SonicWALL, Inc.

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SonicWALL, Inc.

A CHANGE IN STRATEGY IN 1997

ACQUISITIONS AND A PROFIT IN THE EARLY 21ST CENTURY

ORIGINS

SonicWALL’s founders spent most of their first decade in business designing and selling a different type of product than the network security products that defined the company in the 21st century. The change in strategic direction made by brothers Sreekanth Ravi and Sudhakar Ravi stemmed not from failure, but from a perceived chance for greater opportunity, one that seduced the two young entrepreneurs to abandon a profitable and growing business and pursue a different course. The brothers, separated in age by one year, both attended the Champaign-Urbana campus of the University of Illinois before different interests pulled them in different directions. Sreekanth Ravi, the younger of the pair, jumped into the business world, founding a manufacturer of high-performance video products named Generation Systems. His brother continued his education, earning his master of science degree in computer science from Stanford University. When Sreekanth Ravi sold Generation Systems to a publicly traded computer products company in 1990, he was ready to try his luck as an entrepreneur again. For his second venture, he enlisted the help of his brother, who was involved in semiconductor research at Stanford. When the brothers came together in February 1991 to found SonicWALL’s first incarnation, Sreekanth Ravi was 25 years old and Sudhakar was 26 years old.

The Ravis named their Santa Clara, California-based start-up Sonic Systems. Sreekanth Ravi took the titles of chairman, chief executive officer, and president. Sudhakar Ravi served as Sonic Systems’ vice-president of engineering. The pair focused their efforts on developing networking products for Apple Macintosh computers, a market far smaller than the one targeted by the Ravis at the end of the decade. Sonic Systems’ devices enabled Macintosh computers to connect to networks using Ethernet communications standards, which had been developed by Xerox during the 1970s. By the time the Ravis started their business, Ethernet standards had become the most widely used technology to facilitate communication among computers on a local area network, providing fertile market conditions for Sonic Systems to gain its footing. By 1995, the Ravis had turned their first profit, posting $251,000 in net income on $10.4 million in revenue.

A CHANGE IN STRATEGY IN 1997

The financial figures recorded in 1995 represented record-high totals for Sonic Systems as an Ethernet-based company. The Ravis soon began to turn their attention to the business opportunities created by the growth of the Internet, specifically the security concerns of small- to medium-sized businesses that increasingly were accessing the Internet for a variety of purposes, including communications, information gathering, and commerce. The brothers remained committed to their original business plan through 1996, when Ethernet-related sales totaled $9.3 million, but in 1997 they began to test the waters of the Internet security market. The turning point in their business occurred in October 1997, when Sonic Systems introduced the SonicWALL DMZ, an Internet security appliance with a list price of roughly $1,800. The debut of their first Internet security hardware gave the Ravis their first stream of revenue, $250,000 by the end of the year, from the market that soon would provide the sole means of support for their business.

The release of the SonicWALL DMZ marked the beginning of the company’s transformation into an Internet security appliance maker, a process that would take 26 months to complete and turn Sonic Systems into SonicWALL. The Ravis decided to concentrate their effort on the Internet security market in 1998, when volume shipments of SonicWALL appliances commenced. They also began offering content filtering subscriptions to customers in 1998, giving them the option of receiving lists of objectionable web sites on a weekly basis. As the company’s security business ramped up, its Ethernet-related business began to fade. In 1998, the company generated $2.3 million in revenue from the sale of security appliances and $5.1 million from Ethernet sales. In 1999, the company’s Ethernet sales dipped to $1.6 million, while Internet security sales mushroomed to $19.4 million. The final stages of the transformation occurred during the last months of 1999, beginning with a change in the company’s name to SonicWALL, Inc., in August. In November, boasting a young and growing product line of security hardware, the company sold its promise on Wall Street, completing an initial public offering (IPO) of stock. In December, it stopped shipping Ethernet-related products, ending its involvement in its original line of business.

COMPANY PERSPECTIVES

Our goal is to extend our leadership position by continuing the transition to a comprehensive provider of integrated security, productivity and mobility solutions. We plan to accomplish our goal by focusing on Value Innovation, the process whereby we deliver solutions with price-performance advantages.

Entering a new century with a new name and a relatively new line of business, the Ravi brothers essentially were starting anew with SonicWALL. The switch to selling Internet security products, according to the company’s filing with the Securities and Exchange Commission on February 23, 2000, was a seamless transition, free from requiring “any significant restructuring of personnel, facilities, manufacturing, or operations.” There were, however, a number of new senior executives who arrived during the critical stage of the company’s transformation into a security appliance producer. Between April 1998 and September 1999, the company’s main offices, which had been relocated to Sunnyvale, California, underwent a changing of the guard, taking in a new vice-president of business development, a new chief financial officer, a new vice-president of sales, a new vice-president of operations, and a new vice-president of engineering. Sudhakar Ravi, who had served as the company’s vice-president of engineering since 1991, became the company’s chief technical officer in September 1999. With a new cadre of senior executives at his side, Sreekanth Ravi, who continued to hold the three most powerful posts at the company, began fleshing out SonicWALL’s presence in the security appliance market.

