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Optical/IP

Telica: It's the Customers, Stupid!

At a time when many other softswitch vendors are going belly-up or being sold for small change, softswitch-based voice and data infrastructure provider Telica Inc. announced today that the company has received $60 million in third-round funding, bringing its total funding to over $120 million.

So what's enough to differentiate a startup in a difficult market these days? Well, for one thing, Telica has not only made the products it said it was going to make; it also counts some of the largest carriers in the world among its customers. In addition to 17 other large carriers, Telica announced last October that Verizon Communications Inc. (NYSE: VZ) had signed on with a multiyear contract to use its Plexus 9000 switch (see Telica Signs Verizon).

“You can divide startups into two categories,” says Michael Howard, an analyst with Infonetics Research Inc., “those that have customers, and those that don’t. Telica recently announced Verizon, and they have other named customers that are using their gear. The proof of the pudding is when the carriers start buying.”

Highland Capital Partners and Oak Investment Partners co-led the round of financing, with new investors including Prism Venture Partners and Nassau Capital LLC. In addition to the equity funding, Telica recently received a $20 million working capital line of credit.

Sean Dalton, the partner at Highland Capital Partners involved with Telica, said his company was thrilled to continue its relationship with Telica. “We’ve been involved with them really since day one,” he says. “It’s a sad market in general. When we looked at Telica, we saw its traction... and we were happy to step up and play a larger role.”

One of the reasons that Telica is snatching customers away from other softswitch startups, according to Dalton, is that it made the call to include hardware in its product line.

“Most softswitch companies have been a disaster,” Dalton says. “The real value in [Telica] is in the media gateway. They understood that you can’t sell a softswitch without the hardware. This was their key strategic decision, and I think you can say that the market has responded positively.”

Telica's management said the company is intensely focused on its customer base. “We’ve actually executed our plan,” says John St. Amand, president and CEO of Telica, declining to compare his company's situation with that of Tachion Networks, a softswitch provider that fell off the map last summer. “Our top-tier customer base separates us from the competition. Our products are for customers that are the largest carriers in the world. Other companies targeted smaller service providers… and others never built a product.”

The hope, of course, is that Telica’s last round of financing is an indicator that the market is picking up again. After hearing about almost nothing but downsizing and bankruptcy during the last year of uncertainty, it’s nice to see a company that is not only stable but possibly thinking of moderate expansion.

“This money will last us through profitability,” St. Amand says.

Dalton agrees. “There’s enough cash to run this thing for the next couple of years,” he says.

But while Dalton says that this news is definitely good for Telica, he’s not sure that the whole market will profit. “I think we’re back to a situation where you have to be number one or two, or forget about it,” he says. “This is certainly positive for Telica, and positive for us, but I’m not sure if it’s good for their competitors.”

Howard, however, disagrees. “I’m really happy,” he says. "This is another piece of good news for our industry. We’ve hit the bottom of the trough, and this is an indicator that we’re on our way back up.”

Telica counts Cisco Systems Inc. (Nasdaq: CSCO), Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT), among its largest competitors in this market space.

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com
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flanker 12/4/2012 | 11:04:32 PM
re: Telica: It's the Customers, Stupid! I think you can count Sonus among their competition. Anyone care to comment on Telica's switch vs LU, NT or SONS?
flex 12/4/2012 | 11:04:31 PM
re: Telica: It's the Customers, Stupid! Ahh, lets see. 1)It does what it claims to do 2)It is installed and live in carrier networks (including Verizon) 3) Telica is added head count, not cutting like Sonus, NT or LU. Telica looks to have positive momentum created from under committing and over performing.
optical_man 12/4/2012 | 11:04:31 PM
re: Telica: It's the Customers, Stupid! I have to agree that NT/LU/ALA/CSCO are their main competitors. The other voip vendors (unisphere, sonus, etc) are bit players.
1) Unisphere - old products, dumped most of their line up
2) Sonus - an obvious stock pump and dump (gave hundreds of pre ipo stock options to everyone and their brothers to get biz.....the biz is now leaving them). See June issue of forbes (on line) to see how they built this house of cards. Also, w/ sonus, it seems you have to buy about 700K in Sun Microsystems gear to get their system to work.
Telica's main focus needs to be on how to beat up LU and NT while they build a basis.
flanker 12/4/2012 | 11:04:30 PM
re: Telica: It's the Customers, Stupid! I have not heard bad things about Telica or Sonus. What is the advantage of soft switching - or is the Telica product simply more dense with a lower cost per port?

