The Light Reading Interview

In The Spotlight: Dan Smith

Of the co-pilots of Sycamore Networks http://www.sycamorenet.com (Nasdaq: SCMR) - founder and Chairman Desh Deshpande and CEO and President Dan Smith - Smith has a rep for being the no-nonsense business and sales brain. Known for his operational acumen and his ability to grow a company in a sensible way - including the frugal use of office furniture, and coach class travel for all - Dan makes sure the organization is running like clockwork and rewarding shareholders, while Desh takes the role of technology visionary.

But behind his public persona, there's more to Smith than simple business savvy. Smith's staff describe him as "incredibly charismatic," "a leaders' leader" - and point out that he commands huge loyalty within the company.

In the mid-90s, Smith was president and CEO of Cascade Communications, in charge of all operational facets of the company. Cascade grew to $500 million in sales and 900 employees before being acquired by Ascend Communications in June 1997. Smith became executive vice president and general manager of the Ascend Communication's Core Switching Division. Ascend was later acquired by Lucent Technologies Inc.

With a resume like that, expectations for Smith's next venture were always going to be high. Right now, Sycamore is going through a critical stage of growth, having grown to over $100 million in revenue since going public last fall. It's also started the process of expanding its portfolio from point products to an end-to-end solution set by acquiring Sirocco Systems (see Sycamore to Buy Sirocco for $2.9B). Smith's ability to integrate the company's acquisitions strategy and propel Sycamore Networks to the next level will be critical in the company's attempts to live up to the enormous expectations created by its $28 billion valuation on Wall Street.

In the interview, Smith shed some light on a variety of hot topics, including:

· Sycamore's plan for high-speed expansion
· Why people might not want to work for Corvis
· The most feared competitors in the industry
· What he thinks of Lucent's acquisition of Chromatis
Light Reading: You just made your first significant acquisition: Sirocco Systems. When will Sirocco start producing revenue?

Dan Smith: We expect to begin initial field trials in the summer timeframe, and more extensive trials in the fall. The first customer will be by the end of the calendar year, and first revenue by the first quarter of next year.

Light Reading: How far do you expect to go with your acquisition strategy? Do you have acquisitions goals for the next year?

Dan Smith: We have a thoughtful approach to the business. You can't grow this fast unless you manage it very carefully. With respect to upcoming acquisitions, we have a strategy, and any possible acquisitions that come our way have to fit into the plan -- so we're looking out a few quarters.

Light Reading : Could you give us some more details of how many acquisitions you're planning?

Dan Smith: We expect there will be others in the future. We believe we already have a very significant product portofolio. We envision three vectors. First is expansion of the product line--Sirocco is an example of that, in the metro access space. That opens up a significant market. Another vector is various industry segments. Our energies today have been focused on telecom markets. Examples of areas that we haven't been in are cable infrastructure and wireless networks and undersea applications. Another vector is adding digital IP services on top of the infrastructure.

Light Reading : There were some rumors about Sycamore trying to buy Chromatis before Sirocco. What's the inside story on that?

Dan Smith: There were lots of rumors surrounding that. We make it a practice not to comment on rumors. This industry doesn't suffer from a dearth of rumors.

Light Reading : Yes, we know, that's our livelihood.

Dan Smith: But you guys do a pretty good job of filtering through them. We believe we did a good job in the metro access space and believe we picked the best team in the industry. If you think about who might start these kind of rumors, Lucent http://www.lucent.com (NYSE:LU) makes sense. What I wonder is, Lucent acquired Ignitus, and I don't know why they didn't just add DWDM interfaces to the Ignitus platform and they would have a product at a much lower cost [than buying Chromatis]. But you'd have to ask Lucent about that.

Light Reading : Among competitors, who do you admire and fear?

Dan Smith: From a competition perspective, we participate in a broad swath of this industry, from access to core transport. Different competitors are more active in some areas than others. Long haul, there's Lucent and Nortel (http://www.nortel.com) (NYSE, TSE: NT) and Ciena (http://www.ciena.com) (Nasdaq: CIEN). In the access space, we don't see any of those three. On the access side, there are 30 or 40 companies. It's too early to determine how that will shape up. I'm pretty sure 40 companies won't survive in that space. We respect Lucent, Nortel and Cisco.

Light Reading : Is Cisco (http://www.cisco.com) (Nasdaq: CSCO) a competitor? Will it be?

Dan Smith: I think they've made three acquisitions, Monterey, Cerent, and Pirelli, and all of those cases they're first steps in the space and I expect them to make more. I left out Qeyton, also. In optical, there's not a lot to acquire in switching and transport. They are doing well with the Cerent product. With the others, they weren't buying market share or revenue, so they are going to have to take them to the leadership position that Cisco normally aspires to. They haven't demonstrated an ability to do that in the service provider market yet.

