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“TRAFFIC CONTROL”
Technology
Computer Networks
NASD: FFIV
F5 Networks, Inc.
401 Elliot Avenue West
Seattle, Washington 98179
Phone: 206-272-5555
John McAdam
President and
Chief Executive Officer
Interview conducted by:
Diane Reynolds, Co Publisher
CEOCFOinterviews.com
March 2002
BIO OF CEO,
John
McAdam has served as our President, Chief Executive and director since July 2000. Prior to joining F5 Networks, Mr. McAdam served as
General Manager of the Web server sales business for IBM.
From January 1995 until August 1999, Mr. McAdam served as President and
Chief Operating officer of Sequent Computers Inc., a manufacturer of high-end open
systems, which was acquired by IBM in September 1999.
Mr. McAdam holds a B.Sc in Computer Science from the University of Glasgow,
Scotland.
Company
Profile:
F5
Networks is a leader in Internet Traffic and Content Management (iTCM). The company’s integrated suite of
software-based products enables enterprise customers to manage, control and optimize
Internet traffic and content, improving the performance, availability, and scalability of
their networks. In addition to selling its family of appliances and application switches
directly and through value-added resellers, the company licenses its industry-leading
traffic management software to OEM customers, including Dell and Nokia. It also sells its software into the emerging blade
server market. The company’s solutions
are widely deployed in large enterprises, top service providers, financial institutions,
government agencies, healthcare, and portals throughout the world. The company is headquartered in Seattle,
Washington, and has offices throughout North America, Europe and Asia Pacific.
Ceocfointerviews: Please let my readers know what is happening over
at F5 Networks.
Mr. McAdam: F5 is very much focused on traffic
management solutions for the Internet, and following the collapse of the dot-coms in the
last quarter of calendar 2000 we have been refocusing our business on large corporate
enterprises. Our target customers are Fortune
2000 companies that have applications running in the data center and are redeploying those
applications using the Internet. Our traffic
and content management products effectively optimize those applications, lowering their
cost and improving their performance. And in
conjunction with our shift of focus to the enterprise, we’ve announced a number of
new products and blue chip partnerships.
Ceocfointerviews: Actually, this company was founded back in 1996
and you didn’t go public until 1999, so it has been around.
Mr. McAdam: Absolutely. We started out building
software-based products to optimize the flow of traffic on the Internet, and over the past
six years we’ve established a significant technology lead by integrating hardware
solutions for routine traffic management tasks with sophisticated software solutions for
more complex application-related functions. Not
to sound complacent, that’s one of the reasons we think we have a distinct advantage
over competitors such as Cisco and Nortel, whose products are not integrated and are
primarily hardware-based, and over would-be competitors who might attempt to duplicate our
achievements. I’m not saying the latter
couldn’t be done, but I don’t think it could be done overnight.
Ceocfointerviews: There are so many links, graphics,
attachments—you name it, it’s out there and I think it’s becoming a little
overwhelming at times. So, are you
simplifying it for the end-user?
Mr. McAdam: What we are doing isn’t really
simplifying it. You might say we’re simplifying it from a business viewpoint but,
fundamentally, what we are doing is making both the network and network applications run
better. Whenever business
applications—whether they are from SAP, Oracle, Microsoft or any other enterprise
vendor—are being deployed using the Internet, our products can optimize those
applications, speed up their performance, and improve reliability. They also ensure that
the servers running those applications are highly available by checking to make sure they
are running properly and rerouting traffic elsewhere if a server goes down. What’s more, we can do that both
locally—that is, within a data center—and globally, between multiple Web sites. For example, if a customer has sites in San
Francisco, New York and London and the San Francisco site goes down for some reason, our
products will automatically reroute traffic to the other sites. Similarly, our products
can take one site—say, New York—off line and redirect traffic to the other sites
while they automatically update the content—web pages, data, applications,
whatever—at the New York site. As an
extension of traffic and content management, our products can also encrypt and decrypt
messages using the SSL—Secure Socket Layer—protocol, boosting performance and
freeing up valuable space on servers which have typically been used for this function. The market for SSL has been growing significantly
during the past year, and we currently have three-quarters of the market for multi-purpose
SSL devices. Where we see the next window of
opportunity is in migrating our technology and expertise to wireless networks, a segment
of the market we think will start to take off within the next 18 to 24 months. We’ve
already established our credentials in this space as a key provider to NTT DoCoMo in
Japan—where, incidentally, we hold the number one market share in traffic
management—and we are currently engaged in joint development of wireless technologies
with Nokia. Internet content accessible
through wireless devices—cell phones and other hand-held products—no longer
includes just data but encompasses video and voice as well. And the increased complexity,
frankly, gives us an opportunity to make products that optimize that wireless access.
