Extreme Networks, a three-year-old Santa Clara, California-based company, was by many accounts the first to market with Layer 3 switches, which blend the speed of network switches with the intelligence of routers. Extreme has managed to grow rapidly -- and its stock price has reflected such growth -- despite the subsequent entry of router king Cisco Systems and powerhouse Nortel Networks into its market.

The company generated over $100 million in revenue the first six months of its fiscal year, which ended in December 1999. Revenues in the last quarter of 1999 tripled to $55 million from the year-ago period. On January 20, Extreme announced second-quarter profits that exceeded Wall Street's expectations; its shares rose 20 percent in one day of trading, with over 7 million shares traded, more than triple the three-month daily average. The company's shares are up more than 420 percent since its initial public offering in April.

TRIPLE LAYER CAKE

"They've executed extraordinarily well. Their cost points are very strong. They've been growing rapidly. They were the first to market and remain the largest player," says Christopher Stix, managing director of SG Cowen Securities.

"There are only a few products in this market that are performing well, and they are products from Extreme, Foundry (Networks), and Cabletron Systems. Extreme has the broadest product base and the market is exploding," says Erik Suppiger, an analyst at Chase Hambrecht & Quist. Mr. Suppiger points out that Cisco, Nortel, and 3Com have a presence, but he believes that all of their products are inferior. "Extreme has a huge technological advantage, and it has proven to be sustainable business to this point," he says.

Cassimir Medford, a Redherring.com special correspondent, recently met with Gordon Stitt, Extreme's cofounder, president, and CEO, to talk about the company's surprising ride to the top of this growing market. Mr. Stitt, a veteran of more than 20 years in the computer industry, cofounded Network Peripherals, a network switch company, before he and partners Stephen Haddock and Herb Schneider started Extreme.

STALKING CISCO

Q: What was it like selling a new routing concept into a market that was considered Cisco's natural territory?A: At the time we started delivering this technology, it was not a very well understood concept. Cisco was very slow to embrace the technology. They've only recently started delivering products in our category. We had to explain the concept and show people that they really can route at these faster rates. The market's expectation was that routing is slow. We had to convince them that routing could run at wire speed. They could build redundancy in by meshing multiple routers together, and it doesn't affect your performance. That's innovation. When people hear that, they latch on to it because it really helps them. People minimized the use of routers because they were expensive and slow. A lot of the great capabilities of routers in the area of redundancy through alternate routes were not used as extensively because users were concerned about performance and complexity. Today you can find small dot-coms that have a couple-hundred-node networks in a collocation cage. They are using routing in mesh-connecting multiple Extreme switches together for redundancy and resiliency. That was not acceptable two years ago because people didn't believe they could do it.

Q: Do you frame the company differently when you speak to technologists versus financial professionals?A: Investors today are very smart people. I don't pretend to understand how they make decisions, but they do a lot of homework and they are not making knee-jerk reactions to a presentation. They are always calling up asking questions about the business. I think there is a lot of investment today by individual investors. There is a different market out there -- investors who are working in the short term and sometimes moving in and out of stocks daily and doing lots of smaller trades. We were one of the first data networking companies to go public, and our focus was the institutional investor, and on any given day the institutional trading in our stock is pretty high. You deal with those two groups -- the institutional and the individual investors -- differently, but at the end of the day, revenue is what counts. I look at some of the companies and the valuations are all over the map. You just can't get into why XYZ's valuation is high because there is a lot of speculation floating around. We focus on our business. A million router ports shipped must mean a pretty broad customer base, because that's a lot of ports. We spend a very high percentage on R & D, higher than both our similar-size and larger competitors. I believe we are in the second inning here; there is a lot of game to go. We need to continue to innovate and invest in technology and distribution.

Q: Does the presence of Cisco in your market change the competitive dynamics for you?A: Cisco is a great company with a broad product base, but their products aren't simple. We do have a big advantage there. Customers want simplicity. It is very difficult to find people to work on complex systems. You've got to look at the cost to train people. It's pretty quick and simple to train people on Extreme's equipment. We just introduced a new chassis, the Black Diamond 6816. The blades that somebody bought on our first chassis will work in this new box. The new software works on their old chassis. It is not just investment protection; you also don't need to retrain people. What you learned on the last product applies to the new one. That's quite unlike Cisco, which has half a dozen different product architectures. When the pager goes off in the middle of the night, you have to figure out which architecture you are dealing with and how you control that functionality. In our case, it's the same architecture on every port.

Q: Your market is made up of both traditional information technology (IT) customers on the one hand and service providers focused on the dot-com market on the other. Do you market your products differently to these two groups?A: There are differences and similarities between the two. Both groups need something that runs all the time. They need problem-free networks. The dot-coms have to bring a Web site up in a couple of weeks, while a lot of traditional companies accept a two-year implementation of enterprise resource planning (ERP). The dot-coms move much more quickly because the money only comes when the network is up and working. As a result, the decision-making is a lot less political. We, for example, are focused on getting the cost of the products that we build down, but their cost is the cost to build the network. Their product is the network. The network has to be simple. It has to work and it has to be cheap. They want to spend their money on content and commerce and all the things that generate revenue.

Our role in this is not just supplying them with products. We have to be very flexible in services. We must supply them with people who can help them do the design, help them bring up the network, and help them with their confidence. We have to give them the confidence that they have a partner, not just a vendor that drop-ships boxes. We set up a leasing company about nine months ago. It is important to these companies that you turn credit and leasing around very quickly. We can spend our time working on meeting future needs, not on lease rates. That's not a terribly interesting discussion for me or for them.

Q: How tuned are you to the needs of the dot-coms?A: The dot-coms have very clear near-term goals. They tend not to be very political. They tend to be technology-savvy and they tend to be in a big hurry. These things all play to us in that we can deploy a large complex network practically overnight, because our stuff is simple and very high performance. We speak the dot-coms' language. It's simplicity and scalability. They want something that's easy to install and is going to scale as they grow. If you are trying to push a technology to them and they are not responding, then it means one of two things: they don't need it or they are not ready for it. You have to listen pretty carefully.

Discuss Extreme Networks in the Public Companies in the News discussion in our Public Companies discussion forum, or visit the forums home page.