Getting Redback back on track

With his appointment last week as CEO of the San Jose, Calif.-based communications-equipment maker, DeNuccio becomes the third executive to hold the position at the young company since it went public in May 1999.

Now the 42-year-old DeNuccio, a veteran of communications hardware giant Cisco Systems, is charged with righting a foundering Redback. The company--part of the vaunted public offering class of 1999--jumped to early prominence for its broadband subscriber-management equipment that was popular with DSL (digital subscriber line) providers and phone companies. But it later was battered by the decline in communications-industry spending.

Stock in Redback fell nearly 13 percent in midday trading Wednesday to hit a 52-week low of $3.52. Shares have traded as high as $171.13 and as low as $3.85 in the past year.

Part of the company's plan calls for branching out beyond its original product into the markets for metropolitan-area optical-networking gear and Internet Protocol-based networking equipment. The strategy pits Redback against the likes of DeNuccio's former employer Cisco, as well as other heavyweights including Nortel Networks and Juniper Networks and smaller players such as ONI Systems.

As a measure of how tough DeNuccio's job may be, Redback recently slashed its executive's annual salaries by 25 percent in exchange for additional stock in the company. The program, which became effective Aug. 16 and ends March 31, was mandatory for the 20 executives at the vice president level and higher and optional for all employees. There were about 80 total participants in a company of about 950 workers, executives said.

"It's really a stock-for-salary program," said Redback Chief Financial Officer Dennis Wolf. "The real intention in this is the belief that the company has that the current stock prices are really low, and if we are able to execute over the next year or so, there will be leverage for the employees to participate in the upside."

Wolf said the program only saves Redback about $400,000 per quarter on total quarterly operational costs of slightly more than $50 million. "So obviously we didn't do it for the cost savings," he said.

The company in August also repriced stock options for its employees, a spokeswoman said.

It's into this morass of executive turnover, strategic change and financial complexity that DeNuccio wades.

In a recent interview with CNET News.com, DeNuccio discussed his decision to leave the Cisco fold, his plan for boosting Redback amid the industry's downturn, and the wisdom in plunging headlong with new products into already crowded markets.

Q: Why did you leave Cisco to join Redback?
A: Well, I've been on leave of absence from Cisco for six months and looked at a lot of different opportunities in the start-up world, as well as companies that are already public, and I was looking for a platform that I thought could become the next-generation supplier to the telecommunications industry when it gets healthy again.

What I saw here at Redback was an incredible portfolio of technology that's either in place in the market with leadership like SMS (Subscriber Management System, Redback's technology that authenticates high-speed Internet users) or entering the market in the metro-optical space, and soon edge routing, where there's enormous opportunity for growth. We've got a pretty broad portfolio of technology and one of the best engineering teams in the industry, in my opinion.

So Cisco wasn't the place for that?
Well, what I think is going to happen is the bigger the company gets--if you look at the traditional suppliers, Lucent, Nortel--the bigger you become, the harder it is to innovate. So if you look at what happened in the computer business, like IBM is today, they're an integrator as much as anything else. That's what happened to a lot of the computer suppliers of old.

I think that over time, the big guys that supply telecommunications are going to have to rely on technology companies such as ourselves to innovate and create technology that they can then bring in and be an integrator of. So I think that fundamentally, because of what's happened in the marketplace, the speed at which technology's still moving and the network's still moving and the inability of large players to innovate and create new technology is going to create a new paradigm where a small technology company like ours is going to align with larger distribution players and integrate.

How do you plan to encourage communications carriers to buy Redback gear in this difficult sales environment?
There's really three major product portfolios that we have here. We have broadband subscriber management, and because we're a leader in the space that's where we got hit the hardest, like the whole industry has...But I think we can grow market share and revenue in that traditional product line, which will be a main driver of our return to profitability. We have with that product all of the largest customers in the world. So we have a good customer base even though it's been depressed because of the spending problems.

We're in SBC, BellSouth, Qwest and Verizon--the four biggest (local exchange carriers) in the country. So we're in all the biggest players. That bodes well for that product line as DSL returns and as spending returns.