Sreekanth Ravi began to make bold moves before SonicWALL completed its first year as a publicly traded company. In October 2000, he reached an agreement to acquire a Murray, Utah-based company name Phobos Corp. whose history mirrored SonicWALL’s evolution. Founded in 1995, Phobos initially made Ethernet cards for high-speed networks, but after butting up against stiff competition and realizing that Ethernet cards faced a future of dwindling profit margins, the company’s management switched course. In 1998, Phobos began applying its expertise in networking to developing products for coordinating traffic on servers and providing encryption capabilities. Sreekanth Ravi agreed to pay nearly $280 million in cash and stock for Phobos, a purchase price exponentially greater than the less than $3 million in sales the Utah company generated from its new business line in 1999, but financial stature mattered little in the reasoning behind the acquisition. Instead, Ravi was focused on technology, specifically a circuit board for servers that offloaded the encryption needed for secure online transactions. By adding Phobos’ Secure Sockets (SSL) and load-balancing technologies to SonicWALL’s security appliances, Ravi hoped to expand his reach beyond small-sized and midsized business customers and attract larger customers.

As SonicWALL began its pursuit of customers who operated large networks, leadership changes occurred for the first time in the company’s history. Ravi, who had held the three most powerful positions at the company since its inception, began to cede some of his power. In October 2001, Cosmo Santullo was hired to serve as SonicWALL’s president and chief executive officer. Santullo spent two decades working in various capacities for IBM Corporation, his lengthy stay there ending in 1998. For seven months he served as senior vice-president of global marketing for EMC e-Business Solutions before being promoted to president. He vacated his post after five months, leaving EMC to join Mirror Image Internet, Inc., a provider of Internet content delivery systems based in Woburn, Massachusetts. Santullo served as the company president and chief executive officer for nearly two years, leaving the firm to join SonicWALL. After joining SonicWALL, Santullo remained in Massachusetts, commuting across the country to the company’s main offices in Sunnyvale for ten months before resigning in August 2002, unwilling to make a permanent move to California.

Instead of reclaiming his titles as chief executive officer and president, Ravi turned to SonicWALL’s vice-president of partners, alliances, and strategic accounts, Mike Roach, to serve in such capacities on an interim basis. A permanent replacement was hired in March 2003, when Matt Medeiros joined the company. A graduate of the University of San Francisco, Medeiros held executive positions at NeXT Computer, Apple Computer, Optical Polymers Group, and Allied Signal before serving as the president and chief executive officer of the components division at Phillips Electronics, the position he held prior to joining SonicWALL. The appointment of Medeiros as the day-to-day leader of the company coincided with the selection of a new chairman. Ravi passed the duties to a board member, Chuck Kissner, but continued to serve as director of the company.

KEY DATES

1991:: SonicWALL is founded as Sonic Systems, a developer of Ethernet devices for Apple Macintosh computers.
1997:: Sonic Systems introduces its first Internet security appliance, the SonicWALL DMZ.
1998:: The company decides to focus its efforts on the Internet security market.
1999:: Sonic Systems changes its name to SonicWALL, completes its initial public offering of stock, and ships its last Ethernet devices.
2000:: SonicWALL acquires Phobos Corp.
2003:: Matt Medeiros is appointed president and chief executive officer.
2005:: SonicWALL acquires Lasso Logic and enKoo.
2006:: An e-mail security vendor, MailFrontier, is acquired.

ACQUISITIONS AND A PROFIT IN THE EARLY 21ST CENTURY

Medeiros took charge of a company whose financial record in the Internet security market offered room for improvement. Sales grew robustly at first, jumping to $112 million in 2001, before sliding downwards to $103 million in 2002. SonicWALL’s sales decreased to $94 million during Medeiros’s first year at the helm, but of greater concern was the company’s problem with profitability. Years of annual losses pocked the company’s foray into the Internet security market, representing a glaring blemish that Medeiros intended to remove. SonicWALL lost $20 million in 2001, $93 million in 2002, and $17 million during Medeiros’s first year in charge.

SonicWALL’s development during this period was highlighted by several acquisitions. In November 2005, the company paid nearly $16 million for Lasso Logic, Inc., a California-based provider of backup and recovery solutions for data protection. At the same time, the company acquired assets related to remote access technology owned by enKoo, Inc., paying $2.4 million for technology it intended to incorporate into SonicWALL products that featured virtual private networking and SSL. Shortly after completing the acquisitions, Medeiros could point to success on the financial front, giving cause for celebration as SonicWALL celebrated its 15th anniversary. After sales increased to $125 million in 2004 and jumped again to $135 million in 2005, the pattern of declining revenue appeared to have stopped. More important, the company reversed the pattern of annual losses as well. After posting a loss of $313,000 in 2004, SonicWALL generated a profit in 2005, registering $6.2 million in net income.

Buoyed by the company’s improved financial performance, Medeiros began preparing for the future, intent on making growth and profitability bywords in the years ahead. Early in 2006, during SonicWALL’s 15th anniversary, Medeiros completed an acquisition that he hoped would contribute to the company’s financial stature. He paid $31 million for e-mail security vendor MailFrontier, a company whose products monitored e-mail traffic for viruses, spam content, phishing attacks, and other threats. Medeiros intended to add MailFrontier’s messaging security software and hardware to SonicWALL’s range of products, a product line that was expected to become more comprehensive in the years ahead.