(COMTEX) B: Are You Aware of Avici?
New York, Jul 24, 2000 (123Jump via COMTEX) -- On January 06, Enron
Communications (NYSE:ENE) startled the telecommunications world by announcing
the company's intention to test Avici routers for deployment in its broadband
network - heralding a significant change in the market climate for
high-performance routers. The announcement signified two things. First, it
affirmed that the new requirements of systems providers across-the-world would
necessitate an increase to terabit capability. Second, it confirmed that the
ocean of photonic pulses, in the deep core of the network, would now be ushered
in and out by higher capacity routers - the likes of which Juniper Networks
(NASDAQ:JNPR) and Cisco Systems (NASDAQ:CSCO) do not currently have to offer.
July 27, Morgan Stanley Dean Witter will close the allocation books for the
initial public offering of Avici Systems. The sale of 6 million shares to the
general public is expected to price within a range of $18.00 to $20.00, raising
$114,000,000 for the young company already 20% owned and backed by Nortel
Networks (NYSE:NT). The company filed May 18, but has been cautious about
bringing its shares to the market. The reason being the current market
environment - although by-and-large friendly to networking companies - no longer
disposed to look kindly upon start-ups with meager revenues and small customer
bases. Nonetheless, the story of the "terabit trendsetter" is likely to generate
one of the largest amounts of block "buy" orders this IPO market has seen for
some time.
A Sought After Solution
Today's communications networks apply optical networking technology to alleviate
and replace many of the hindrances that traditional copper-based networks pose
for the future of communications technology. Not only have optical networks been
introduced in a cost effective manner, they have also opened the door to wide
deployment of broadband Internet access - the demand for which is forecast to
grow at a compound annual growth rate of 77% for the next three years.
Significant advances in optical technology - such as soon to be introduced
Lucent (NYSE:LU) and Nortel DWDM transmission systems which belt data at speeds
of OC-768 or 40 Gbps through fiber strands - have outpaced advances in packet
switching and routing technology; a market that Cisco was once largely
responsible for pioneering. Large bottlenecks have arisen in communications
networks at the points where optical core meets packet cell switches - intended
to route data more efficiently.
The solution to this problem has been, for systems providers like Williams
Communications (NYSE:WCG) and AT&T (NYSE:T), to deploy super-fast routers which
can forward data at optical speeds. The resultant fact that optical networks
will become inevitably more prevalent in the telecommunications backbone, will
cause the market for IP backbone routers to flourish.
A Challenge to Dominance
The market for high-end routers is currently divided in an 85 to 15 percent
distribution, between Cisco and Juniper - an addressable market-size that
currently stands at $1.6 billion, headed for $5.5 billion by 2003. The two
companies' current product lines, however, are no longer the most powerful
solution on the block. Additionally, as total network traffic zooms towards a
bewildering 16 million terabits of data per month in 2003 (RHK), CLECs and ISPs
are rattling their knives and forks in demand for more bandwidth.
In March of this year Juniper introduced its largest and most powerful router,
the M160 next generation solution with OC-192 interface. However, systems
providers' experience with the M40 router has been that a 12-14 month life cycle
is too short - the product seemingly comes a little too late to satiate
providers' demand for increased processing capability in the optical network
core. The new generation of Juniper products, therefore, will most likely be
used toward the edge of the IP core.
Cisco - employing marketing tactics that only a multi-billion dollar company can
afford - boldly announced earlier this year its 12000 terabit system.
Essentially an array of its 12016 chassis connected by a terabit switch fabric -
it is scorned by existing customers as being wasteful of precious port
interfaces and expensive.In addition to this, no one is sure whether Cisco can
actually deliver the solution - due to the fact that the aforementioned switch
fabric hasn't actually been developed yet. The company acquired Growth Networks
recently, (I might add, subsequent to declaring the company's new capability),
which may bear the fruits of the missing link - however until then, customers
may well have to see the terabits pulsing before they believe it.
Ahead of the Hordes
Avici was the first company to introduce the concept of the terabit router back
in 1997.A product of months and months of development, its TSR terabit router,
was unveiled at Networld+Interop on May 11, 1999. Perceived as an industry
milestone, the switch was demonstrated, and will be sold, in conjunction with
Nortel's OC-192 transport node as the Versalar TSR 45000. The TSR is capable of
supporting over 8,000 OC-3c or 560 OC-192c connections, but can mix and match
within various speeds. The high-resiliency control software used in the system
incorporates thin-layer 1 and 2 in order to easily integrate and support frame
relay, ATM (Asynchronous Transfer Mode) and SONET (Synchronised Optical
Network).
