrate, you need to have proof of concept. You need to have people who are doing it – getting the first couple folks to do it is always the hard part, regardless of what the technology is. If you get over the hump, get the first few successful, and have their businesses grow successfully, that really validates the technology and the approach we have.

Light Reading: Even in the face of the public-market meltdown, one of your competitors (Riverstone) was able to have an IPO. Is there some good news in that for you?

Stitt: I think that markets tend to swing from one extreme to the other. No pun intended.

Light Reading: Sure it was!

Stitt: [laughs] For a while, there were a lot of companies going public, now there are none. The right answer is something in the middle. Companies with proven revenues, companies that are really ready to be in the public market can go ahead and do that. Certainly, when the door is completely slammed closed, I think that's bad for the industry overall.

That said, I think there was a lot of funding over the last couple years, venture capital funding, there's just so much money thrown in, that there's just a lot of companies out there, and the doors to the public market... are just going to be a little more discretionary... What's the right word?

Light Reading: Cautionary?

Stitt: There's just going to be different standards. Show me revenues, show me profitability, show me some stability. Which is really, traditionally, the way it has been.

Light Reading: Do you spend a lot of time thinking about Wall Street?

Stitt: My perspective has always been, we're here to build a business. We're here to deliver products to customers. The process of going public was a step along that path. The only downside I've seen so far, is when you issue options to employees and the stock price goes down, it's something that we have to deal with.

It adds a level of complexity to managing the business. But at the end of the day, ultimately, I believe Wall Street rewards great companies. We're in a time where there's uncertainty today, and a lot of tech companies have been beaten up, and I believe we'll come out of this, and there will be winners and there will be losers.

Light Reading: At some of the recent VC conferences, everyone seems to be saying that the market for metro system companies is incredibly overfunded, and we're already starting to see some of them fall out. Is this too much money into one market? Is it inevitable that some of the companies will not make it?

Gordon Stitt: If you look at the time we started in building high-speed switches, there were, depending upon how you count, 12 to 25 companies that were funded at the same time. It seemed like a lot, to us. If you look at today, or the last year, there was a lot of VC funding that flowed into networking, because it was a growth space. The numbers may be greater today, but not all companies will survive. I don't think that's a new phenomenon.

Light Reading: In terms of investments... haven't you folks invested in some service providers, like Yipes Communications Inc.?

Stitt: We have made some very small investments... We haven't made any specific disclosures. It's an area where we've been very, very careful and continue to be. I don't know the exact count, but I'm sure it's less than five.

Light Reading: What is the purpose of investments like that? Is it just to get a bit closer to their business plans?

Stitt: There are some strategic implications for us, in terms of a source of information, if you will. If we have tremendous respect for a technical team, and we feel they can help guide our internal development, then we want close ties with that company, whether that company is a customer or not.

Sometimes that investment is a way to seal that, to make sure there's that kind of information flow. In all honesty, we've really closed off the tap pretty much these days, given the climate and the risks in making investments.

Light Reading: Certainly, the vendor-financing thing has been shaky.

Stitt: Vendor financing is different from what we're talking about – vendor financing is helping people buy your products. We've never done that. That is a very risky strategy for a company such as ours. Certainly some of the big guys can go off and do that and take the risk.

Light Reading: What do you think of the current washout of CLECs? Is that a concern, since they are potential customers?

Stitt: I'm not sure anymore what a CLEC is. I think a lot of the people that have had high visibility as their stock prices have dropped, have been in the business of, for example, providing DSL services around an ILEC. That model has run into trouble. We haven't really participated in that market, and, in hindsight, we've had no exposure.

Light Reading: But a lot of service providers seem to be having problems getting funding for their buildouts. Is that a concern?

Stitt: I think there was so much funding, and when the problems came, and happened pretty quickly, I think the pendulum swung too far the other way. I really do believe today there are good companies that are having a very difficult time getting funding. I think it will come back down to center.

If you look at what happened in the dotcom space, when money was just flowing into every type of deal, there's no way all those companies were going to survive. Venture investors have always funded multiple companies in a segment, and they get filtered out before they get to the public markets. What happened this time, is a lot of companies got public and then the trouble hit.

Light Reading: Is the challenge for servicer providers not about "how fast" but about "how fast can I make changes?"

