Running rings around Cisco

Pereira, the CEO of telecom equipment maker Riverstone Networks, runs one of the few companies in that field to successfully withstand the last year's punishing downturn. Indeed, his Santa Clara, Calif.-based company bucked the trend, actually making a profit on higher sales for its second fiscal quarter.

Pereira helped start equipment maker Yago Systems in 1996, which was acquired a few years later by Cabletron Systems. He was subsequently chosen to run Riverstone, one of four companies that would ultimately be spun out of Cabletron.

But talk about timing. One day after Riverstone's spinoff in February 2001, the sector got whacked as Nortel Networks issued what would become just one of its many earnings warnings that year. Eight weeks later, Cisco Systems stunned an increasingly jittery Wall Street with the disclosure that it had accumulated $2.25 billion in inventory.

Pereira talked with CNET News.com, discussing the company's successes, its challenges, and the strategy for competing against Cisco.

Q: In terms of quarterly revenue, Riverstone is not the largest player in its field. Is it good to be small these days?
A: Yes it is. It's good that we started building our revenue base when the market had already cratered, so it allowed us the expectation that we would not double (in revenue) every quarter. The benefit of being last to market is that we got to build in a somewhat saner environment. Our competitors had to go on a revenue binge because the expectations were out of this world. When the whole thing came crashing down (our competitors') cost structure was out of whack with revenue structure and they had to take a lot of people out of the equation.

In other words, there's a benefit in being later to the party?
Every company--including Cisco--spent time restructuring, (while) we spent less time...so there's some benefit to having come in at the tail end of all that bingeing.

What's your take on why Riverstone seems to be doing better than similar companies like Extreme Networks and Foundry Networks?
The bulk of their revenue comes from the enterprise market, so the fundamental markets we chase are different. They do sell (to) the service provider, but that's almost like a side business. Much of their business is enterprise. In that market, you're fighting Cisco at their strongest. In the service-provider market, you're fighting Cisco not at their strongest, so it's a little easier. Secondly, we do more than half of our revenues from overseas right now, just because outside the United States is where people are spending.

If you want to sell to the enterprise market, are there a lot more constituencies you have to satisfy?
The enterprise market primarily buys brand, and that's where Cisco is strongest. The enterprise market can be late with new next-generation technology because their business is not fundamentally driven by what the network looks like. The network is a productivity enhancer; it carries e-mail and things like that--all the productivity tools of the enterprise. The carrier space...carries revenue--that is their business. They cannot be late to market with the right product because then they miss business opportunity. So companies like ours that can move more aggressively...on the product road map tend to win business.

In 1999, when you decided to go after the international market and the large-carrier market in the United States, weren't things still going pretty well in the United States?
They were starting to go downhill at that point in terms of the signs we were seeing. There were a lot of (carriers) all focused on creating a lot of bandwidth. All the optical, broadband and Ethernet guys were in full swing and we would ask (carriers) about their business model and the answer was always "we will offer the bandwidth cheaper than the next guy." After you talk to (enough) people, you see there's only going to be about two guys left standing here because they're all trying to outdo each other.

There has been a lot of time spent debating capacity in the long-haul networks versus capacity in the metropolitan networks, so now is the big issue building out the metropolitan networks?
The networks always tend to build from the inside out. The core was the first place people focused on because there was not enough capacity there for DSL (digital subscriber line) and cable and it was really driven by a residential model. A lot of capacity got put in there and the residential market did not exponentially grow demand for the bandwidth--it's kind of been about the same. So now we have to rely on the business guys to suck up all that excess bandwidth. But the business last mile has really not been upgraded. The residential last mile went from dial-up to DSL and cable, but the business last mile is still by and large a T1 model, so once that gets upgraded...there will be applications that can suck out the bandwidth. Then the cycle starts all over again.

As far as competition goes, you suggested that Cisco is not as strong in the metropolitan area.
I think Cisco is strong wherever they put their mind to (be strong) because they have incredible resources and deep pockets (compared) to a company of our size. But I think what helps is that they have a lot of other things going on, so the brain cells are spread thinly across a lot of other issues, problems and challenges and we are probably one of their lesser concerns at this point.

They're clearly preoccupied, but are there other factors?
This market is not large enough yet for Cisco to actually put in a significant amount of resources. The return is not there. The market size is not large enough for a company that needs to do billions of dollars per quarter (in) revenue. Support and service is (also) an issue for our customers because 90 percent of their operational costs are really in supporting the networks, service issues, outages and all those kinds of things. That is something that even a Cisco cannot go out and buy. That is something you have to build over time, and since (a significant amount) of their business is enterprise focused, their support model is built differently.

If you say that your response to Cisco is one silver bullet, you're dead, because Cisco takes a pot shot at that silver bullet. It has to be a multi-pronged approach.

Riverstone is profitable and revenue is up. Does that turn the company into an acquisition target for a bigger company?
Our driving, fundamental approach to this has always been one that satisfies our three major constituencies: employees, shareholders and customers. Any acquisition strategy--either of us or by us--has to make all three happy.

There's always the other reason why people sell, which is to just sell out. If you look at our history, we've been around that block so many times. We started as Yago and sold it to Cabletron. Most entrepreneurs should quit at that point, move on and become solo entrepreneurs. We stayed and made the product successful and took on a monumental effort of overhauling and turning around an East Coast company.

So why did you sell the first time?
We sold to take it to the next level and then concluded that even the next level above that was to split the thing up into multiple pieces and bring the parts out in a focused manner. (After) having brought Riverstone this far along the path of success...selling out as the motivator behind a merger or an acquisition is not a very likely scenario. We've done a lot of the hard work, so having come this far to give up just doesn't make sense.

It sounds like you want to stay with this company at least for a little while longer just to see what happens.
I've been with this thing for five years and I want to see what the last act looks like.