IronBridge Networks, Charlotte's Web Networks (Owned by MRV (NASDAQ:MRVC)),
Nexabit (Owned by Lucent) and Tellabs (NASDAQ:TLAB), each claim to have a
terabit router. The potential market will evolve accordingly, over time, as each
player finds its alcove of customers. Product differentiation, in the case of
routers, will include support for various interfaces, or as Avici has
introduced, a self-perpetuating switch fabric. The Charlotte's Web router, close
on the heels of Avici, can gurantee QoS (quality of service) by supporting TDM
connections, which prioritize signals with respect to their medium. For example,
voice signals are usually given priority because of the timeliness and
sensitivity of the signal. IronBridge has noted its intention to differentiate
itself by using an all-optical switch fabric - as opposed to common copper-based
methods.
Avici's TSR also stands out among its peers due to its hardware based
Application Specific Integrated Circuits (ASICs) that dramatically continue
where software based solutions, unable to keep-up with internet traffic loads,
cease. ASICs enable prioritization, based on requested QoS, without compromising
speed and efficiency - promising the possibility of building one common optical
IP infrastructure, as opposed to the various layers that are prevalent now.
The market for routers is not unique in networking equipment, in that the
success of any one company will depend on who is working with you and who is
giving you support. In telecommunications, even the largest players like Siemens
can wait around for contracts for months. Avici seems to have addressed this
issue adequately. Working with Nortel, Corvis, Williams, Deutsche Telecom
(NYSE:DT), Enron and Amber Networks, has assured the communications world of its
intention to address the needs of its networking contemporaries. In stark
contrast to Cisco, whose terabit solution implies dramatic resource waste for
its customers, Avici's is scalable, effective and provides a cost-savings of
approximately 50% per port.
The young company has made significant headway into the market, as evidenced by
systems provider readiness to test and buy their router. However, to be able to
penetrate the space to the same extent, Avici should take lessons from Juniper's
example of ensuring interoperability with "gorillas" such as Cisco. In fact, one
of the prime reasons behind the success of the Juniper routers has been the
JUNOS internet software which is fully interoperable with Cisco's IOS - the most
widely deployed operating system today. If Avici can surmount this significant
barrier to entry, its routers could be installed at critical points within any
network core.
Another key issue will be manufacturing capacity and its management. It is
vitally important in today's networking world to satisfy demand, and not keep
providers waiting. Demand emanates from the consumer, is funneled through to the
ISP, like Concentric (NASDAQ:CNCX), is then aggregated at the systems provider,
like Williams Communications. If the manufacturers of the systems contained
within a network are not timely, this delay will likely result in a loss of
customers. Marconi is an example of a company whose books are thoroughly clogged
- and are sacrificing company reputation as a result.
The head-on competition in the space will, in the short-term, come from Lucent's
Nexabit. However, Avici has several convincing advantages.First, Avici was able
to bring its TSR to the market well in advance of Nexabit, who started shipping
only within the last two months. Second, Nexabit has already witnessed the
emergence of software glitches in its product. Third, Lucent has had
considerable trouble integrating Nexabit, having also suffered the loss of the
start-up's CEO.
What many investors will be considering is Avici's financial performance to date
- one reason why it has delayed the first trading day until now. Revenues for
the first quarter of this year were $504,000 with a gross margin of 14.8%. Net
losses totaled $16.6 million for the same period. Crucial to understanding
Avici, is that its product was only ready for testing at the end of 1999, and
conclusive evidence indicates that Avici's TSR is the terabit router to beat.
Enron Broadband Services and Williams communications have agreed to future
minimum purchases totaling $45 million at least, through 2001.
With approximately 45 million shares outstanding after the offering, the
company's market capitalization could easily reach $1 billion on the first day
of trading. The crucial variable to watch on first-day trading will be volumes.
The allocation books have been extremely tight, as indicated by MSDW, and a
number under 10,000,000 will be highly positive if purchasing shares in the
aftermarket. Consider also that optical networking IPOs are often highly valued,
and the investor temptation to flip on the first day may be too much to resist
if the price begins to skyrocket. This, therefore, may be a highly volatile
stock for the first few days subsequent to the pricing.
In summary of the points presented above, Avici Systems may be the next
benchmark product in routing/switching technology. The company was clearly able
to predict the necessity for such a product as long as three years ago, when
network traffic was a fraction of that in existence today. Chances are, Avici is
already thinking about the future needs of carriers, and this offering will aid
them in cultivating the company's answer to the next question - before it has
even been asked. The next two years will, at the very least, be intriguing -
watching how Juniper and Cisco hold their ground against the determined
entrants, who promise to blow apart this tightly-clinched market.
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