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Full profile available at Small Cap Review smallcapreview.com ******************************* Avici Systems Inc. (NASDAQ: AVCI) Stock Price: IPO Pricing at approximately $19. Raised from 6 million at $19 to 7 million at $29. ******************************* ******************************* Profile ******************************* Avici Systems Incorporated is a developer of high-speed data networking equipment for communications service providers. Avici Systems, Inc. invented Terabit Switch/Routing to build the 21st century public network infrastructure. The equipment made by Avici helps communications providers transmit massive volumes of data across their fiber optic networks for Internet services and other telecommunications needs. Avici's Product allows telecommunications companies and Internet service providers to transmit high volumes of information across their fiber optic networks. Their high-performance solution is being marketed to telecommunications companies and Internet service providers, referred to as carriers, that are creating next-generation optical networks to address the increasing data traffic across the Internet. ************************* Background ************************* To facilities-based carriers, the most important issue is the ability to provision bandwidth to end-user customers to keep up with the exponential demand for Internet-based services. With this in mind, Avici's TSR® is one of the only products of its kind that provides carriers with the scalability needed to provision over a terabit of aggregate bandwidth. With its mission to build "speed of light" networks for the 21st century, Avici is a leader in integrating packet-based technology with carriers' optical investments to ensure highly scalable, highly reliable and highly cost effective networks for the future. A study by telecommunication research firm RHK forecasts a lucrative $15.8 billion market for switches and routers by 2003. According to RHK, Avici's market share of less than 1% ranks it seventh, well behind Cisco Systems' 48% share. But Avici's product, the Terabit Switch Router, only became commercially available very recently. Most competing routers have a capacity limit of 40 gigabits (Gbps) per second or less, while a new product from Juniper Networks raises the ceiling to 160 Gbps. But Avici says it can one-up everyone with gear that can reach more than five terabits, or more than 5,000 Gbps. Data traffic over today's communications networks is growing at an exponential rate, far exceeding the growth in voice traffic. Ryan Hankin and Kent, an industry research firm, estimates that North American data traffic reached 350,000 terabytes per month in December 1999, compared to 50,000 terabytes per month for voice traffic in the same period. This proliferation of data traffic is being driven by a number of factors, including increases in: the number of Internet users worldwide, which according to International Data Corporation, an industry research firm, is expected to increase from approximately 144 million at the end of 1998 to approximately 602 million by the end of 2003; and business use of the Internet for applications such as e-commerce, video streaming and virtual private networks. To keep pace with the growing demand, transmission speeds have increased from kilobits per second to megabits per second to gigabits per second. The next step in transmission speed is referred to as terabits per second. One terabit per second is equal to one trillion bits per second. Pioneer Consulting LLC, an industry research firm, estimates that peak-hour Internet bandwidth demand in North America alone will grow from 0.33 terabits per second in 1999 to 17.92 terabits per second in 2004, representing a compound annual growth rate exceeding 120%. Limitations of the Existing Public Network Infrastructure The existing public networks are largely built on technologies that were originally designed to provide only voice services. These networks are based on circuit switch technology, which dedicates an individual connection, or part of the network, for the duration of a call even while there are pauses in the conversation. Although adequate for voice traffic, circuit switch technology is inefficient for the transmission of large volumes of data 28 traffic, which tends to occur in large, intermittent bursts. As data traffic carried over the existing network infrastructure began to increase, carriers increased the capacity of their networks by overlaying devices designed to increase data transmission rates and that are based on network standards such as Synchronous Optical Network, or SONET. At the same time, carriers also sought to increase the efficiency of data transmission through their networks by adopting packet switching technologies, such as Asynchronous Transfer Mode, or ATM, and Internet Protocol, or IP, which divide data traffic into individual packets and transmit them independently over the network. These packet-switching technologies enable carriers to send data from multiple sources on the same connection, thereby substantially reducing the bandwidth wasted using circuit switch technology. With much of the growth in data traffic attributable to the increasing use of the Internet, IP has become the predominant standard