Hugh Martin, ONI Systems Inc.

"What we’re all about is to take advantage of the huge opportunity in photonics to build another Cisco."

July 3, 2001

14 Min Read
Hugh Martin, ONI Systems Inc.

The Light Reading Interview

{Image 1}In The Spotlight: Hugh Martin

In the midst of the telecom depression, Hugh Martin, CEO of ONI Systems Inc. (Nasdaq: ONIS), is a pretty happy guy. In fact, his bouncy manner and perky mood are quirky enough for us to question what he’s putting in his coffee.

Will the mood hold up? Good question. We still don’t have the answer, but, so far, Martin’s still smiling. While ONI’s IPO contemporaries such as Corvis Corp. (Nasdaq: CORV) have had their clocks cleaned, shares of ONI Systems have held up pretty well, and the company is still in growth mode.

As Marvin Gaye once asked (before his dad shot him), “What’s Going On?” Well, ONI’s managed to land new customers, while other optical networking companies are simply trying to retain the ones they have. In fact, “new customers” is Martin’s battle cry. ONI has about 20 of them and expects to land more in the coming quarters (see ONI Beats Numbers, Boosts Guidance).

It’s a long way from the days when ONI puffed up its IPO by floating large tranches of equity to an influential technologist at a major customer (Matt Bross, at Williams Communications Group (NYSE: WCG); see Williams' CTO Profits From His Position ) and a well-known Wall Street analyst (Paul Johnson, at Robertson Stephens; see Analyst Owns $9M in ONI Systems Stock ). Many networking companies have played the same insider IPO games, only to fail at landing new customers after going public. ONI’s post-IPO customer story has blossomed.

More than twelve months later, the Brosscapades and Johnsongate have faded into the woodwork as an IPO postscript. Delivery on the fundamentals has boosted Martin’s stock here at Light Reading.

Indeed, the performance has been impressive. ONI appears to have hit the juiciest part of the optical networking market, now ranking second in terms of market share in the metropolitan market behind leader Nortel Networks Corp. (NYSE/Toronto: NT). Nortel, however, lumps a bunch of aging Sonet gear into that category, whereas ONI remains the metro DWDM pure play.

Instead of fooling around with exotic architectures, god boxes, or macho, long-haul physics experiments, ONI’s product strategy is quite simple: “How about a 32-wavelength DWDM add/drop mux that can be configured in a ring topology and offer fully protected circuits?” Sounds tasty. And it’s been followed up with winning additions like, “Would you like a Sonet interface with that?” and “How about a little ESCON?” Leave room for dessert.

Combine that approach with state-of-the-art inventory management and a no-frills acquisition and business development strategy, and presto — it turns out that Hugh’s got a clue.

To add a twist, we learned during the interview that Martin’s in the hunt for a coveted Top Ten Movers and Shakers spot. He also disclosed the interesting history of his developing rivalry with peer-turned-Cisco-turncoat Carl Russo, his ambitions for massive industry dominance, and how he and Juniper Networks Inc. (Nasdaq: JNPR) CEO Scott Kriens might some day team up.

Read on about:
Cashmere and Carl Russo
Hugh's Clues
Surfing Sorrento
A Mover and Shaker?


Light Reading: Have you seen “The Producers” yet?

Hugh Martin: No.

Light Reading: Do you plan to?

Hugh Martin: No.

Light Reading: So you’re not a Mel Brooks fan.

Hugh Martin: No. Haven’t had the time.

Light Reading: Okay... So. I just saw Carl Russo, from Cisco. He was asking about your turtlenecks. What’s that all about?

Hugh Martin: Oh, he’s got a real hangup.

Light Reading: Seriously, he said you had nice cashmere turtlenecks and he wanted to know where you get them.

Hugh Martin: It’s stupid. During the winter I like to dress casual and he likes to give me shit about it. But let me tell you my Carl Russo story.

Light Reading: Please do. This sounds good.

Hugh Martin: Oh, of course. So, Scott Kriens [CEO of Juniper], Carl Russo [then CEO of Cerent], and I were all CEOs at K-P companies [companies funded by Kleiner Perkins Caufield & Byers, the Silicon Valley venture capital firm]. We used to get together and chat. One day, I was up in Petaluma [California] and Carl had already filed for his IPO. He looks at me and says, “I want you to look me in the eye and tell me that you have the balls to go all the way and go public. If I have to build Cerent as an individual company, and you guys aren’t out there to partner with or join with later on, I’m never going to make it on my own. So I want to know you’re not going to chicken out. I want to know that when Cisco makes the big offer, you’re not going to fold and sell.”

I said, “Carl, I’m the original entrepreneur of this company, you’ve got to be kidding me. I’m not interested in selling. I think we have a great opportunity to build a wonderful corporation." He said “Great, wonderful.” Two weeks later, he’s gone [Cisco bought Cerent for $7 billion in the fall of 1999].

