Pat Nettles, Ciena

"Ciena being an acquisition target is not something I would encourage people to think about."

October 4, 2000

14 Min Read
Pat Nettles, Ciena

Pat Nettles, CienaThe Light Reading Interview

In The Spotlight: Pat Nettles

Patrick Nettles is the Southern gentleman of optical networking. He eschews flashy marketing, likes the phrase "steak before sizzle," and cites former Alabama football coach Paul "Bear" Bryant as his childhood icon.

Since 1994, he's been a director and Chief Executive Officer of Ciena, a company with a "mad-scientist" heritage and an already twisted history. The company, recently rediscovered by Wall Street after years of scorn, is reaching another turning point.

After launching a blockbuster IPO in 1997, Ciena ran into growing pains. Founder David Huber had a falling out with the management of the company he founded and left to form Corvis Corp. (Nasdaq: CORV), a company that now directly competes with Ciena. The two companies aren't exactly friendly with one another: Ciena recently filed a patent infringement suit against Corvis during their IPO registration period.

Then there's the whole Tellabs saga. In 1998, Ciena had agreed to merge with Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). But the deal collapsed, as did Ciena's share price. The company then went on to miss financial projections for the ensuing quarter. Investors were miffed.

Somehow, through all this, Nettles has remained somewhat of an obscure character. He's known to be a bit media-shy. Ciena's quarterly conference calls are more notable for their somnambulistic quality than for drama and entertainment. You might have called him "No Headline Nettles" -- until Light Reading tracked him down. Perhaps Nettles isn't attracted to the glitter because his roots are in technology. He holds a BS degree from Georgia Institute of Technology and a PhD from the prestigious California Institute of Technology.

But there you have it: Steak before sizzle. Nettles has led the company through a turnaround in which it has posted record gains in revenues and quarterly profits in 2000. Its share price has soared, and the company is on track to post nearly $1 billion in revenue on the year.

Here he talks about:

· Why Dr. Huber doesn't come over for barbecues
· The trouble with the long-haul market
· Ciena's strange marketing campaigns
· How Ciena was saved by the Tellabs debacle
· His allergy to mergers and acquisitions
Light Reading: Your mascot, Lightworks Lou, took a nasty knock at NFOEC (see Ciena Mascot Assaulted at NFOEC). How's he feeling these days? Pat Nettles: The damage was more to the ego. It would have been a good publicity stunt if it had actually been planned that way. The fact that it just happened is one of those unexplainable events.

Light Reading: Talking of explanations, what do you make of the sky-high company valuations and the renewed vigor of our industry?

Pat Nettles: I think it reflects the importance of what's going on -- the overall interest. This is an infrastructure build of unprecedented scale. There's going to be an unusual opportunity, bigger than, say, 10 or 20 years ago.

Right now it's unusual because there's been so much interest that everybody's a winner. Whether that persists is questionable. The way we look at it, you have to have good fundamentals to stay with the game.

Light Reading: Financially, Ciena is one of the stronger optical networking companies. Yet, somehow people perceive you as a secondary player, even to some of the startups. Do you have any explanation for that?

Pat Nettles: I don't know. I guess that in the past, when mystery was out there, people would take a negative view of that. But again, with all the successes and new technologies that have been rolled out, the best is now presumed [of mystery].

We don't think in the long term that the market will miss the fundamentals, so our view is to focus on the fundamentals first, put the steak before the sizzle. And to build the fundamentals for the long haul in the interest of the customers first, building technologies that really matter as opposed to technologies that are neat. Hopefully by doing all that we'll have the staying power when the final resolution of market leadership is established.

Light Reading: You refer to 'mystery' and 'neat' technologies. You wouldn't by any chance be referring to Corvis, would you?

Pat Nettles: No one in particular. In general, the aura of mystery is something that is a great promotional gimmick. But for the business fundamentals, it's delivering real products to real customers and solving the real problems they're dealing with. To do that, you have to communicate. That's the way we do business.Light Reading: You must have a tense relationship with Corvis [its founder and CEO, David Huber, was previously a founder and CEO of Ciena]. You filed a lawsuit during Corvis's IPO quiet period. Dr. Huber hasn't been over for a barbecue lately, I take it?

Pat Nettles: No, I would say that's an accurate assessment. People want to make something personal about this -- I don't think it's personal, and it's not personal from their side. They've chosen to enter the business directly in competition with us. So clearly direct competition gives some rough knocks from time to time. I can't really comment on the lawsuit. But it wasn't about doing something because they were doing the IPO.

