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How Do You Follow A $7 Billion Buyout?


Carl Russo became famous in tech circles in August, 1999, when his optical-networking company, Cerent Corp., was bought by Cisco Systems Inc. (CSCO) for $7 billion -- one of the highest prices ever paid for a privately held tech company. Two years later, after helping Cisco get its optical business booming, Russo decided to retire. He wasn't looking to relax, though. He wanted to devote himself full-time to his lifelong passion for driving Formula One-style race cars. He had taken the wheel in dozens of races and loved the adrenaline rush of flying along at 160 mph. "It was time to go racing for good," says the 48-year-old Russo.

It didn't work out that way. While he didn't abandon the racing circuit, Russo returned to the networking game two years ago as chief executive of little-known Calix Networks Inc. What drew him back was the opportunity to turn around a struggling startup, in which insiders say he had invested more than $20 million. Now Calix, of Petaluma, Calif., is burning up the track. Sales of its networking gear, which lets phone companies deliver video and Net services to people's homes without expensive upgrades, doubled last year, to over $100 million, and the company is generating the kind of excitement rarely seen since the bubble days. "Calix is a hot company," says analyst Sam Wilson of JMP Securities. "It could be the next Cerent."

"RIGHT PLACE, RIGHT TIME"

Not that Russo is headed for another $7 billion bonanza. For the telecom world, those days are long gone. But just as Cerent helped pioneer the use of optical technology to shoot Internet traffic between cities and towns, Calix is on the leading edge of another megatrend. Telephone companies, desperate to head off competition from cable rivals, plan to spend billions over the next few years to upgrade their networks so they can offer TV along with voice services. Using Calix gear, which sits in apartment-building basements and the telecom cabinets that dot suburbia, phone companies can roll out such services just by adding an extra circuit card. "Carl is in the right place at the right time. This market is going to explode," says Frank Dzubeck, president of telecom consultant Communications Network Architects in Washington.

Serious challenges remain, to be sure. While Calix has signed up more than 140 phone companies, from tiny rural outfits to larger regional players such as CenturyTel Inc. (CTL), it has yet to land one of the giant Bells. That's key for any communications-equipment company that wants to have a lasting impact -- or a blockbuster public offering. And competition is rising fast. Market leader Alcatel (ALA) recently landed a huge contract to help SBC Communications Inc. (SBC) deploy its video-on-demand TV offering. "Carl is a smart guy, but this is a tough business," says Hilary Mine, Alcatel North America's senior vice-president for marketing.

Russo has faced tough challenges before. In college, he was an aspiring research physicist and "business was the furthest thing from my mind." Then, when he was 21, his mother died, six weeks after finding out she had leukemia. With Russo's grieving father too shaken to attend to his one-man electronics distributorship, Russo dropped out of college (he never graduated) and took over. "I bought every sales book I could find. Somebody had to keep an eye on the business," he says. "Although I almost figured out how to put it out of business."

That's classic Russo: Always quick with a wisecrack, he seems as much prankster as manager. There's a serious goal, however. "You've got to let people be themselves. If you don't, I don't know how you get the creativity you need, or the criticism." These days, new employees are often shocked to find him working while sitting on the floor of his cubicle, legs crossed Indian-style. "It's more comfortable -- and it's amazing what happens when you put yourself in a physically subordinate position to people," he says.

His idiosyncratic style has paid off. Russo co-founded Cerent in 1997 and had it ready to go public just two years later. It was when Cerent filed its financials with the Securities & Exchange Commission that Cisco came calling. While the price was a stunner, most analysts say the deal paid off in spades for Cisco. Sales blossomed from $100 million to about $1 billion in 18 months, says one insider. Russo jokes that the money hasn't changed him -- except for the beachfront mansion in Santa Barbara and the $18 million Cessna Citation X he bought.

His experience at Calix hasn't been quite as easy. The company was in deep trouble when he agreed to become CEO in February, 2003. It had just laid off half its employees and was struggling to deliver on its promises. Just days into the job, Russo got a call from Ringgold Telephone Co. -- which had discovered a glitch that prevented it from turning on a new TV service it had already begun to advertise. Many startups might have offered to take their gear back and leave it at that. But Russo invested more than $1 million to buy a rival's equipment to help solve Ringgold's problems and then worked with Calix' engineers to fix the bug. Says Ringgold Executive Vice-President Phil Erli: "I will forever be in Carl's debt. It was a class act."

Russo engenders respect around the racetrack, too. In just two years his two-car team, called RuSPORT, has become a top contender in the Champ Car series, which is similar to Formula One racing. That's in part because of Russo's close oversight. In a league in which most owners are weekend hobbyists, Russo has interviewed almost every member of the 45-person team, right down to pit crew. "He put a great deal of thought into what he wanted this team to look like," says team President Jeremy Dale.

As for Calix, investment bankers say it could easily do a public offering this year. Still, Russo insists he's not looking to go public or sell out. "We're just trying to build a sustainable, good company, and frankly, we've got a lot of work to do," he says. Maybe so. But once again, Russo looks as if he's driving the pace car.

By Peter Burrows in Petaluma, Calif.


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