for transmitting data across networks. Nevertheless, carriers have been forced to adopt and deploy multiple protocols, such as SONET, ATM, IP and Ethernet at gigabit speeds, or Gigabit Ethernet, and a variety of devices within their networks in an effort to manage the proliferation of IP-based data services. The advent of Dense Wave Division Multiplexing, or DWDM, an optical technology that multiplies the amount of data that can be carried over existing fiber optic lines, has provided carriers with substantial raw capacity in the core of their optical networks. The widespread deployment of DWDM technology by carriers has now shifted their focus away from the deployment of additional fiber lines toward packet switch equipment that can transmit and route data in volumes and at speeds that take advantage of the expanded bandwidth enabled by DWDM. Carriers are therefore primarily focusing on routers, devices designed to forward IP-based data packets, as the equipment of choice for harnessing the benefits of DWDM. The transmission capacity of fiber optic lines has increased at a greater rate than the transmission capacities of routers. This has created a chasm between the capabilities of existing routers and the optical transmission network and has produced bottlenecks in the public network. This chasm results in large part because of the limited ability of existing router designs to adapt to the evolving and increasing bandwidth demands of carriers. For example, current router offerings employ a centralized design, which inherently limits the number of interfaces available and, accordingly, the ability to incrementally increase the bandwidth capacity of a router. This limitation requires that carriers either cluster multiple routers to emulate the functionality of a single large router with greater capacity or repeatedly undertake large-scale upgrades, known as forklift upgrades, to address the increases in optical transmission speeds and capacities. Historically, router vendors have introduced new router designs every 12 to 18 months. Clustering routers requires that a significant number of interfaces, which are the links between routers and the rest of the network, be dedicated solely to interconnect multiple router chassis. Therefore, clustering has proven to be inefficient. Ryan Hankin and Kent estimates that, for existing routers, approximately 70% of these expensive interfaces are used for interconnection instead of transmission. At the same time, existing routers are unable to communicate with the newer generation of optical transmission equipment to dynamically change bandwidth or enable the provisioning of new services without disrupting the entire network. This limitation increases the time and effort required for carriers to deliver new services or reconfigure the network in the event of sudden changes in bandwidth demand. Carrier Requirements for a New Architecture. To respond to the challenges created by the increasing volume of data traffic on the existing public networks, carriers are not only focused on optimizing their next-generation optical networks for more efficient data transmission, but are also searching for a means to rapidly provision new revenue-generating data communications services. As a result, carriers are demanding solutions with the following attributes: Scalability Without Disruption: Carriers want a cost-effective means of increasing capacity on a continual basis. As a key building block of the public network, routers must therefore have the ability to expand capacity without forklift upgrades or other significant disruption of the network. Carrier-Class Reliability: The equipment that carriers deploy within their networks must offer the highest level of up-time and redundancy. To meet this requirement, known as carrier-class reliability, router designs must minimize any single points of failure and provide automatic recovery from network failures and device errors. High Performance: In order to capitalize on the increasing capacity offered by optical technologies, carriers demand high levels of performance and flexibility. Although there are different measures for determining performance of routers, Avici believes the most critical measure is the ability to process and forward packets at transmission rates matching the line rates available over the fiber optic core. Quality of Service Functionality that Enables New Revenue-Generating Services: Quality of service is the ability to assign different priorities to different traffic types, which is crucial to the delivery of time-sensitive data streams, such as voice and video. Routers must provide quality of service functionality over IP without adversely affecting performance. In addition to prioritizing packets, routers must be able to manage and control network congestion to enable carriers to deliver service level guarantees to their customers. Reduced Network Cost and Complexity: In addition to the cost of deploying routers, carriers incur substantial capital costs in deploying and interconnecting multiple types of networking equipment. More importantly, the costs of running a network are significant. Not only must each router be managed as an independent element of the network, but each additional type and piece of network equipment increases the complexity of network design and