Stitt: It's not about speeds and feeds and bandwidth, and millions of packets per second; those are the table stakes. You gotta have that to get in the door. But once you're there, you've got to look at how you provide services to that provider. They're running a business; and they're going to sell bandwidth and sell incremental services to an end-user customer, and we need to build those capabilities in our switches.

Light Reading: Who do you see as your biggest competitors, or your toughest competitors?

Gordon Stitt: The answer to that question is pretty easy – it's Cisco. They're a very well run company, they're a tough competitor, they always have been.

Light Reading: What about Foundry, and Riverstone? Do you see them at all?

Stitt: Sure.

Light Reading: Is there room for everyone in this market?

Stitt: It's a huge market. No question about it, there's room for other companies. We believe that we're very, very early in the game. We say it's the bottom of the second inning, and sometimes I wonder if it's maybe bottom of the first!

Light Reading: To keep Extreme's growth going, where are the most important customer market areas... What's the mix?

Stitt: We try not to predict what the mix is, because you get locked into certain assumptions. We continue to focus on the large enterprise space, that's been a great market for us. It continues to be more than half our revenue. In the service-provider segment, the Ethernet metro-area market is an emerging market: We do see a lot of growth ahead in that space; we're very, very early.

Light Reading: And (since you're in California) you're building a power plant?

Stitt: [laughs] I don't know; I think that's a short-term kind of opportunity, and not long term.

Light Reading: Let's switch gears a bit. You've been around networking a long time. Standards are always fun; are the battles any different these days, than say, fast Ethernet vs. 100VG-Anylan?

Stitt: That type of Beta vs. VHS battle hasn't happened recently. We're very active in standards – our CTO, Steve Haddock, is vice-chairman of the 10-gig committee. We have people participating in a number of standards bodies.

If you look at the 10-gig standards, there are certainly different groups that want that to go in different directions. But rather than a battle of one or the other, there's been a compromise reached that really meets everybody's requirements, and that has resulted in a local-area or LAN PHY and a WAN PHY. We think that's a great solution, that core Ethernet now has two different styles, if you will.

It's still Ethernet frames – so when you bring it into a switch, and when you route it, there's no translation required. And that's the beauty of Ethernet. Everyone understands it; everybody knows what an Ethernet frame looks like.

Light Reading: Have you buried Sonet yet?

Stitt: [laughs] Sonet is certainly selling very well. But if you look at the cost differences between Sonet and Ethernet, I think that you're hard-pressed to find a carrier today that isn't looking at Ethernet.

Light Reading: But isn't there an infrastructure problem, in terms of building Ethernet in the metro? Is that why you're adding support for T1 and DSL links?

Stitt: Today you've got Ethernet on one end, Ethernet on the other, and all this expensive Sonet stuff in between. What we want to do is deliver a way where service providers can eliminate all that expensive stuff.

Also in the world today – there's much easier access to dark fiber than there was 24 months ago. So companies such as Yipes can go in and lease, rent, or buy dark fiber and carry it to a particular building. There are some places that they can't get to for whatever reason, or it would take too long to get the fiber there.

What we wanted to do was provide an alternative way to get connectivity there, and that's the reason we introduced T1 capability.

Light Reading: [looking at purple walls] Do you get a discount on old Silicon Graphics paint?

Stitt: It is the color.

Light Reading: Is this fun, to be doing this? Do you ever get tired of networking? You don't want to start a winery – or get jealous of Lew Platt (who is now CEO of Kendall-Jackson)?

Stitt: [laughs] There are a lot of wineries that are run by ex-Silicon Valley types... It's a great hobby, and K-J is a big, big one... it's consumer marketing. I think that would be fun too... It's a very competitive business, and that would be a blast.

But right now, in networking, you look at the environment we're in, and watching people experience this high-speed connectivity, once they really have a 10-megabit line versus that 1.5 DSL line, it's just a whole different experience.

I think we're just beginning to touch the types of applications that you and I as consumers, and you and I as business people, can have access to. When you look at the delivery of entertainment-grade video, over an IP network, and you look at what that means to you, as a publisher, for instance? It's pretty exciting.

There's incredible opportunity. We know where we are today [in networking], and we have a very clear idea where that's going, with true broadband going to apartments, businesses... It's exciting, the path between here and there.

-- Paul Kapustka, Editor at Large, Light Reading http://www.lightreading.com