Also, I dont see why CSCO is considered a competitor. IP aside, I cant imagine finding CSCO voice grade equipment in the C.O. (no offense to CSCO, its just not their strength).
netmgr 12/4/2012 | 11:04:29 PM
re: Telica: It's the Customers, Stupid! It is fun reading these posts... I would like to know how much of the farm these guys had to give up to get this last ditch round of financing to cover floating loans from the bank for the last several months... Telica does not even have VOIP yet. Sonus does and is expanding into Asia. I know you guys are thinking that he must be a Sonus guy. Actually not, but go ahead and think it. Telica really only has Internet Offload, which is a dying business especially since most of the CLECs died. Verizon is only using the Telica box because they got it for virtually free and they are using it for Internet Offload. If I am wrong, oh well. I would like to hear more of why Verizon did not comment on this big deal that Telica won! Companies like Verizon would love to announce a big deal if it was related to buying a next generation Media Gateway that is 99.999s and has good VOIP. Of course Telica has a better capacity. They are not doing VOIP. When they do, I am sure the BHC rate will be lower.

Lets see now:
Telica has Internet Offload.
Sonus has Internet Offload, Hot Standby redundancy (They do have their own Media Gateway and it is not a bunch of SUN systems), Tandem class 4 switching.
Santera has Internet Offload, and they have GR303 and are working toward Class 5 replacement. Nobody has class 5 replacement yet.
Of course Nortel does have their Succession line, which they announce a 1.4 Billion dollar deal with Cable & Wireless...
There are also others out there just chugging along waiting for a real deal from a Baby Bell. Right now, only Public companies really have a deal (Sonus) with one of those. I am not saying that Telica does not have a possibility with Verizon, I am just saying that the fat lady has not really sung for them yet. I will not believe that it has until a real carrier has announce with Telica.

Hey, if I am wrong, I would like to hear about it... I hope Sonus is not the only guy left to compete with the big guys.
optical_man 12/4/2012 | 11:04:29 PM
re: Telica: It's the Customers, Stupid! To answer your questions in reverse order:
1) Cisco competition. Cisco has 20 billion in the bank. They will figure out carrier voip eventually, or buy it,
2) Sonus vs. Telica: Telica has about 10 times the density, and doesn't have the Sun Microsystems problem. Sonus was a master stroke of publicity and hype. Witness their Williams deal in 1999. 100 Million dollar future build out. To date Williams has bought under 4 million (reported), Williams sold ALL their 200,000 pre ipo shares of Sonus (see Insider Sales) and Sonus has fired the Williams sales guy (from what the Nortel guy tells me). So, it looks like Telica was actually the squirrel putting away his acorns while Sonus was at the Media hype trough. (check out their "insider sales" on any stock board and you will choke).
3) Why softswitch? Classic switching works well, is over priced, under performs all the neat IP things being asked of it, but is currently entrenched. Biggest thing? It works. Carriers know they need to switch (no pun intended), but are some of the most conservative folks on this planet. They realize that if they're late to the game they will lose a few million but will still be in business (unlike some of Sonus' customers who are gasping for air ie; XO, GLBX, Level 3, etc). They will change, but it will be a slow change.
495guy 12/4/2012 | 11:04:28 PM
re: Telica: It's the Customers, Stupid! Well check the web page. If you believe the marketing then Telica claims to have all the things that Sonus has at a higher density. Which means they take up less real estate in a CO.

They way I understand it, Sonus redunancy wasn't built into the product up front. It was added later and doesn't work very well.

Also they way I undersand how the RBOCs work they don't like to promote their suppliers mainly because they buy from multiple suppliers and that just gets everyone pissed off.

Sonus is a marketing Juggernaut. I will give them that one. Their stock has been going up and down for the last month on bogus buyout rumors.

I think Telica has thier number though it will only be a matter of time.

------------------------------------

Lets see now:
Telica has Internet Offload.

Sonus has Internet Offload, Hot Standby redundancy (They do have their own Media Gateway and it is not a bunch of SUN systems), Tandem class 4 switching.
Santera has Internet Offload, and they have GR303 and are working toward Class 5 replacement. Nobody has class 5 replacement yet.
Of course Nortel does have their Succession line, which they announce a 1.4 Billion dollar deal with Cable & Wireless...
There are also others out there just chugging along waiting for a real deal from a Baby Bell. Right now, only Public companies really have a deal (Sonus) with one of those. I am not saying that Telica does not have a possibility with Verizon, I am just saying that the fat lady has not really sung for them yet. I will not believe that it has until a real carrier has announce with Telica.