management. Carriers are demanding solutions that reduce the number and types of network equipment and optimize the technologies employed in their networks. Interoperability: Due to economic constraints associated with upgrading an entire network to accommodate new technologies, it is critical that new network equipment support the protocols and devices already deployed in carrier networks. Currently available routers were designed to handle lower capacities and transmission speeds and cannot economically address carrier requirements, much less the enhanced functionality demanded by carriers. Instead of trying to adapt older technologies or interim solutions that provide only incremental increases in capacity, carriers are now seeking a new solution that will enable them to cost-effectively build next-generation optical networks designed to capitalize on the opportunities created by the growth of the Internet and the proliferation of data traffic. The Avici Solution is a high-performance TSR that is engineered to provide a long-term solution for the next-generation carrier networks by providing a platform for growth and control of increasing volumes of data traffic. TSR has been designed to meet the current and evolving performance and bandwidth requirements at the core of carriers' optical networks. The Avici TSR enables in-service scalability as demands on the optical layer increase, thereby eliminating expensive clustering designs and forklift upgrades. Avici believes that this scalability and flexibility positions the Avici TSR as a long-term solution for carriers. In-Service Scalability: The TSR enables carriers to incrementally add capacity in a cost-effective, non-disruptive manner. This capability for dynamic, non-disruptive bandwidth provisioning enables carriers to service existing customers while rapidly adapting to changes in bandwidth demand, new service offerings and increased usage. Carrier Class Reliability: The Avici TSR has been designed and manufactured to provide carrier-class reliability. We believe the TSR's technologically- advanced features, such as distributed architecture, Velociti switch fabric and Composite Links, will enhance the reliability and performance of carrier networks. The TSR's proprietary ASIC-based design and redundancy features provide high levels of system reliability. Ability to Manage High Volumes of Network Traffic at High Speeds. TSR through Composite Link technology, is capable of processing data packets at virtual line rates exceeding 10 gigabits per second, thereby achieving virtual performance beyond OC-192. TSR can achieve these transmission rates at full utilization of network interfaces without sacrificing packet throughput performance. In addition, the TSR provides the ability to prioritize IP traffic through its quality of service features without any loss of transmission speeds. Ability to Offer New Revenue-Generating Services: TSR provides an effective foundation for the delivery of next-generation data communication services. The TSR enables carriers to add capacity for new services and customers without network disruption and to prioritize IP data traffic to effectively provide quality of service guarantees. As a result, carriers are able to offer and charge for new and enhanced services, such as voice-over-IP and video streaming, and can also dynamically modify their service pricing structures. Cost-Effective Network Expansion and Operation: The Avici solution reduces the need for network equipment such as ATM and SONET devices and optical integration equipment. The redundancy also eliminates the need for costly back-up equipment. The high speed interfaces reduce the need for additional fiber capacity. In addition, the solution reduces ongoing network operating expenses through the TSR's high port density and proprietary ASICs, which reduce requirements for floor space and power consumption. The TSR's key interoperability features preserve carriers' investments in their legacy network equipment. ********************** Business ********************** Avici develops and sells high-speed data networking equipment that enables communications service providers to transmit high volumes of information across their fiber optic networks. Their high-performance solution is being marketed to telecommunications companies and Internet service providers, referred to as carriers, that are creating next-generation optical networks to address the increasing data traffic across the Internet. The strains placed on existing public networks by this dramatic increase in traffic volume are forcing carriers to purchase new equipment that will optimize the bandwidth of their next-generation optical networks while also facilitating the provisioning to their customers of new revenue-generating services. The Avici Terabit Switch Router product, known as the TSR, is designed to address the critical needs of carriers by: managing high volumes of network traffic at high speeds; providing the ability to incrementally add capacity to the network without disrupting network performance, which Avici refers to as in-service scalability; demonstrating high levels of operational availability and redundancy, which Avici refers to as carrier-class reliability;. prioritizing traffic types to facilitate the provisioning of new revenue-generating