P-Cube's Party Marred by Interoute Flop

Here's a lesson on the perils of working with distressed carriers: Startup equipment maker P-Cube Inc. was all set to announce its first major customer this week, but then the customer came undone. P-Cube had won a deal with European carrier Interoute Telecommunications, but just as P-Cube was about to tell the world, Interoute told the startup to hold the news.

Interoute went into receivership on Tuesday, according to Alcatel SA (NYSE: ALA; Paris: CGEP:PA) Alcatel, the main creditor involved (see Interoute Goes Into Receivership. Its business administration is being handled by a third party on behalf of Alcatel, until the companies involved can agree on how Alcatel can recover what it is owed. Interoute also laid off half its staff.

The receivership doesn’t necessarily mean that Interoute’s assets will be sold, although that’s a likely outcome.

P-Cube had granted media interviews ahead of its customer announcement, which was first scheduled for November 18. In an interview with Light Reading earlier this week, P-Cube executives said Interoute had installed the company's network devices in four cities -- Amsterdam, Frankfurt, London, and Paris -- with wider deployments expected in the near future.

Company officials remain upbeat, despite Interoute's plight. "The whole game is about who can offer a solid, next-generation backbone, and I still think Interoute is one of the best candidates out there," says Yuval Shahar, P-Cube's CEO. "Interoute has huge, huge potential, assuming it survives."

P-Cube's product is a pizza-box-sized gadget that classifies traffic passing through a carrier's transport devices so that, theoretically, the carrier can charge different prices for different types of IP traffic. P-Cube's flagship product, the SE1000, is designed for medium-to-large points of presence and manages up to a million concurrent IP service flows at wire speed, supporting up to 100,000 subscribers, the company says.

Interoute had been running live traffic over P-Cube's devices for six to nine months, P-Cube's Shahar told Light Reading earlier this week. Shahar says Interoute was not P-Cube's only customer; P-Cube has been shipping for revenues to customers in Asia, Europe, and the U.S. "You can't bet the farm on any single account," he says.

Interoute has at least a tangential interest in P-Cube's success or failure. Jim Kinsella, Interoute's chairman, and Ohad Finkelstein, Interoute's former chairman and CEO, are both on P-Cube's board of directors. Before Kinsella joined Interoute he was an advisor to the Sandoz Family Foundation, which is both a principle shareholder of Interoute and a minority investor in P-Cube.

News of Interoute's receivership came as a surprise to many in the industry who thought the carrier was debt-free. “We weren’t expecting this at all,” says one source at Interoute, who spoke on the condition of anonymity. “Frankly, there was no feeling that we were in financial difficulty up until last Friday."

The source points out that vendor financing was listed as an operational expense, not as debt, on Interoute's books. “The biggest bill was the monthly payments to Alcatel,” he says.

P-Cube hasn't announced any other customers to date, but it did talk up a marketing agreement with LM Ericsson (Nasdaq: ERICD) earlier this year. The equipment startup has raised more than $65 million in funding to date, including a $35 million Series C round which was announced in May.

— Phil Harvey, Senior Editor, Light Reading

Eugénie Larson, Reporter, contributed to this report.

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