From TWST:
DENNIS BARSEMA - REDBACK NETWORKS INC (RBAK)
CEO Interview - published 04/24/2000
DOCUMENT # JAW618
DENNIS L. BARSEMA, Chief Executive Officer of Redback Networks, Inc.
joined Redback in November 1997. Previously, he was the Senior Vice
President and General Manager at Centigram, a telecommunications
company. He also served as Vice President at SoftSwitch, a
telecommunications company. Prior to that time, he was Vice President at
Primary Access and AT&T Paradyne. Mr. Barsema holds a BS in Business
Management from Northern Illinois University.
Sector: Business services
TWST: Could you begin by giving us a brief overview of Redback Networks,
Inc.? Then describe what you see as the business and company today?
Mr. Barsema: Redback Networks was incorporated in September of 1996. So
the company is three and a half years old. We started shipping product
in the 1Q of 1998, about 18 months after the inception of the company.
Some of the things that we like to bring up are that Redback has a great
reputation for being very fiscally responsible and the fact that we do
believe that start-up companies should show a profit Or at least we have
an obligation to track towards profitability and not just spending
money. But Redback, in getting to our IPO, we used less than $60 million
worth of VC money. So we raised a relatively small amount of money in
terms of getting our product out and getting to IPO to kind of carry
that fiscal theme forward to today. When we announced our 4Q results for
1999, we announced our 1Q profitability. We had $.4 profit in the most
recent quarter. But going back to the history of the company, we've been
shipping product now for eight quarters. We have in excess of 150
customers worldwide. Our customers are primarily service providers,
which are comprised of carriers like Bell Atlantic and SBC. It's
comprised of ISPs like EarthLink or UUNet. Generically, the ISPs and the
carriers are kind of referred to as the service provider markets. That's
our market and that's who we're selling to. The equipment that we're
selling is really building the infrastructure for broadband networks. So
I think that's one of the reasons why Redback has been so closely
followed and watched by the investment community and it's very clear
that broadband, be it DSL or cable or wireless, whatever the medium
maybe, is the wave of the future. Redback is helping to build the
infrastructure of the networks to support broadband access to the
Internet. Our product allows for massive scalability, provisioning and
deployment of value- added services for the service provider customer.
In terms of employees, I was employee number 31 with the company. I
joined the company in the fall of 1997, so I joined 12 months after the
company was incorporated and five months before we started shipping
product. Redback is up to more than 550 people. Redback has had
significant growth over the last two years. On November 29, 1999 we
announced a merger with Siara Systems. That was a pretty big mark on
Wall Street and I think a pretty big splash in the marketplace in
general because it's the first time that a company that had gone public
acquired another pre-product, privately held company, which is what
Siara Systems was. We will ship the Optical product, called SmartEdge,
for revenue in the 3Q of the year 2000. And the price tag was $4.3
billion. The shareholders of the former company's stock hold
approximately 38% of the combined company. Redback's shareholders hold
the remaining 62% of the combined company. So I think it was a very bold
step in the eyes of a lot of shareholders, a very bold step in the eyes
of a lot of customers, but it's one that's been received just
tremendously well. Clearly it's been well received on the Street. It's
been very well received by our customers because what Redback has done
is we've defined now what we're calling the 'New Access Network.' That
is the network the market space that we are going after. These products
take us all the way from the core router out to the very edge of the
high-speed access network. It's allowing us to provide,massively scale
the subscribers that can be supported on our customer's network. We are
collapsing in a number of different transports and a number of different
products into one product out at the edge of provider's location, either
a central office or a regional day at the center. So very clearly the
new access network is where the market is headed. Redback feels we have
the early mover advantage in that space and we look to be the dominant
player in the access space specifically the new access networks. We now
have 550, of which over 330 of them are software or hardware developers,
we have a very robust engineering organization. We have over 100 people
worldwide in our sales organization.
TWST: I think one of the difficulties investors sometimes have today is
identifying who's competition and who's an affiliate relationship or a
necessary relationship in the marketplace today. Can you go through a
little bit of the recognizable names what the server and router,
hardware, software companies are out there that you see as competitors
and which ones also share relationship space with Redback?