services, such as video streaming and the transmission of telephone calls over the Internet, referred to as voice-over-Internet Protocol; operating with existing carrier equipment; and reducing network cost and complexity. TSR provides these benefits through proprietary technologies, including application specific integrated circuits and distributed system architecture, as well as Composite Link technology which enables the addition of incremental bandwidth between the TSR and the carrier's network. TSR has been designed to provide a long-term solution for the bandwidth requirements at the core of carriers' optical networks. Currently available routers were designed to handle lower capacities and transmission speeds and, accordingly, cannot economically address the increasing capacity requirements of carriers. The Avici TSR has been designed to enable in-service scalability as demands on the optical layer increase, thereby avoiding expensive interim solutions such as clustering designs and repeated equipment replacement. The TSR became commercially available in the fourth quarter of 1999 and the first recognized revenue, consisting of $504,000 from sales of the TSR to one customer, in the first quarter of 2000. This customer has currently deployed our TSR in a segment of The National Transparent Optical Network, a research network consortium that is part of the Internet initiative known as SuperNet. In addition, Enron Broadband Services and Williams Communications have agreed to future minimum purchases of the TSR and follow-on features totaling $45 million through 2001, subject to successful completion of field trials. While there has been no commitment to purchase equipment for deployment, the TSR has successfully completed laboratory testing at AT&T and has been selected by AT&T for field trials which we expect will be completed by the end of 2000. Any future commitments for deployment orders will be dependent upon the successful completion of these field trials. TSR has also been shipped to a limited number of other customers and prospective customers. ********************* Mission ********************* The facts are astounding: The number of web sites double every two months; $116 billion in electronic commerce will be transacted over the Internet by year 2000; more than 90 percent of corporate desktops equipped with web browsers. The results: Internet Service Providers (ISP) are experiencing up to four times growth every year. Not only struggling to keep up with demand, ISPs are under pressure to create new value-added services to remain profitable and build a competitive edge. But the challenges of meeting this explosive demand with existing circuit-based technology are proving insurmountable. After all, the root of circuit-based systems lies in technology that dates back to the turn of the century. It was specifically created to carry voice, and now this technology is being asked to move vast amounts of data and provide state-of-the-art services for mass video conferencing, exponentially increasing e-commerce applications, virtual presentations, and a wealth of additional enhanced services - stretching circuit-based systems to the limit. What's needed is a new core infrastructure. And Avici Systems is leading the way with its terabit switch/router that meets both today's and the future needs to move mass amounts of data in a reliable way, with predictable performance, and in a cost-effective manner. ************************* Products ************************* Terabit Switch Router The Avici Terabit Switch Router (TSR®) is the first switch router designed for the core of the 21st century public network to successfully undergo third-party stress testing. With its scalable architecture, TSR supports tens of gigabits today, and can scale to tens of terabits as bandwidth needs increase. Supporting up to 2240 OC-48 or 560 OC-192 connections, the TSR is optimized to take advantage of the huge increases in backbone bandwidth enabled through dense wave division multiplexing. In addition to providing industry leading scalability and throughput, the TSR also incorporates quality of service features (QOS) that give customers the flexibility to engineer the network to handle multiple types of traffic. ********************* Employees: 226 ********************* ********************* Competition ********************* Noteworthy competition includes Cisco, Lucent and Juniper Networks. In order to compete effectively, Avici must deliver a product that is superior in meeting the needs of carriers and scales easily and efficiently with minimum disruption to the network, interoperates with existing network designs and equipment vendors, provides extremely high network reliability, provides high speed interfaces and high performance packet processing capabilities, reduces complexity by decreasing the need for overlapping equipment, provides effective network management and provides a cost-effective solution for our target customers. Welcome to TSR! ************************* Management ************************* Avici Systems Incorporated Management Team Surya Panditi President and Chief Executive Officer Surya Panditi joined Avici as its senior officer in 1997. Prior to Avici, he served as vice president and general manager at US Robotics. His earlier experience includes Intel