Riverbed, with its highly successful WAN optimization technology, has long competed with Cisco – but in a niche fashion, acknowledges CEO and co-founder Jerry Kennelly. Now, the company is taking its fight to the core of Cisco’s business with new SD-WAN routing technology that could make existing routers obsolete in the world of hybrid clouds and virtual networks.
In this installment of the IDG CEO Interview Series, Kennelly spoke with IDG Chief Content Officer John Gallant about this new battlefront, as well as Riverbed’s expanded role in application performance management. He also talked about Riverbed’s decision to go private in 2015 and why that move brings big benefits to customers.
When you bring up the name Riverbed, most people think of the WAN optimization company. How do you want them to think of Riverbed today?
Riverbed enables people to use applications across global networks, across vast physical distance, with the best performance, the best visibility, lowest cost, best response time. Our tag line is the “application performance company”, but it’s really what we do. When we got this business started I don’t think people understood WAN optimization that well. People thought it was all about bandwidth optimization.
Bandwidth is important. But we did something much more important, which was overcome the latency of packet travel in global networks such that you can get sub-second response time accessing sites anywhere in the world. When we started the company in 2002 the world was CIOs delivering applications to their knowledge workers from on-prem servers across captive MPLS networks. In that world, we were very powerful because we dramatically cut the two big costs of delivering applications; the cost in time - the latency - and the cost in dollars, the price you pay for bandwidth. That’s why we just exploded between 2004 and 2012. Then we realized we had a bigger mission and that was to enable a CIO or network manager to completely control the visibility, repair, response time and delivery of applications over networks. That’s really what we want to be known for.
Before we dig into some specific products and your strategic direction, let’s talk about something that happened in 2015, when Riverbed went private. Why did you do that and what’s been the result of that change?
Wall Street tends to favor revenue growth over profitability or cash flow. We did very well in revenue growth but we had a slowdown between 2012 and 2013 and that depressed our share price which made us an attractive target for activist investors. We got a very enthusiastic activist investor to the stock in late 2013.
That was Elliott Management?
Yeah. The Elliott folks, and they were campaigning. Their job was to buy stock at a discount and then sell it, usually within a year or two, at a much higher price. Your job as CEO is to decide. You have to capture all the noise and activist engagement and your ego and the company and decide the best outcome for the shareholders of the company. What course of action delivers the best share price?
I spent about six months trying to figure that out and in the end decided that to go private delivered a very good share price to all the shareholders, including the activists, employees and institutional holders, and it allowed us to operate with the benefits of being private. A lot of people don’t understand this but the equity model is usually a highly leveraged model where they put in some amount of equity and a large amount of debt to finance the go-private activity. To go private, you have to actually be both profitable and have a strong cash flow and those were two strong aspects of Riverbed. In a sense, it’s almost a mark of honor to be able to go private.
+ GOING PRIVATE: Riverbed goes private in $3.6 billion deal +
Once private, we needed to do some pivoting to re-fire up the growth. We were already very profitable but we could have been more profitable so I sold two lines of business. I sold our cloud storage business to NetApp and I sold our virtual ADC {application delivery controller} business to Brocade. Both of those were very good businesses, both best-of-breed products at the time but not really great fits with Riverbed, our sales force and our channels.
NetApp and Brocade were better homes for those businesses. That allowed us to focus on our core business and we’ve been able to re-fire the growth in the core business and improve profitability. When you have too many lines of business in one company you end up with a lot of extra cost, a lot of overlay technology specialists and overlay sales specialists. We were able to redo the cost structure of the company and this year, 2016, we’ll do $1.1 billion in sales at a 32% operating margin and generate over $350 million in cash and that’s the second year of being private.
On top of that I was able last year to do two important acquisitions. I bought a company {Ocedo} in January that had what we think is one of the most advanced versions of SD WAN - software-defined wide area networking. That will be very important for the future of Riverbed. In August, I bought a Boston/Tel Aviv company called Aternity that has a very interesting, probably best-of-breed product in what’s called end-user experience monitoring that’s been a great addition to the company. Those things would have been difficult to do under the eye of Wall Street where you’re on this 90-day treadmill. The private equity investors have more of a three- to four-year horizon for generating the value of their business rather than having to check every day to see what your stock is doing.
If you were to boil it down to a sentence or two, going private is good for customers why?
It’s good for customers because we’re able to focus on delivering value, making the company and the product more attractive and doing the best quality support. We’re less focused on grinding them the last week of each quarter to give us one more [purchase order].
Riverbed uses the term “application-defined networking”. What does that term mean and how is that shaping your corporate and product strategy?
I said a bit earlier that there was an old world in 2002 that CIOs had for delivering applications; on-prem servers, MPLS network. Today, a CIO has to deliver applications from an on-prem server, from a SaaS provider who has his own data center somewhere, from an infrastructure-as-a-service data center at [Microsoft] Azure or wherever. He has to do it with his MPLS network and he wants to mix and match in a cheaper broadband internet network. All the permutations and combinations of trying to deliver applications with speed at a good cost with the right response time in this new world is very complex. It’s the hybrid cloud world. Old fashioned routers are still widely used and that’s one of the issues in the cloud world. Most things have been upgraded to 21st century technology to support cloud data processing except networking. Most networking is still mid-1990s technology, 25-year-old technology.
In this new, complex world you want to be able to decide packet-by-packet according to what the application is, how you route it, with what rules and what SLA. If a packet comes across a router and it’s an employee looking at a YouTube video, then you can give that a low priority and send it off over cheap bandwidth. If you look at the packet and inside the packet is an HR inquiry to the corporate data center, then you can give that packet high priority, high security and send it over your MPLS network.
You can only do that if you’re routing on Layer 7, which is the application layer, and only if you have a technology of deep packet inspection where you know what’s inside every packet. Classic routing and switching is done at Layers 2 and 3 in hardware. The future of networking in the hybrid cloud world is to route not at Layer 2 and 3 in hardware; it’s to route at Layer 7 in software using your application knowledge to route properly in terms of speed, cost, performance and security for each user according to the application type.
If you understand the routes of WAN optimization in the SteelHead product of 2002, it’s a Layer 7 optimization that requires application knowledge to do the latency optimizations. We have 15 years of domain knowledge, of understanding every packet and we have the best-of-breed deep packet inspection technology so we were able to do these latency optimizations at Layer 7 on all those applications. That knowledge is unmatched in the industry. Now we can use that knowledge to do routing at Layer 7 based on application knowledge rather than doing routing at Layers 2 and 3 based on hardware.