Mr. Barsema: From a competitor standpoint, there are two main
competitors Cisco and Nortel Which is something that we enjoy because we
have the utmost respect for Cisco and Nortel. But in terms of agility,
which I'm a very strong believer in, that if you're going to be
successful, you have to be agile, you have to be nimble. You have to be
able to react quickly to market changes. You have to be able to react
quickly to customer needs and demands. I've always been on the side of
the fence if a company like a Redback can react a lot quicker and we can
be much more agile in reacting to the market shifts and changes than a
larger company. Therefore, I think that we can continue not only to get
the early mover advantage, but keep the earlier mover advantage. The
great part about the space that we're selling into (the service provider
space, the carriers and ISPs) is that they don't care who they are
buying from. What they care about is that they want to provide or to buy
best-in-class product at every point along the way in their network
because the network is the revenue machine for them. So they've got to
make sure that they network that they've built is best in class at every
point along the way. So they are more than happy to manage multiple
vendor relationships in order to get best in class within their network.
They don't look to a Cisco or a Nortel to do everything in the network
from the router out to the CPE equipment, out to the classified
switches. They look for best in class at every point along the way. So
Redback which provides the best-in-class equipment for the high speed
broadband network, has a great opportunity to go into the service
providers and for them to evaluate our equipment and buy based up the
merits of our technology. We feel that any time we can go up against our
competitors truly be evaluated on the merits of our technology and the
merits of what our product enables from a services standpoint, that will
enable us to win those decisions 10 out of 10 times. In terms of other
relationships that we have that are key to us, there are several out
there from a router standpoint . We go up to the core router. We're not
providing the core router, but we interoperate and interface with the
core routers. So relationships with, for example, Juniper Networks, we
work very closely with them on a number of deals worldwide where the two
of us are being used by the customer to build their broadband network.
Then there's other relationships down at the central office with the
markers of DLAMs, which is the modem, if you will, for the DSL network.
That product resides in the service provider's central office and that's
what on the other side of the Redback product. We take the traffic
coming from the central office locations, coming in from the DSLAMs and
the DSL networks. So we have to interoperate with all the different
manufacturers of the DSLAM equipment.
TWST: As bandwidth moves towards that ultimate game of commodity
pricing, it would seem like the value add of technology management
services and systems integrated with the hardware services and systems
would seem to be the true value for those companies, and that seems to
define what you're describing for Redback.
Mr. Barsema: That's exactly right. When you think about the name of the
market space that Redback is in today, which is called the subscriber
management system (that's the name of the product, the SMS and the
subscriber management market), what we're doing is we're managing
subscribers for the service provider and that range's all the way from
their billing information to being able to provision services and
applications that that subscriber has signed up for and is willing to
pay for from the service provider. Being able to manage the bandwidth
that the subscriber wants from the service provider and being able to do
that on a dynamic basis, so that the subscriber can alter or select the
speed at which they want to run. All of those types of services and
applications are provisioned and enabled within the Redback platform in
addition to providing the connection point for the subscriber to the
high speed Internet. So there's really two key components to the
Redback story. One is the technology to provide the connection of the
subscriber to the high speed Internet. But the second is to manage and
be able to enable the services and applications that the service
provider is in turn selling out to the subscriber, because we're a very
strong proponent here at Redback of the fact that where the service
provider going forward is going to make their money is really not in the
connection costs. When you look at broadband connections to the
Internet, the price continues to drop. A year ago it was $69.95. Today
in California, PacBell is selling DSL Internet connections at $39.95.
I'm sure a year from now it will be under $20. So clearly the service
provider is not going to make all of their money or make a dominant
share of their money in the connection charges. Where they're going to
make the money is on the value added services that you, the subscriber,
are willing to pay for from the service provider. All of those services
and applications are enabled through the Redback platform.
TWST: How much interaction will there be between Redback and those
publication providers on those networks? One goal would be to fill up
the broadband with applications and that's obviously one goal that the
ISPs and the other network companies have to address at this point.
Where does Redback fit in or where do you benefit from that build out?
Mr. Barsema: There's quite a bit actually. I think what you will find is
that some of the applications are developed and delivered by Redback
ourselves. There's a number of applications that some of our largest
service provider and ISP customers come to us for that we develop and
support the application ourselves within the Redback platform. There are
other content providers out there that Redback is working very closely
with who are developing the content/application that the service
provider would run on the Redback platform that they would be pushing
out to their subscriber. So it's a combination of Redback building the
applications ourselves and Redback working with outside development
houses and content providers who are building content for the service
providers network. But clearly anything that puts more traffic onto the
broadband network is good news for Redback because the more subscribers
we can put onto the broadband network, be it cable, DSL wireless or
whatever the medium is in the future, the better it is for us.