Ceocfo Interview: As the Internet becomes more widely used, people
are becoming more concerned about security. You
have new products that incorporate security features.
How does that work?
Mr. McAdam: I referred briefly to SSL a minute ago. Basically, the SSL—Secure Socket
Layer—protocol is a technology that has become the method for encrypting traffic on
the Internet. When you log in to your
bank’s online site, for example, all of the data exchanged between you and the bank
is encrypted so no one else can get access to it. More
and more we are seeing that requirement is essential not only to banks and other financial
institutions but with Federal agencies and other large organizations that need to ensure
that their transactions are secure. Basically,
we’ve capitalized on the growing demand for SSL by integrating it into our traffic
management products, and the results have exceeded our expectations. A year ago, BIG-IP—our local traffic
management product—didn’t have SSL capability.
We added that roughly nine months ago, and within a few months about 40% of
the BIG-IP systems that we installed shipped with an SSL card in the box. Over the past couple of months, we’ve
introduced the BIG-IP 5000 and the BIG-IP 2000, both of which include SSL on an
ASIC—an Application Specific Integrated Circuit—tightly integrated with the
products’ switching and traffic management capability.
By contrast, if you want to buy a traffic management solution and SSL acceleration
from one of our competitors, you would have to purchase two separate boxes. Parenthetically, if you wanted to get all the
functionality of these products from our competitors you would have to buy three separate
boxes, and you would likely pay up to twice as much for a solution that was not
integrated.
Ceocfointerviews: The reason I mentioned earlier that the company
was originally founded in 1996 is that back then there were a lot of companies entering
into this field and many have fizzled out. What
has been your strength that has kept you holding on?
Mr. McAdam: Obviously in 1996 there were a lot of
technology companies springing up. For the
most part, they were selling to the dot-com fraternity and of course dot-com companies
were the right customers to sell to at that time because they had lots of money and were
racing to build infrastructure, and sales cycles were very short. Prior to 2001, F5 also grew rapidly on the
strength of sales to dot-com customers. Since
then, the thing that has kept us going and, in fact, contributed to a very successful year
last year, can be summed up in two words: people
and products. Number one was the people. The people within the company haven’t really
changed in any significant way. We’ve
obviously added people since 1996, and we have some really tremendous people here that can
adapt very quickly to changing times. When
we moved up from dot-coms to the enterprise the organization was able to make the
transition very quickly. Equally important
was the functionality and the basic architecture of our products. We’d decided early on to choose software as
the core of our solution instead of hardware. We
have recently added hardware components to our traffic management solution, but the core
of our intellectual property remains software, and that allows us to add functionality as
the customer requirements change. We’ve
been unique in that respect and that is very significant.
Other factors that go hand-in-hand with good people and products are
high-quality and excellent service, both contributing to exceptionally high levels of
customer satisfaction. These became even more
important as we shifted the focus of our business to the enterprise market. Apart from that, carefully managing the details
our business and paying close attention to the company’s balance sheet have enabled
us to not only survive the downturn but position the company for growth in a flat market. At the end of the day, however, what’s
really important is having great products with clearly differentiated functionality and
great people to develop, sell and support them.
Ceocfointerviews: Many companies that were formed a couple of years
back were not equipped to handle the changes of today. So the companies that are still
around can say “Been There, Done That”, and know were to go from here.
Mr. McAdam: Absolutely, and don’t get me wrong. We had our challenges. In January of 2001—it seems like a long time
ago—we did make a reduction in force of 15%. That’s when the dot-coms imploded
and we saw dot-com sales shrinking from 80% of our business to almost 0% in less than six
months. We battened down the hatches from a
financial point of view, kept expenses to a minimum and kept the company focused on
selling to the enterprise. Subsequently, we
grew our enterprise customer base from under 20% to more than 90% today, and we exited
2001 with essentially flat revenues—something we’re very proud of in light of
the fact that most or our competitors reported revenue that was significantly down from
the prior year. Equally important, we entered
2002 with a finely-tuned operating model and a strong balance sheet with a solid cash
position and no debt. And we very definitely
know where we are headed.