Corporation, Ungermann-Bass, where he held several marketing, product and general management positions, and Telco Systems. Panditi has a Bachelor of Science degree in engineering from the Indian Institute of Technology and an MBA from Wharton School of Management. Phil Carvey Vice President of Advanced Development Prior to joining Avici as a co-founder in November of 1996, Carvey was the chief architect at BBN for Butterfly, Lightstream and the MGR (Muliti-Gigabit Router) product line of switches and routers. Carvey also held several senior management and engineering positions during his tenure at BBN. Previous to BBN, Carvey was the vice president of research at Ztel Inc. Carvey has a BS degree in engineering from the Illinois Institute of Technology and a MS degree from MIT. Paul Brauneis Vice President and Chief Financial Officer Paul joined Avici as Vice President of Finance and Chief Financial Officer in January 2000 with over twenty years of broad-based financial experience in the telecommunications, computer software, Internet services and IT services industries. He previously served as Vice President and Corporate Controller at Wang Global from 1997 through 1999 and at BBN Corporation from 1995 to 1997. From 1993 to 1994 he was Vice President, Treasurer and Chief Financial Officer of Spinnaker Software, Inc. and from 1980 to 1992 served in several financial positions at M/A-Com, Inc. including Vice President and Controller and later as Vice President/Finance. From 1969 to 1980 he worked at PriceWaterhouse, most recently as a Senior Audit Manager. Paul is a graduate of Boston College and served in the U.S. Army. Chris Gunner Vice President of Engineering Prior to joining Avici, Gunner spent 11 years in network products engineering at Digital where he worked on network architecture including Integrated ISIS and network management architecture and attained the level of consulting engineer. There, Gunner also designed and developed routing and bridging protocols. He is a contributor to the IETF including co-chair of the ISIS working group, a contributor to the NIST OSI implementors workshop, and co-designer of 4 patents in the networking field. Gunner holds a Theoretical Physics Honours degree from the University of Southampton (1976) and a PhD in Biomechanical Engineering from the Polytechnic of Central London (1982) With 20 years of experience in network engineering, Gunner developed the Cambridge Ring network and protocols for college computer service enviroment providing virtual terminal, file transfer, printing services. He worked on a research project in Distributed Computer Systems at University College London, specializing in Distributed File Systems and Remote Procedure Call. Peter Chadwick Vice President of Product Management Peter Chadwick has held various marketing and management positions at IBM, USRobotics and 3Com. Prior to joining Avici in 1998, he was Director of Product Marketing for remote access servers at 3Com. As part of IBM's Networking Division, Chadwick was responsible for marketing IBM's Ethernet, Token-Ring and campus ATM products, launching the IBM 8250/8260 hubs, and the 8270 family of LAN switches. Brian McCormack Vice President of Sales and Service Before joining Avici, Brian held several positions at DSC Communications Corp., including vice president, major carriers sales; vice president, telco sales; and regional vice president. Earlier, he was regional manager for CISCO Systems. His experience also includes a decade at Northern Telecom, Inc., where he was vice president of sales, and 12 years at IBM. Brian holds a BA degree from St. Anselm College.Hank Zannini Vice President of Government Sales Before founding Avici, Zannini, was most recently a senior manager of telecom business development at Analogic. Prior to Analogic, Hank served as vice president of marketing and business development at Salem Institute, a consultancy specializing in LAN/MAN/WAN interconnectivity markets with extensive focus on ATM, SONET and WDM technologies. Zannini was also the founder of Ztel Inc., the first company to integrate computer and telephony applications at the desktop. He has also been actively involved with standards committees since 1980 and continues to actively contribute to the IEEE 802 Ethernet standards committee and the SMDS Forum. Zannini has a BS degree in engineering from Northeastern University. Dr. Larry Dennison Director of VLSI Development As co-founder of Avici, Dennison has held both managerial and technical positions at BBN and General Computer. Previous to Avici he was a division scientist at BBN. Dennison's experience includes working on low-power communications systems, earth stations for digital satellite communications, ATM switches and IP routers. He has BS, MS, and Ph.D. degrees from MIT. Ed Maggio Vice President of Manufacturing Ed has over twenty years of manufacturing and operating management experience in technology companies. Ed began his career at Digital where he held various manufacturing management positions at plant and business unit levels. He was the Vice President of Operations for ImagiTex, Inc. during the company start-up and growth stage, and later the Chief Operating Officer after it became a subsidiary of The DuPont Co. He served as Vice President of Operations and Customer Services for Boston Technology's