TWST: You're at the end of stage one on the merger with Siara and stage
two, the integration of the two companies, begins. Is there room for
additional merger and acquisition activity or do you need to sort out
the parts and pieces at this point before you take on anything? Can you
afford not to take on more?
Mr. Barsema: I think it's a combination of all of the above and that's
the world that we live in today. You know, again, it gets back to that
word I used before that you have to be agile and you have to be able to
move quickly. I'm a very firm believer in that before you move into
other spaces within or outside of the markets that you're focused on
today, and very clearly Redback is focused on the high speed access
space, you've got to be good at what you're doing today. You've got to
build a core competency, you've got to build a market share in what
you're doing today before you expand too far outside of your boundaries.
Clearly I felt that Redback had become the dominant player in the
subscriber management market. Redback defined that market three and half
years ago. Before Redback came along, nobody had ever even dreamed of
the subscriber management market space. Redback was the first to
identify the problems that were going to exist in terms of being able to
massively scale up the number of subscribers on the broadband network.
We brought the product to the market to allow that type of massive
scale. We've been very successful having 70% market share now in the
subscriber management space. So I felt that we had achieved that level
of competency in the subscriber management space that we were ready to
look for the next area of growth for Redback. What I wanted to do was in
the high speed or broadband access space, broaden our reach. So the
merger made a lot of sense in that the products that Siara was
developing were really for the metro optical market space. As I said
before, we'll be able to go from the core out to the very edge. I think
it's incumbent upon us to get real good at that and to become the
dominant vendor in what we've now defined as the new access network.
Again, three years ago we defined the subscriber management market. We
got the early mover advantage. We've now defined the new access network.
We think we have the early mover advantage there as well. We have to get
very competent at that. We've got to build the market share I think
before we start to broaden out beyond the new access network. Now within
the new access network as we've defined it, there are areas where I
think certain acquisitions and/or partnerships, relationships can exist
for us to fill out the role that we play in the new access network. And
those acquisitions could exist in a couple of different spaces. It could
be in the applications space and acquiring technologies that allow us to
significantly enhance or accelerate new applications that can go on to
the new access network and the Redback platforms. It could come in the
area of voice over IP. I believe that voice over IP is going to have a
very strong role going forward. So that's just an example of a couple of
areas within the new access network where I think there is still
significant expansion left for us from an acquisition standpoint.
TWST: Are there any misperceptions or misconceptions that you hear or
confront from investors, from analysts or from potential investors that
you feel somehow don't understand or perhaps miss the same targets that
you're shooting for? Are they using the right metrics to what you see as
that target?
Mr. Barsema: Despite the valuation that Redback has earned within Wall
Street and the valuation that we've been given by investors, I still
feel that Redback is undervalued. I feel that going forward the Redback
that's defined the new access network and the Redback that is building
products and services to exploit the new access network should have the
same comparables from a valuation standpoint as a Sycamore or a Juniper
Networks. I think that we are below where they are today, but that's
where I believe our comparables should be. I think that they will get
there and I think what investors are waiting to see now is that there's
a couple of flex points, as I would call them. I think it's the
introduction of the products end of the market space. Clearly there's a
very significant product road map that both Redback and Siara were on
this year. I think it's inherent upon Redback to deliver on that product
roadmap. So I think investors are wanting to see that. I think that when
investors see the type of customer concentration and the penetration
that we're going to make within our customer base with the combined
product road map, I think they will be tremendously excited. So I think
that there is a tremendous amount of room left for us to go this year
from a valuation standpoint. I wouldn't say it's a matter of folks
missing anything. I wouldn't say it's a matter of we need to demonstrate
to the market and to investors just how well we will execute on this
product road map. I think that the point that I would make is that
Redback has an outstanding reputation from an execution standpoint.
We've executed on everything we've committed to the market space. So I
think that we've built the reputation that people have confidence in our
ability to execute. When they see just how well we are going to
executive on the product road map and on the strategies that we have
this year, I believe that the valuations that we will have will be in
the range of the other comparables that I mentioned.
TWST: When analysts and investors look at the R&D pipeline that you
have, what's the time frame, that they should address in trying to
assess how deep or how significant that pipeline is and should be?