Hey, if I am wrong, I would like to hear about it... I hope Sonus is not the only guy left to compete with the big guys.
optical_man 12/4/2012 | 11:04:28 PM
re: Telica: It's the Customers, Stupid! netmgr,
Expanding into Asia. You mean China? 1 Billion people, each making $20.00/month. Do the math. US/Europe is where the current cash is and will be for the next 12 years.
Yes, sonus has a media gateway, so does telica. If you knew how new players got into big accounts, you'd know it was via ICD. Look at the Sonus press releases, most of them talk about something other than Voice (that's ICD). Voice is something they'll deliver in 1-2 years for their customers. Yes, Telica is about 1 year behind Sonus in development, so what? One year is a clock tick in Carrier's minds. Sonus has to run every other piece on sun gear (2x sun for redundancy, nice!)
Here's the article to which I referred....makes you wonder what kind of game is going on at the Hype Factory.
Read the last TWO sentences of the article for a synopsis.


Switch Hitter
Daniel Lyons, Forbes Magazine, 09.17.01


TELECOM | Sonus Networks sold debt to its dearest customer. Was it shrewd business or just revenue puffery?
Sonus Networks scored a coup in July when it landed a contract to sell phone switches to BellSouth. Sonus makes soft switches, inexpensive computer-based switches that can replace costly traditional circuit switches. Until now big carriers have shunned the new gear and stuck with costly but reliable circuit switches.

Sonus' bankers cheered, as they have filed with the SEC to raise as much as $1 billion in a second public stock offering (the first was in May 2000). But Sonus didn't mention one side deal in the press release: a $10 million sale to BellSouth of convertible debt, with a 4.75% coupon and a right to convert into Sonus stock at $30.

Sonus and BellSouth won't say how much the switch contract is worth. Analysts reckon it is about $4 million, so the debt payments partly offset the cost of the switches. But thanks to the conversion option, BellSouth may end up getting paid to use Sonus gear. Sonus trades at $16. Should it hit $40, BellSouth can convert for a $3.3 million pretax profit. At $60, BellSouth makes $10 million.

The tactic is perfectly legal, and it is giving fits to Sonus' privately held rivals, which have no such option. With $210 million in expected revenue this year, Sonus already has a big lead in the $370 million soft switch market, expected to hit $2 billion by 2003. Sonus shares are trading at a staggering 400 times expected 2001 earnings of 4 cents a share.

But its dealmaking is giving some investors pause. "From our perspective it's a red flag," says Victor Cunningham, securities analyst at Olstein & Associates, a mutual fund company known for scrutinizing financial statements.

Sonus Chief Executive Hassan Ahmed insists the switch sale and the debt deal are unrelated. He says Sonus simply wanted to raise a little cash, and BellSouth's $10 million "loan" replaced recent acquisition expenses. BellSouth won't discuss its reasons for making the investment.

The arrangement is a new wrinkle on a game very much in vogue during the late 1990s telecom bubble. In that version, equipment makers would issue equity in the form of warrants to a carrier in exchange for a contract. When the SEC caught on, some firms had to subtract the value of the warrants from revenue.

Sonus could face a similar hassle if its auditors don't believe the debt and the switch sale are completely unrelated, says Scott Martin, chief executive of diCarta, a California software developer whose products help companies handle revenue recognition issues.




Sonus has accepted venture capital equity from other customers, including Global Crossing and Williams Communications, and relied heavily on its wildly successful initial public offering as a way to win the hearts of potential customers. Sonus set aside 700,000, or 12% of the offering, as so-called friends-and-family shares. The typical allotment for new issues is 5%.

In some cases its enticements backfire. Dana Crowne, chief technology officer at Allegiance Telecom, a carrier in Dallas, got turned off when Sonus sent him a FedEx package containing forms that would let him buy 2,000 shares in the public offering. "I'd never even had any contact with Sonus before. It was such a blatant and slimy tactic," Crowne says. He now refuses to take calls from Sonus salespeople.

seahorse 12/4/2012 | 11:04:27 PM
re: Telica: It's the Customers, Stupid! Looks like Telica is about to sign a 16 city deal with KMC: http://www.telecommagazine.com...

And if the article is correct, they also have trunk side IP and ATM in addition to PRI.
h 12/4/2012 | 11:04:26 PM
re: Telica: It's the Customers, Stupid! Can somebody point me to some interesting in depth
articles/papers which talk about softswitches,
their benefits and the technologies associated
with it. I am new to this area of networking and
would like to learn more. Is there an article
something like the GMPLS article on lightreading,
that goes over the technology, business aspects and
players in the softswitch industry ?
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