Light Reading: Dr. Huber has this long history with Ciena. Do you consider this an advantage? You must know a little bit about the man and what his strategic or technical bent might be in the marketplace.Pat Nettles: I don't know that that matters so much. What's clear today is they [Corvis] focus on the niche. That requires a lot of special technology that is clearly something that he's gotten recognition for, and I give him credit for that.

We've looked at that customer side of that equation very hard. The bulk of the applications for the customers in North America for ultralong haul are substantially simpler to address than the approach we understand they are doing. So that's where we're starting our focus, on ultralong haul.

The issue is whether the customer can do it as part of an integrated platform. A single platform that can address the normal routes as well as the ultralong routes is a great advantage to the customer. You have a lot more interoperability and integrated management, and they only pay for the advanced technology that's required.

Light Reading: Could you elaborate a little on the technology and your approach?

Pat Nettles: The pieces you are talking about are Raman amplifiers, forward error correction, and other compensation techniques that are used to deal with fiber. All of those things can be employed when they are needed. What we are doing is using the things that are needed for the sweet spot first and we'll have additional capabilities as we see the market environment.

Light Reading: What's the sweet spot as you describe it?Pat Nettles: It's in the 1,500 to 2,000 kilometer route length.

Light Reading: And that's based on the basic network topology today?

Pat Nettles: Yes, it's based on how the country is and how much traffic has to stop where.

Light Reading: So the customers aren't expressing huge demand for a long-haul product?

Pat Nettles: There are maybe a few 6,000 kilometer routes, but does the customer really want to pick an entirely different supplier, with an entirely diferent management scheme, training, and so on to deal with that piece of their network?

Light Reading: But somebody must be asking for it. What about the trial customers?

Pat Nettles: It piqued the interest because it was a new technology, but again, we're talking to our customers and potential customers, and what I'm saying is reflecting the feedback we're getting.

Light Reading: There are many critics of the Ciena marketing approach. Could you explain the Ciena marketing strategy?Pat Nettles: We've focused the marketing message on a customer audience rather than the broader audience. Frankly, that's been a matter of living within our means. The bulk of our advertising has been in trades, not in the Wall Street Journal and Business Week.Light Reading: And we thank you for that.Pat Nettles: [Laughs] I think in some sense we have not had the consistent message that we would have like to have delivered. That's all being revamped. Our view still is that we want to put more emphasis on the steak than on the sizzle. A lot of these companies are prone to overpromote and thus get themselves into positions that are not defensible.

Light Reading: Which of your product lines presents the brightest future for the company?

Pat Nettles: Clearly CoreDirector [Ciena's optical switch] is a game-changing technology that is coming to market right now. We have just begun to take revenue from CoreDirector. Up until now, we've been mostly building transport and long haul.

CoreDirector deals with the capital investment in legacy networking. It deals with physical issues such as footprint; it gives a basis for controlling operating costs by automating the processes that are required for delivering services and restoration. Last but not least, it provides a new basis for a set of new optical services matched better to climates that are being built with Internet computers, instead of Sonet/SDH approaches.

Light Reading: What's the run rate on that product line?

Pat Nettles: We haven't given any product-line specific data but we had revenue from a few customers in the previous quarter. We see that growing, and we've just gotten started in terms of volume.

Light Reading: The metro networking market -- and particularly next-generation Sonet -- is exploding. What do you think of what's going on there?

Pat Nettles: We think Cisco did a really good job with Cerent. They really had a great tactical execution to tackle a legacy marketplace like that with a low cost of entry. It's a great sales organization to deliver that kind of product to the market. It's still, in my view, a legacy play and in the waning stage of the market. Sonet will be around for a while, but the use of Sonet ADMs in the way they have been used is highly unlikely to exist much longer. Sonet is one technology that is used for aggregation, and that will feed into WDM networks, governed by switches like CoreDirector where the resoration and provisioning features will be provided.

Light Reading: So you believe that DWDM is the way to go in the metro space?

Pat Nettles: You need to use the right technology in the right space. There is certainly the need for TDM aggregation in the metropolitan space. Sonet will be a part of that. I don't think that there's any impetus for the digital wrapper stuff that Lucent has promoted. In that case, let's just throw all the Sonet away and put all some new Sonet in. The requirement goes beyond Sonet.

Light Reading: Ciena is quite a comeback story. Could you relate the rollercoaster experience of the last few years? [In 1998 Ciena experienced some financial problems, and its share price nosedived when a merger with Tellabs failed to materialize.]