Light Reading: What do you think of Corvis? (http://www.corvis.com)

Dan Smith: Corvis has been largely focused on the ultra-long haul space. That was their genesis. Over time they've broadened their pronouncements to all-optical switching. The challenge they will have is can they take the technology and translate it into profits and revenues? They have potential customers--but they are only potential customers. They try to position themselves as having more advanced technology and that's a viewpoint that I don't share. Some of the stuff they do is years old.

Light Reading : So you've seen the Corvis technology?

Dan Smith: They've been quite secretive but pieces are starting to come clear. Up to this point they haven't participated in the field of combat and they haven't exposed themselves or taken any fire. Now that they've filed an S-1 they have to expose themselves and they will see some return fire.

Light Reading : They [Corvis] also have a relationship with Williams http://www.williamscom.com (NYSE: WCG), as do you. Will there be a battle between you two at Williams?

Dan Smith: No. They're using Corvis products for different applications--ultra-long haul, which we haven't done. But over time I expect that we will be going head-to-head.

Light Reading : Williams brings to mind some very controversial relationships with start ups giving equity to carriers. Before you went public, how did you handle that--were you asked for equity?

Dan Smith: Williams did not have equity in us before the IPO and there was no avenue for individuals to do that. I know other companies have done that, but we have not done that and there was not discussion of that. In my mind, Williams was a good partner and we negotiated them the opportunity to buy shares at the IPO price. They're a strong partner and I'd just as soon put the shares in their hands, as in the hands of an institutional investor.

Light Reading : How did the relationship with Williams evolve?

Dan Smith: Williams had the vision of how important wave services would be. It made sure that the relationship [with Sycamore] developed quickly because we have that common vision. Every carrier will adopt that vision in time. Like launching any new technology, you need to search out those early adopters.

Light Reading : Back to equity, you're saying your approach was different than some of the other companies?

Dan Smith: ONI [Systems Inc.] http://www.oni.com (Nasdaq: ONIS) and Corvis have taken a very aggressive approach to giving pre-IPO shares to potential customers. Now that ONI is public, they can't do that anymore. Corvis is pre-public and they are pushing that concept quite aggressively. That's unique in my mind, but they obviously think it's in the interest of shareholders.

If you go to the Corvis S-1, they have a lot of shares, and they went through a lot of run-outs--they did a lot of private rounds with VCs and suppliers. That's an unusual capital structure to be in at this stage of the company. The slice of the pie that employees have is a lot smaller than typical companies at this stage of development. It's already diluted out substantially.

Light Reading : So you think Corvis will have trouble keeping people?

Dan Smith: People will ask what's their slice of the pie and they will see it's pretty darn small. There's always the law of unintended consequences that you don't think about when you do something.

It takes a lot to be successful. Technology is part of it, but not all of it. You have manufacturing, and the need to sell and build and manage an organization. Once you become a public company everything is different.

Light Reading : What did you learn from Cascade, and how is this different?

Dan Smith: A lot of what we learned at Cascade was timeless. We learned how to build an infrastructure. We learned about the carrier business. We learned how to lead an organization of excellent people, and scale that. Organizing and leading people is extremely important.

Light Reading : Last year you had an enormous IPO and you've grown quite a bit in the last year. What are the main challenges facing Sycamore right now?

Dan Smith: Scaling the organization. That not only has to do with the number of people, but the organizations and systems.

Light Reading : We hear you're working on a new building.

Dan Smith: We moved into a third building and we have a fourth online this summer. We'll have 300,000 square feet.

Light Reading : There's a lot of competition for hiring right now. How are you dealing with the problems of finding staff?

Dan Smith: To date we've done well. When we filed to go public we had 146 employees and today we have over 500. That doesn't include Sirocco. We've done very well to attract excellent people to this organization. But you have to work very hard .

Light Reading : And it doesn't hurt to have a healthy stock price.

Dan Smith: It doesn't, but some people say it's a highly valued company and they ask how it's going to grow. But we don't think it's a detriment.

Light Reading : Would you ever consider selling the company?

Dan Smith: It's a public company, and I'm just one of the shareholders. I could never say never with respect to selling the company, because I've got a fiduciary duty to serve shareholders. I've shown in the past that I would do that above my own personal goals. That being said, we believe this is a major opportunity that will unfold over a number of years. We need to be a very large company as quickly as we can get there. That has to do with being a leader in the marketplace. To compete successfully we have to be large company. If you believe the market is 100s of billions, than in being a leader, you will have a large piece of that.