Ceocfointerviews: You mentioned earlier you do have competitive
differentiation in software and hardware. Obviously, hardware—appliances and
switches—is the bigger portion of the revenues right now. Do you see that changing?
Mr. McAdam: We have two business opportunities moving
forward. One of them is a core business, an
appliance running our software. That accounts for almost 70% of our business. However, we see a software-only opportunity
growing dramatically going forward. A little
more than a year ago Dell began licensing our BIG-IP software to ship on their own
appliance—called PowerApp BIG-IP—and that business has been growing nicely over
the last nine months. This January, Nokia
also started shipping a co-branded appliance running our software, and we expect that
business to ramp steadily for the remainder of our fiscal year. Under a similar arrangement, Enterasys will be
taking our software and putting it on a blade in their enterprise switch later this year. Another potentially large software opportunity is
linked to the emerging blade server market. Blade
servers consist of a chassis that can house up to 24 servers, each on a printed circuit
board that slides into a common backplane. As
traffic comes into the chassis it needs to be balanced across all the servers. The majority of these servers will be Intel-based,
and since our software is both Intel-compatible and easily portable, it is uniquely suited
to sit on a blade—or two, for redundancy—and manage the traffic across the other
blades. Since December 2001 we have announced
relationships with Hewlett Packard and Compaq to sell our software for their blade
products, and we expect to announce similar relationships with other blade server vendors
as they announce their products over the next several months.
Ceocfointerviews: How much of your revenues are coming from the
international market?
Mr. McAdam: About one-third, depending upon the
quarter. Out of that, about 10% is in Europe
and the rest is in Asia Pacific. We are
extremely strong in Japan, the first country where we have jumped ahead of Cisco in market
share. A lot of our success in Japan is owing
directly to the fact that we have a terrific group of people in our Japan organization. We also have strong partnerships with companies
like NTT, Tokyo Electron and others who resell our products in the Japanese market. In addition, we have been able to leverage the
unique capabilities of our software to become the traffic management standard for i-mode,
NTT DoCoMo’s wireless Internet service that I alluded to earlier. Currently there are over 30 million people in
Japan that access the Internet via mobile devices, and we have the capability within our
traffic management software to ensure transaction integrity. If someone performing a transaction is
disconnected before the transaction is complete, all they have to do is reconnect and our
software will link them back to the server they were on and allow them to pick up the
transaction where they left off. This is a
capability that none of our competitors can provide and one that we have been able to
leverage into additional Japanese business and other wireless opportunities worldwide.
Ceocfointerviews: You are addressing all of the right spots right
now. I know when you were talking about
Japan, they are very mobile over there and it has grown quicker over there than it has in
the U.S.
Mr. McAdam: That is correct. But it is beginning to take root in the U.S. and
Europe as well. Companies like Sprint are
starting to build a wireless infrastructure. It
probably will come even faster in Europe. We
just got notification today, for example, that NTT are moving into Germany and planning to
roll out i-mode there. That’s very
exciting, particularly in the context of the work we’re doing with Nokia to jointly
develop a mobile content delivery prototype for wireless networks.
Ceocfointerviews: You have talked quite a bit about partnerships. How important are they to the growth of this
company?
Mr. McAdam: They are critical. Our main competitors, Cisco and Nortel, are
multi-billion dollar companies, and we are a small, young company with just over $107
million in revenue last year. Although we
seldom lose to these competitors on the strength of our products, when we compete with
them in the Fortune 1000 we are often at a disadvantage because of size alone. Our
partnerships help us counteract that. To be
able to say that companies like Dell and Nokia are reselling our products and companies
like Hewlett Packard and Compaq are taking our software and putting it on their new server
architecture is really a major asset from a creditability point of view. In addition, we have a growing number of strategic
partners—including Microsoft, Oracle, Tivoli, BEA, HP Openview and a score of
others—who don’t generate revenue for us directly but whose products pull our
products into their accounts. To understand
how that works, remember that our products are software-based and tightly integrated
through a common software architecture called iControl.
Last year, we created an iContol interface and began distributing it for free as a
software development kit that allows third-party software vendors to modify their
applications to interact with our products in the network.
For example, if a Microsoft application needs to have updated content on a group of
servers, the application itself can send a message to our products telling them to take
the group of servers offline, update the content, and bring the servers back
online—all without human intervention. That
saves time and money and eliminates errors in the process.