Then we're entering two spaces that I think are...two of the biggest segments in the industry and also will be the first places that spending will return to in re-architecting the networks. And that's in the metro-optical market and in IP on the edge of the (network). So I don't think it's in the core IP, where there will be a lot of changes, but in the metro space, whether it be optical or IP; that's where spending is going to be and where most of the next movement and migration and change in the network is going to happen. Regardless of whether the industry is getting healthy again, we're entering two very large markets.

When Redback first burst onto the scene the company was popular with broadband service providers for its SMS gear. But now the company appears to be migrating more toward producing metropolitan optical equipment, a market already dominated by Ciena and ONI Systems, among others. Why the new focus?
There are only a few players that are playing heavily in that space based on the new decisions that are being made. I believe we have a revolutionary product. We have a very, very strong product line. Yes, we're going up against competitors, but I don't think it's as crowded as the market is blurred into thinking it is.

What further changes do you foresee to the way networks are run?
I think we're moving more and more toward a virtual network.

Meaning?
Where fixed connections to the network will become a smaller and smaller piece of how the network is architected. And we will have virtual hookups. Whether we will be companies, branch offices, or employees or people from home, we'll have virtual connections to the network. And the network intelligence will understand who we are, where we go to get authorized, what kind of services the network owes us because of what kind of user we are--so the virtual nature of the network will become more and more a driver, vs. today; networks today are predominantly fixed-architected. Where you know you have 10 branches, there's a fixed pipe to each one of those branches; your employees can hook into each one.

What is the outlook for Redback Networks? Do you anticipate reducing the company's profit or revenue estimates or trimming the work force?
It's too early to say anything. I do have a strong commitment to increasing the top line and making sure every dollar we're spending is necessary and is a good return for either our customers or our shareholders. So I think we're going to focus on both the revenue line and the cost line.

Redback is an awfully young company to already be on its third chief executive. Dennis Barsema was replaced by Vivek Ragavan in July 2000. Why has there been such turnover at the top spot?
Well, I think the reality is the company went through a difficult acquisition with Siara, and I think it challenged the leadership team as it was going through that. I think that's the result of where we're at.

Do you think Siara Systems was worth $4.3 billion?
I think it was absolutely the right thing for the company to buy. And in those days it was a good price. Do I wish I could buy at today's prices? Yeah. But it was absolutely the right thing for the company to do. So I think it was a good acquisition, in other words.

Do you plan to stay longer than 13 months?
Absolutely. I've been a CEO prior to Cisco, and I really wanted the opportunity to be CEO again. I think Redback is the right foundation to build the right kind of telecommunications company for the future. And that's why I came here, because this is a company for the long haul.

Why are so many top executives leaving Cisco Systems?
I think it's predominantly due to opportunity, and not anything negative about Cisco. If you look at myself, I wanted the opportunity to be CEO again. (Cisco CEO John Chambers is) committed to staying at the company, so...if you look at the people who are leaving, they're predominantly seeking CEO or COO jobs. So I think it's more of a personal opportunity rather than anything negative about Cisco.

How will the communications-equipment sector emerge from this recent downturn? What lessons will have been learned? How will the sector change?
On the customer side first, I think to a certain extent it's not all that different from the dot-com demise in that speed was the primary driver of the business plan and not revenue growth or profitability. I think that just like the dot-com world, the telecommunications world from now on will no longer build business plans that don't have return on investment in some reasonable time.

So I think that's a healthy thing for building stronger telecommunications companies and therefore more reliable networks where we're not all trying to replace our DSL because our suppliers are going out of business.

And I think for equipment manufacturers, it probably means that similarly, return on investment is going to be more important but also more conservative management as we scale up when growth returns--and I do think it will return. And when growth returns, we'll take a more conservative approach to scaling our organization. Because now we realize just how erratic the demand can be.

We've never seen a falloff in any business the magnitude of this one. I think you're just going to have more inherent fiscally conservative scaling of corporations from here on out.