Light Reading: Maybe he already had the offer and he was just trying to scope you out?

Hugh Martin: [Shakes Head]

Light Reading: So basically you’re saying Carl’s a real wuss.

Hugh Martin: Basically.

Light Reading: So you guys all had a grand vision of how you would link arms and fight Cisco together? The Keiretsu thing, eh?

Hugh Martin: Well, entrepreneurs talk about how markets evolve.

Light Reading: So are you and Scott Kriens still talking a lot about that?

Hugh Martin: We talk a lot. As we move to the optical edge, we think that a Juniper router would make a great IP access device. So we look at ways to combine the M5 and the M10 with the ONLINE25000 [ONI’s product] for an integrated IP edge access device.Light Reading: Now Cisco has gone gaga over DWDM metro. Are you afraid of that?

Hugh Martin: Well, we need to respect Cisco, because they have a terrific channel. They have a real understanding of carrier-grade products in the optical space. I think it was somebody on Light Reading interviewing Carl, and he was saying that while he was troubled by some products, all he wanted was a small, dumb optical CSU/DSU [see Carl Russo, Cisco ]. That reflects their understanding of optical markets.

But as a company you are the people who are in your company. They have not moved solidly out of the TDM switching arena. That have added expertise -- the Qeyton product, Pirelli, and Monterey. So from that collection they want to put together a unified optical strategy. Against that kind of effort you have companies like Nortel with the HDX story, you have Ciena Corp. [Nasdaq: CIEN] with the CoreDirector and their long-haul systems, and then you have ONI with a regional system for metro access and a new optical edge product, which is all compatible and talks through the common management system. It’s really tough for a company like Cisco to break into that marketplace.

Light Reading: They must have come knocking on your door at some point.

Hugh Martin: They were investors in the company, and we had a close relationship with them for many years. But we believe that Cisco is not the last large technology company to be built. What we’re all about is to take advantage of the huge opportunity in photonics to build another Cisco.

Light Reading: The metro market is a good market to be in now, but it’s not that huge. How big is it? Won’t you eventually have to tap other markets for growth?

Hugh Martin: We’ve done a lot of detailed analysis on the size of the metro market. Last year the metro optical market was about $300 million. This year it’s going to be about a $1.5 billion market. A five-fold increase — that increase is in the face of tremendous contraction in other sectors of the industry. We feel pretty good about the company growth today. Estimates vary, but we have pegged the growth in 2003 to about $8.75 billion. So, we’ve got another three-times or four-times worth of growth on top of the 5-times going on now. In 2000, we had about 20 percent market share. So if we continue to grow with the size of the market, we’re going to do extremely well.

Light Reading: How is that measured? Where are the numbers coming from?

Hugh Martin: We use a combination of various market-research firms and the numbers that we have looking at various deals. Nortel says that metro was about $550 million, but they clump in Sonet. We just count DWDM.

The Dell'Oro Group just put our their new numbers, and they said Nortel had 48 percent, we had 25 percent, and Ciena had 14 percent [of the metro networking market].

Light Reading: So you’ll be focused on metro DWDM for a while?

Hugh Martin: There are other companies that have gone into optical and said, “We’re going to be the next Cisco; we’re going to go after four different parts of the market simultaneously.” Our core strategy is to go after a market, dominate that market, and move onto others, but never take our eyes off the market we started with. So, we moved into the regional long-haul market with the ONLINE11000; we’ve also moved into the access market and now the optical edge market with low-cost products; and I feel like we still have our eyes on the ONLINE9000 market. We’ll move into new markets, but only at a rate at which we won’t compromise our initial start.

Light Reading: What’s the new product about?

Hugh Martin: ESCON — a high-speed, mainframe protocol.

Light Reading: Now that sounds pretty sexy. [Ed.: Someone needs to get out more.]

Hugh Martin: There is a ton of it in the financial community. The only product out there today, from Nortel, has a four-channel card. We have four times the density.

Light Reading: You acquired that Finisar Corp. [Nasdaq: FNSR] product and got it to market pretty fast (see ONI Systems Touts Access Box). Are you going to do more of that — buying individual products, rather than companies?

Hugh Martin: Yes. We hired a guy, Andy, in business development [Andy Page, a former investment banker, is ONI’s vice president of business development]. His charter is to be very aggressive at looking at ways in which we can add technology but not entire companies. The Finisar deal was really smart because we didn’t inherit a lot of employees with a big burn rate and a bunch of integration issues. What we got was raw technology and a company that’s highly motivated to make it happen. It combined the best of both companies.

It was all done with Finisar working very hard and us working very hard. We’ll look at out-and-out acquisitions.

There are 100 companies in the metro area alone. Many of them are flat. As these companies have difficulty there will be more than one opportunity to add technology to our company.