When a Microsoft salesperson sells the application, he can sell that feature as an
added benefit. But in order to take advantage
of it, the customer must have F5 products in the network.
Hence, the pull that our partners’ products exert and their importance to us
in getting around our competitor’s size advantage.
Ceocfointerviews: You seem to be growing strictly through your
partnerships and not through acquisitions? Would
you consider acquisitions as a source for growth as well?
Mr. McAdam: We aren’t currently contemplating any
acquisitions, although we would not rule out the possibility if the right opportunity
presented itself. Having said that, we have
the luxury right now of having very significant opportunities opening up to us. I mentioned the software business, principally the
Dell and Nokia business and making sure that we seize the opportunity to become a major
player in the emerging blade server market. These
and our new products represent exciting but very challenging near-term opportunities. Farther out, developing our iControl partnerships
and working with Nokia to develop wireless technology will require use to stay focused on
these opportunities as well. That being the case, any acquisition opportunity would have
to be extremely compelling for us to pursue it at this time.
Ceocfointerviews: Since you are competing on a large scale with
companies larger than yourselves, especially in the finance area, are you going to be able
to keep up with them?
Mr. McAdam: I think we absolutely can. Last year was a tough year for just about every
technology company out there. During that
year we had tremendous success growing our enterprise customer base, fine-tuning our
operating model and improving our financial position.
Currently, we have $72 million in cash, and for three quarters in a row now,
we have been cash flow positive from operations We
have no debt whatsoever. We’ve reduced
inventories dramatically and brought days sales outstanding down from over 100 a year ago
to 70 in the last quarter. Our gross margins
have increased from 53% a year ago to 68% last quarter, and we’ve indicated that we
expect to see continued improvement there. Our
financial situation sends a strong message that we are going to be around for a long
while. And—to return to the point I made
earlier—our partnerships with some of the industry’s biggest players have
increasingly enabled us to outflank our larger competitors in penetrating new accounts.
Ceocfointerviews: Will you be able to handle the demand for your
products and services as your company grows?
Mr. McAdam: We can scale our business, if and when we
need to. It won’t be easy, but we can do
it. Once again, partnerships are critical in
scaling the business. We are already using
partnerships to establish a presence in global markets where we didn’t exist. We have an open mind in signing service over to
our partners when necessary. No doubt, scaling the business will be a challenge,
particularly if things ramp as we hope they will. Nevertheless,
it is a challenge we welcome and one that I am personally looking forward to.
Ceocfointerviews: Can you grow and still keep up with the quality
of service that you provide to your customers?
Mr. McAdam: Every quarter we poll our customer base,
and last quarter was the highest level of customer service we’ve achieved so far. That’s with a pretty fast growing customer
base. Overall, we had satisfaction levels in
the low 90s, and on a comparative basis with other companies that is extremely good. The fact is, we can’t afford not to have
excellent service. In most cases, we are
helping to run mission-critical applications, not applications that are simply nice to
have. If a customer’s systems stop functioning, that can have a major impact on their
business. That’s why we put so much
emphasis on product quality. And where
service is required, we leverage technology as much as possible. A great example is a service we office called Ask
F5, which uses Ask Jeeves technology to answer customer questions online. What we’ve found is that as we’ve added
more customers under service contract, the number of calls to our 7/24 service hotline has
remained fairly constant, but Ask F5 usage has grown significantly. The end result is that customers get a quick
solution to their problem either way, and we are able to deliver those solutions at a
lower overall cost.
Ceocfointerviews: What would you say to a potential investor?
Mr. McAdam: I
think the first thing I would say is, “Look at our track record over the last few
years and in particular over the last twelve months.”
I would talk about the improvements in our financial metrics. We run the company very tightly and manage it on a
weekly basis. We are committed to not
producing any surprises and building credibility. We’ve
spent a lot of time creating credibility this year and maintaining it is something we see
as critical. The other things I would talk
about are F5’s product features and functionality relative to the competition, and
frankly that’s not hard to articulate. In
fact, when we actually go head-to-head against the competition we have a high success rate
because of the differentiation we have. We
have just begun a new product cycle with the introduction of the BIG-IP 5000 and 2000, and
that has been rolling out very successfully. Finally,
I like to talk about the medium- to longer-term opportunities: the fact that Nokia is now
shipping our product and we see growth potential in that partnership; the fact that we
will soon be selling our software on Hewlett Packard and Compaq blade servers; and the
likelihood that we will sign up more OEM and blade server partners before the year is out.
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