Pat Nettles: Most companies go through period of trial. For us, it's made us a tougher organization. We focused on customers because we have good feedback even at the lowest point. Our customers valued what we were doing and trusted what we were telling them. With that, we knew we had something to build on. It was obvious even before the events of 1998. We kept on track. We've added customers year by year; we now have an aggregate of 37 customers that have contributed to revenue, 22 in the last quarter.

In some respects, you're influenced by the icons of your youth. I grew up in the South and my father was one of the great Alabama fans of all time. Bear Bryant was one of the great coaches. Even though I didn't go to the university, he's one of the people I've most admired. Bear Bryant said to the team, "The fourth quarter is ours." That's the spirit we've taken at Ciena, and we didn't quit.

Light Reading: Did you lose a lot of people during those days?

Pat Nettles: We lost a few, but frankly not that many -- almost none of our technical resources. We lost a few sales people and a few marketing people. Whether they were the weak players or not, they were the people that saw a loss of immediate opportunity for the roles they played. Ironically, we got some of them back through acquisitions.

Light Reading: The recent news of the default of one of your customers touched off a mini-crisis in the telecom sector (see Ciena Spooks the Market). Could you talk about the state of telecom economics and how healthy the sector is?

Pat Nettles: We think that the service providers have had this imbalance in terms of capital spending and operating costs growing at a faster rate than their revenues. Carriers can't afford to keep doing what they've been doing. They can't afford to keep buying add/drop multiplexers and traditional Sonet gear to build their networks. The focus of CoreDirector is on tackling those problems.

In the particular case of Iaxis, I don't know that that can be extrapolated. There are unique circumstances in every case. I do think that the whole realm of supplier financing, or vendor financing has created a weak spot. That's not something we've focused on, we've been somewhat conservative. We're not sitting on billions of dollars of cash that we want to put at risk. If you look at legacy players, one way of acquiring customers when you don't have the best product is by financing, and there's been a lot of that done.

Light Reading: What was your last acquisition?Pat Nettles: We did the two acquisitions together with Omnia and Lightera.

Light Reading: That was a while ago.

Pat Nettles: That was March of 1999.

Light Reading: There's been a lot of activity in the metro space. Have you been looking at it? There's a lot of talk that there are too many companies now.

Pat Nettles: I think that's right that there are too many companies. What makes us wary in that space is that there are 35 or so companies, depending on how you count, that they all sound a lot alike, and none of them has a lot of customer traction. One of our primary tenets is to look for customer acceptance of technology as the key indicator of what's going on. That's pretty obvious, but we don't see a lot of people making much headway there. We're certainaly interested in the space and we're interested in finding acquisitions that would make sense. But we're not interested in acquiring companies because they can't go public.

Light Reading: Do you think all these companies are created by the bubble of all the venture capital money?

Pat Nettles: There's clearly too much money and too few good ideas in the venture capital world, and I think they'd agree with me. They spend less time evaluating the merits of each deal, and they have a lot of money to place somewhere. It's been some time since there's been a significant number of failures in the world of venture startups. My best guess is we're going to a see a return to a more normal balance as some of these bad ideas fail to materialize.

Light Reading: As I recollect, the audience voted that Lightera went well and Omnia didn't go so well. Why haven't you done anything else? Pat Nettles: When we did those two deals, it was pretty clear that we had a couple of gaps we wanted to fill in the product line. I wouldn't say it was a trivial decision, because there were very big risks just by the timing of where we were and where they were in the stage of development. But it was very clear that we had to do something at that time.

Today we don't see the same imperative, so we're looking very carefully at the next things we should consider. Certainly people ask a lot about the terabit router space, for example. I have very little appetite for getting in front of the Cisco marketing machine unless I have a clear winner. I prefer to stay in a position in the market where I interoperate with Cisco, Avici, Juniper, or with whomever is the vendor of choice for the customer. In the metro space there's not a lot of clarity about who the winners are. If we find something that fits, we're going to act on it.

Light Reading: Your name comes up frequently with potential acquisitions. Juniper and Ciena are two names to come up often together.

Pat Nettles: We don't comment on the rumors. The fact is there are very few companies that have the scale to absorb us as a true acquisition, or the appetite to do that. So we don't view that as a likely outcome. We're about building a significant standalone company. Optical networking is a very big thing, and it's going to be a big thing for a long time. There is plenty of room for a few big players to have a role in the marketplace.

Ciena being an acquisition target is not something I would encourage people to think about.

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