Mr. Barsema The merger was completed on March 8, 2000 and as a company,
we now have over 330 development engineers. I would lay claim to it is
as big or bigger than anything that Cisco or Nortel has in terms of
development engineers who are focused on building products for the new
access network. So I think that when investors look at the size of the
engineering organization that Redback has that's focusing on building on
these products, they should have a lot of confidence in the ability of
Redback to deliver the pipeline. Now in terms of the pipeline itself, I
think there the best benchmark is your customer base. There I think that
when customers see the rate of adoption, that the Redback product
portfolio is going to have this year, they will understand that the
pipeline and the product roadmap that we have for this year is a very
robust one and it's one that we've developed with our customers. I mean
from day one, the first day I came to Redback I set a direction for the
engineering team that I didn't want any feature being developed that
didn't have a customer's name next to it because I'm a believer in that
you work closely with your top customers to understand what features
they need. When I say customers, I'm talking about your non-customers,
too, because I don't want to get the feedback of just the ones that are
already buying my product. I want to get the feedback of the ones aren't
buying my product, but someday I hope that they will. So you take the
feedback of the top service providers in the industry and you hope that
you bet on the right ones. This space is a huge space but there's a
concentrated number of very successful, very large players that you kind
of know who the ones are that you go to for the product direction and
for the technology direction and you develop the products to meet their
needs. What investors will see is that the products that Redback
announce this year are products that have been built in part by our
customers. I mean they've been speced out by our customers and by our
non-customers they will see a very significant rate of adoption this
year for our new technology.
TWST: In summary, what message would you want to leave the investor
with; holding whether it's an individual or an institutional investor?
What is sort of the short list of strengths and highlights that you feel
compel that investment decision today to buy in?
Mr. Barsema: I think in summary I would say that I'm a believer that to
be a successful ongoing public company, you need to be doing three
things. You need to expand the reach in the marketplace that you're
current in. Two, you need to strengthen your importance to the customer
and three, you need to consistently expand the addressable market that
you're going after. And Redback has done and will continue to do all
three. Clearly if you look at the first one, in terms of broadening our
reach within our market space, as I said before, Redback defined and we
pioneered the subscriber management market three years ago. As a result
of doing that, we go the early mover advantage and as a result of the
early mover advantage, we have obtained a 70-plus market share. We have
now defined and we have pioneered the new access network. We have the
early mover advantage in terms of developing products and technologies
for the new access network. We very strongly believe that that will
result in very significant market share for Redback in the new access
network. Number two, strength fitting our importance to our customer.
You know, these customers have only a certain number of hours in the day
and they've got a lot of vendors who are all vying for their attention,
so in order to get the attention of your customer, you've got to be
important to your customer. I think again, with the merger Redback has a
very, very strong product portfolio to address the needs of the new
access network. We have truly strengthened our importance to our
customer. The addressable market for the subscriber management market
was about $2 billion in the year 2001 and those were the numbers that we
showed on the road show last May and we feel that those numbers are very
consistent today. Now with the merger, we have an addressable market
space of $3 billion in the year 2001. So that's a 10 times increase in
the addressable market space for Redback. So doing all three of those
things well, I think makes Redback a very good investment opportunity
for investors.
TWST: Is there anything in particular that you would like to address
that we have not covered?
Mr. Barsema: The only last thing I would add is that another key
ingredient I think to our success going forward is the people side of
it. Redback now has one of the top two IP routing teams in the world.
Clearly as you look at the new access network and collapsing the number
of transport protocols and transport vehicles on to one common platform,
doing IP routing well is going to be very, very important. I think that
the only other company that compares to Redback now from an IP routing
standpoint is Juniper Networks. We also have a world-class ASICs team
and we've got a world-class SONET team. We have built competencies in
three very key areas from an engineering standpoint: the IP routing; the
ASICs, and SONET. In addition to that, Redback already had very robust
IP services experience because that was what the Redback platform in the
subscriber management space was all about. It was all about being able
to deliver IP services. So between the IP services, the IP routing, the
ASICs and the SONET, Redback has very, very strong competencies from an
engineering standpoint. Again, I think that's one of the very keys that
will continue to make Redback a leader in the new access market.
TWST: Thank you.
DENNIS L. BARSEMA
CEO
Redback Networks, Inc.
1310 Moffett Park Drive
Sunnyvale, CA 94089
(408) 548-3500
(408) 548-3501 ' FAX
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