VoIP Systems

Veraz Looks for Respect

VOIP softswitch and media gateway vendor Veraz Networks Inc. (Nasdaq: VRAZ) can't get any respect.

During the company's first conference call since going public, Veraz reported revenues in its core IP softswitch business nearly doubled during the first quarter, and it forecast 20 percent revenue growth for the fiscal year.

But since its IPO, shares of Veraz have fallen by more than 20 percent. In midday trading Thursday, Veraz was trading down $0.50 (7.58%) to $6.10.

The IPO was a bit of a disappointment all along, as Veraz originally hoped to raise as much as $115 million through the public markets at a price of $12 to $15 per share. The company ended up lowering its offer price to $8 dollars, however, and its stock price has lagged ever since. (See Veraz IPO Comes in Low, Veraz Prices IPO, and Veraz Files for $115M IPO.)

So what gives with this company?

Heavy Reading analyst Joe McGarvey says investors might be concerned with the transition of the company's revenue base from TDM- to IP-based products. "Investors could be worried that there has been too precipitous a drop" in DCME (digital circuit multiplication equipment) revenues, he says.

According to the company's earnings release, sales from Veraz's legacy DCME business dropped by nearly 50 percent, to $5.1 million in the first quarter of 2007 from $10.2 million in the prior year's quarter.

Investors may also be looking for stronger overall growth. The company has forecast revenues to be approximately $120 million for the fiscal year, up from full-year 2006 revenues of $99.6 million, but some investors may be looking for more than 20 percent growth from a company in a rapidly growing market.

Veraz expects worldwide VOIP softswitch sales to grow 20 to 25 percent in 2007, as more carriers make the transition from legacy switches to IP-based alternatives. So some investors may see the company lagging the overall market or only barely keeping pace with it.

Just looking at the overall revenue growth ignores the company's trend towards increased IP sales, McGarvey says. "The IP product portion is growing much faster than TDM is; 20 percent growth is good, but if TDM sales are in decline, that means IP is growing much faster."

Veraz CEO Doug Sabella says that his company expects to see a continued year-over-year decline in legacy revenues, but, unlike some other vendors with legacy products, Veraz's conversion of existing customers to IP technologies should continue to drive growth.

Another concern could be the lack of high-visibility Tier 1 customers. McGarvey notes, "Even though they're public, they don't have a huge track record in the Tier 1 market."

Veraz has until now mostly targeted its IP products at providers in smaller developed nations and emerging markets, counting customers in markets such as Latin America, Russia, and India. Sabella explains that the company targeted those regions as a way to deploy all-IP softswitches in markets where legacy infrastructure wasn't already prevalent.

The company also has some deployments in Tier 2 carriers in North America, although only 19 percent of revenues come from that market. Sabella believes the IPO and its track record in developing markets helps give Veraz credibility, which will help it as it moves into the hunt for Tier 1 deployments in North America and Western Europe.

"We're becoming a proven platform," he says. As more and more carriers look to switch from legacy to IP platforms, Sabella expects his company to be in the running for larger contract wins.

Despite investor jitters, McGarvey likes the market opportunity Veraz has ahead of it. "They still have an opportunity because the bulk of the transition from TDM networks has yet to play out," he says.

For the first-quarter 2007, Veraz posted a net loss of $1.2 million, or 8 cents a share share, on revenues of $27.5 million. This is compared with a loss of $3.5 million, or 26 cents a share, on revenues of $21.6 million for the year-ago quarter. (See Veraz Reports Q1.)

The drastic drop in DCME revenues was offset by a 98 percent increase in sales of the company's IP equipment, to $17.7 million. Services revenue was also strong, increasing to $4.7 million from $2.5 million in the first quarter of 2006.

Veraz forecasts that it will post a $4 million loss for the fiscal year 2007 on revenues of approximately $120 million. This compares with a $13.9 million net loss in 2006 on revenues of $99.6 million.

— Ryan Lawler, Reporter, Light Reading

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