TelStrat Swims Upstream

TelStrat International lives in the eye of the telecom storm. The company has turned a profit during each of its nine years in business and it still sees growth coming from its customers, mostly rural independent telephone companies.

"We're still growing and selling stuff," says Dan Carter, senior VP of TelStrat's carrier business unit.

The Plano, Texas-based telecom equipment maker has stayed relatively small since its inception in 1993. Now, with fewer than 170 employees, the company is looking to swim upstream to compete for larger carrier customers.

TelStrat isn't used to making a big fuss about itself to the press, as evidenced by Carter's sincere offer to review this article before its publication (we declined, of course). But now that TelStrat's within a few days of talking up its latest technology, the company is getting feisty.

Coinciding with the rush of news surrounding NFOEC 2002 (the National Fiber Optic Engineers Conference), the company is preparing to announce a significant upgrade to its Inteleflex product: an access box that combines the functions of a DSLAM (Digital Subscriber Line Access Multiplexer), a DACS (Digital Access Crossconnect), a T1 concentrator, an ATM switch, a voice-over-IP gateway, a Sonet add/drop multiplexer, and a video delivery platform in a single system.

TelStrat executives won't yet say what they've changed about the product, but they're confident it will propel them to new heights. "I don't think anyone in the broadband digital loop carrier market will be able to touch us in terms of (product) flexibility and bandwidth capacity," says Carter.

The product's currently supports about 2,000 subscribers, says Sid Schmid, TelStrat's senior director of product strategy. The updated product -- with improved software and other features -- will support many, many more, Schmid claims. In fact, TelStrat expects to go from serving mostly Tier 3 independent local carriers to competing for Tier 2 and even some Tier 1 carriers.

It won't be able to penetrate the large RBOC accounts, of course, until it goes through the Osmine certification process. The company says this is in its plans down the road.

TelStrat is an interesting case, in that even when the telecom equipment space was a momentum market, it modestly grew only as fast as its revenues would allow. The company was bootstrapped in 1993 with its founders' money.

TelStrat got its start in the enterprise phone equipment market and its first customer was Nortel Networks Corp. (NYSE/Toronto: NT). The relationship proved profitable enough that TelStrat never had to rely on outside investors for funding. Its existence mainly as an original equipment manufacturer (OEM) supplier is also the reason that TelStrat is often overlooked by journalists.

Years later, TelStrat formed an optical networking group that built switching chipsets and other components. Like its enterprise business, TelStrat's optical opportunity was pegged to a flagship customer, Agere Systems (NYSE: AGR), which business kept the company in the black.

TelStrat then expanded into the carrier equipment market by acquiring Infinitec Networks, the Oklahoma-based startup that Carter founded. Carter declined to discuss Infinitec's selling price, though a May 2001 report in The Dallas Morning News says TelStrat paid $10 million, including $3.4 million in cash.

Infinitec's demise came when the company was raising its third funding round in 2000. Its two lead investors -- one a West coast subsidiary of a large Japanese bank -- pulled out at the last minute and the rest of the lot decided to fold the company, Carter says.

The company's investors -- which included C3 Communications, Chisholm Private Capital Partners, Davis, Tuttle Venture Partners, Intersouth Partners, Wachovia Capital Associates, Wincrest Ventures LP, Woodside Fund, and W.R. Hambrecht & Co. -- poured about $40 million into Infinitec over the startup's lifetime, according to Carter.

When Infinitec filed for bankruptcy in April 2001, it listed its total assets at $10 million and its liabilities as about $15.3 million.

Infinitec's equity shareholder list suggests the company was doing the customary palm-greasing that precedes an initial public offering. The list included W.R. Hambrecht's top communications analyst Tim Savageaux, who is no longer with that firm, and Optical Capital Group partner Max Straube, who was previously head of corporate finance and head of equities at W.R. Hambrecht.

Rising from the ashes of Infinitec's IPO dreams, however, is a small business unit housed in a profitable company that hopes to give access equipment heavyweight Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) a run for its money.

TelStrat says its Inteleflex product is deployed in about 200 phone companies in 35 states. Many of its customers are rural independent carriers who, thanks to government funding, haven't had to trim their capital spending as much as the larger telcos have.

The company won't have a booth at NFOEC, but its executives will be at the show to walk the floor and chat up its new gear with customers and prospects, Carter says.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com