class enhanced services systems, and prior to joining Avici was Vice President of Operations at DIC. Ed is a graduate of Western New England College (BSBA) and earned an MBA from Clark University as well as having attended the Amos Tuck School's MBA Update program. ************************ Sales and Marketing ************************* Avici sells and markets their products primarily through their direct sales force, systems integrators and distributors. The sales cycle to carriers typically is a lengthy and deliberate process. After preliminary discussions with with the sales organization, prospective customers may receive evaluation equipment to encourage formal testing. The sales cycle normally includes laboratory testing in which the TSR is evaluated against competing products for performance, scalability, reliability, interoperability and other measures. Upon completion of the laboratory tests, one product is typically selected for field trials in which the product is deployed in a carrier's network in a limited and controlled fashion. Direct sales efforts are focused on the largest carriers. Marketing objectives include building market awareness and acceptance of Avici and the Avici TSR as well as generating qualified customer leads. In addition to traditional marketing activities, Avici plans to sponsor an optical partner program with key optical industry leaders to demonstrate the interoperability of the TSR with their products. Avici's international sales are conducted through systems integrators and distributors. There are two systems integrators in Japan and one in Korea. In addition, in order to further international sales objectives, Avici is identifying and establishing relationships with a number of additional country-specific distributors. ******************* Customers ******************* TSR is deployed in a segment of The National Transparent Optical Network, an Internet initiative known as SuperNet. Enron Broadband Services and Williams Communications have agreed to future purchases of the TSR, subject to satisfactory completion of field trials. The TSR has successfully completed laboratory testing at AT&T and has been selected by AT&T for field trials. The TSR has also ben shipped to international systems integrators, including Nissho Electronics Corporation, Itochu and Samsung, as well as to a limited number of other customers and prospective customers. ********************** Research and Development ********************** Avici has assembled a team of skilled engineers with significant experience in optics, hardware and software, and with particular strengths in the areas of high speed interconnect, scalable connection fabrics, ASIC development and Internet routing protocols. Avici believes that strong product development capabilities are essential to their strategy of enhancing the core technology and developing additional applications in an effort to maintain the competitiveness of product offerings. Avici has made, and will continue to make, a substantial investment in research and development. Research and development expenses were $11.3 million for the three months ended March 31, 2000, $36.8 million for the year ended December 31, 1999 and $27.4 million for the year ended December 31, 1998. ********************** Patents ********************** Avici presently has 13 patent applications pending in the United States. ********************* SEC ********************* Avici Systems Incorporated filings with the SEC can be found at the Securities Exchange Commissions website. The latest company filing with the SEC was form S-1/A on 7-19-00. ******************* Investors ******************* Accel, Brentwood Venture, Oak Investment Partners, Comdisco, Polaris, Nortel Networks 17%, Amerindo Investment Advisors, Sprout, JP Morgan, Anschutz Investment Company, Meritech, Tudor Investments, Bayview. ******************* IPO ******************* On Wednesday 7/19/00 AVCI set its initial public offering at 6 million shares in a projected range of $18-$20 per share. It plans to use the net proceeds from the IPO to fund operating losses, for general corporate purposes such as working capital and capital spending, as well as possible acquisitions. In an amended prospectus filed with the Securities and Exchange Commission, it said it expects to net about $104.8 million from the IPO. It plans to use the net proceeds from the IPO to fund operating losses, for general corporate purposes such as working capital and capital spending, as well as possible acquisitions. In the event of heavy demand, underwriters Morgan Stanley Dean Witter, J.P. Morgan & Co., Lehman Brothers and UBS Warburg have been allotted 900,000 additional shares. After the IPO, there will be 45 million shares outstanding in the company, giving it an initial capitalization of $855 million, based on a $19 per share median price. ***************************** Corporate Financial Snapshot ***************************** Approximate as of 7/21/00 Shares Outstanding:45M Shares in the Float: 6M Market Cap $ 855M IPO Price $19 ************************ Corporate Contacts Avici Systems Incorporated 101 Billerica Ave—Building #6 N. Billerica, MA 01862 voice: 978-964-2000 fax: 978-964-2100 E-mail info@avici.com ************************ | ||||||||||||||
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