Light Reading: Which particular technologies?

Hugh Martin: We’re going to be focused in the next year or two on where the market is going, which we think is the access market, not the long-haul part of the market, but IP switching technologies. We have got a pretty good handle on DWDM and TDM.

Light Reading: Isn’t IP routing the most difficult market in which to compete?

Hugh Martin: I’m talking about telecom-hardened IP. The Foundries and Extremes of the world are enterprise companies trying to move into the telecom world. There are also the Ambers and the Appians, Lantern. One of the realities of the market is when the CLEC opportunity shows there is a lot less demand for that kind of product, so you have time to build the right technologies.

Light Reading: What do you think of Sorrento Networks Corp. [Nasdaq: FIBR]? They’re such a strange company.

Hugh Martin: It takes a lot to build a successful optical networking company. You’ve got to have great hardware. You’ve got to have a tremendous network environment, software tools for planning; you’ve got to have a channel built; you’ve got to have an executive management team that can hire, build, and recruit; you’ve got to have plenty of money. And the environment is more difficult now. I’ll give you one small snapshot. A year ago, carriers were willing to build a network and hope that customers showed up. Nowadays, they won’t build until they have the customers, and then they give you an order and they want it like that. We have a goal to ship two weeks after we receive an order.

We have $800 million in cash — and inventory levels over $70 million. That’s significant resources. If you’re going to go after a lot of these opportunities, you have to have infrastructure, planning systems, and the raw cash. There is a big separation between the companies the have the management teams, the resources, the cash and the experience, and those that are going to struggle.

Light Reading: Sycamore Networks Inc. [Nasdaq: SCMR] seems to have all those resources. Why do they seem to be so beaten up?

Hugh Martin: I think Sycamore is a long-term survivor. They’re going to do well. You’ve got to look at what they’re really good at. What Sycamore is really good at is switching and software. The SN16000 is the exact right product for that. The 6000 and the 8000 products, Dan said it himself, they were made from off-the-shelf technologies. But there’s no such thing as integrating off-the-shelf optical technologies. You need to think about a lot of issues. Sycamore was trying to drop in a chip and give it to contract manufacturers. But nobody in that business really knows how to design a line for manufacturing optical gear. And then they spread rapidly from a simple transport function to switching, transport, and access.

My view is a lot closer to Scott Kriens’ approach at Juniper. He said, “We got the M40, okay. Let’s get the M160, and then we do that.” And then they do the M20 and M5. I think that’s a lower-risk way of building a company. What Sycamore was trying to so was like standing on a log in the water, and then trying to get to the next log without leaving the first one — so they had a foot on each log and the water below them.

Light Reading: So do you see Sycamore in on your deals?

Hugh Martin: Not really. I think right now they’re really focused on core switching and beating CoreDirector. They’ve got to get their head down to work, and that’s the future.

Light Reading: So what else is going on?

Hugh Martin: You know, you guys have the best message boards.

Light Reading: Yes, though sometimes they get a little out of control.

Hugh Martin: You know, my major objective is to get on your Top Ten Movers and Shakers list.

Light Reading: We'll think about it. We were considering it.

Hugh Martin: But I didn’t even make the Close But No Cigar list.

Light Reading: Just sell some more products. Which brings me to my next question. Isn’t your valuation still a little absurd? You’ve got a big number up there, and you’re still valued higher than people that have a lot more revenues than you.

Hugh Martin: At one time, Sycamore had a $15 billion market cap (and higher). We have a $5 billion market cap.

Light Reading: So you’re comfortable with that?

Hugh Martin: What we have to do is focus on building the business. The things that are important about building that business are the number of customers. You know we’ve raised the guidance to 28 to 30 customers this year. That is more important. Some of the others in the industy, they had a bigger market cap a while ago, their customer base never got to more than four or five. Also, what market cap is: investors believing they’re going to make money in the future on profits from this company. It’s the number of customers, it’s the product-line strategy, it’s the space that the company is in.

Light Reading: So what’s with all the sailboats on the wall in your office?

Hugh Martin: We have a house on Martha’s Vineyard.

Light Reading: Go Red Sox.

Hugh Martin: Yes, my wife grew up in Wakefield.

[Conversation degrades into petty discussion of Massachusetts geography]

Hugh Martin: Any way, we have little sailboats that we sail around with the kids on Menemsha Pond [on Martha’s Vineyard].

Light Reading: Watch out for Jaws.

Hugh Martin: Yes, we will. Anyway, I gotta go.

Light Reading: Later.

Hugh Martin: Make sure you tell Carl that I’m going to knock him off the Movers and Shakers list.

Hugh Martin was interviewed at Supercomm by R. Scott Raynovich, Executive Editor, Light Reading
http://www.lightreading.com

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