Polaris Moons Over McCleodUSA

Optical switch vendor Polaris Networks has finally announced a customer: McLeodUSA Inc. (Nasdaq: MCLD). (See McLeodUSA Picks Polaris.) But will the deal's momentum be enough to save the company?

The 30-employee startup, which has been quiet for months, has only lately started talking, after reports that two companies are looking at acquiring the firm. Indeed, the only time Polaris has been in the headlines in recent months has been due to the fact that its executives were leaving and that the company was cutting jobs in the U.S. so it could hire cheaper labor in China (see Headcount: Buy vs Lure and Family Time).

Apart from the odd timing, this customer announcement isn't much to write home about. McLeodUSA, a CLEC with subscribers in 25 states, has only bought one switch from Polaris, the company admits. Yet Polaris has been talking up its link to the carrier since June 2001, when one of McLeodUSA's executives endorsed Polaris's technology in a company press release. The same exec, Todd Wilkens, is also quoted in today's announcement.

Of course, a one-switch sale is not nearly the blockbuster deal a company that has chewed through more than $80 million in venture capital would need to justify its existence. But Polaris says the deal is a three-year agreement and McLeodUSA has more than 40 switch sites, so the company is hopeful.

Though it has struggled as a standalone firm, Polaris has always had interesting technology. Its switch combines the functions of a wideband, broadband, and super-broadband crossconnect system with Sonet add/drop-based transport into a single device. As such, it uses far less space, energy, and labor in the metro hub than a legacy digital access and crossconnect system (DACS). Polaris says its devices sell for between $300,000 and $500,000, depending on the configuration. Polaris CEO and president Surya Panditi says the McLeodUSA deal is a “proof of concept” for the company’s wideband switching devices. “The importance to us here is that a carrier who is not a small carrier has chosen our system after testing it extensively,” he says.

Panditi says McLeodUSA will “cap” the use of its legacy DACS and use the new switches to accommodate network growth. “Carriers do not like to throw away their existing systems, so McLeodUSA will use the Polaris system first for terminating rings on our system, and, second, for expanding their crossconnect as they provide new circuits.”

McLeodUSA has 38 ATM switches, 39 voice switches, and 435 DSLAMs in the Midwest, Southwest, Northwest, and Rocky Mountain regions [ed. note: in the West, then]. It has 2,474 employees and has reported quarterly revenues in the $150 million to $210 million range over the past year.

Before going public with its customer win, Polaris has been talking up the fact that it needs a larger partner to be truly competitive for the switch business of large, national carriers. Its main competitors include Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Lucent Technologies Inc. (NYSE: LU), and Alcatel (NYSE: ALA; Paris: CGEP:PA) -- each of which hold considerably more currency among large carriers.

Light Reading reported January 14 that Polaris was on the selling block and that Tellabs appeared to be the only suitor (see Will Tellabs Take Polaris?). Then some sources pointed out that Anda Networks Inc. -- a company with some of the same board members and investors as Polaris -- was in the running for Polaris as well, despite never having been in the metro crossconnect/switching market before (see Sources: Anda Also Pursuing Polaris).

Meanwhile, Polaris is adamant that its McLeodUSA win is more than just something to give the company curb appeal. Panditi says McLeodUSA tested the Polaris product in various locations for over a year, and is now running live traffic over the system.

“We intend to leverage the endorsement of McLeod when we compete for larger carriers,” he says.

— Mark Sullivan, Reporter, Light Reading

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