NexTone Gets a Loan

The session border controller maker says it needs the $25 million for post-sales support infrastructure and product development

September 12, 2006

4 Min Read
NexTone Gets a Loan

The session border controller (SBC) company NexTone Communications Inc. said Tuesday it has received a $25 million loan from Columbia Partners Private Capital, a Washington-based investment management group. (See NexTone Gets $25M.)

NexTone says it needs the money to buff its post-sale support infrastructure and engineering staff, and to do some more product development.

"This is not an equity round. This is a debt round to enhance all the equity we've raised so far,” NexTone CEO Malik Khan tells Light Reading. Khan says the loan will likely represent the company’s last funding event.

Columbia hopes to make some return on interest from the loan, which Khan says will be "just higher than bank debt return." Columbia has no equity ownership in NexTone.

The loan comes on top of NexTone’s existing venture capital funding, which totaled $67.5 million after the company’s D Round last November. (See NexTone Dials Up $35M More.) Earlier venture investors in NexTone include One Equity Partners , BCE Capital , Core Capital Partners , Mid-Atlantic Venture Funds , and Safeguard Scientifics.

Despite the need for a loan, Khan says NexTone's 2006 revenues are on track to grow by two and a half times over its 2005 revenues. The private company won't release actual sales numbers. Khan expects his company, which now has around 500 carrier customers, to reach profitability in 2007.

NexTone says it's seeing record growth supplying session border controllers to carriers establishing VOIP peering relationships with other carriers. “We will use the money in Europe and the U.S., where we see a very vibrant market opportunity," Khan says.

Columbia Partners managing director Christopher Doherty points to NexTone’s quarter-over-quarter growth numbers, market share in the SBC space, and repeat customer business as the key reasons for extending the loan. Doherty’s firm manages roughly $200 million in capital, and typically invests in mid- to later-stage companies.

Khan says the session border control space has narrowed down to a two-horse race. “If you ask who are the viable suppliers of session border control, most people will tell you it is NexTone and Acme Packet,” Khan says. “There’s no one else.”

Acme Packet Inc. (Nasdaq: APKT) spokesperson Kevin Mitchell has no problem with that assessment. “I don’t think that’s an unfair characterization; there certainly have been a lot of exits in the space,” he says. (See Acme Packet Lines Up IPO.)

The SBC space has indeed thinned out nicely in the past 18 months: Netrake Corp. was acquired by AudioCodes Ltd. (Nasdaq: AUDC); Juniper Networks Inc. (NYSE: JNPR) bought and shut down the Israeli SBC player Kagoor; Ditech Networks Inc. (Nasdaq: DITC) took out Jasomi. (See AudioCodes Takes Netrake, Juniper to Acquire Kagoor, and Ditech's Itsy Bitsy Jasomi Deal.)

Newport Networks plc (London: NNG) remains active but has yet to announce a Tier 1 customer and reports revenues of $1 million to $2 million.

“I do agree they are the two players, but it is also to both of their advantages to get that story out,” says Heavy Reading analyst Jon Longo. “Acme has gone public with its numbers with its S-1 and amended S-1. NexTone has not gone public yet, and looks to benefit from the halo effect of comparison with Acme."

Heavy Reading analyst Graham Finnie is a little less comfortable with the two-horse race idea. “Is the market really mature enough technologically speaking to settle into a duopoly yet?” he asks.

Both Longo and Acme’s Mitchell say that some deft new players -- like Sansay Inc. and Data Connection Ltd. (DCL) -- are addressing the SBC space.

NexTone's Khan believes Acme is dominating in applications where carriers need session border control between the carrier network and the user network. NexTone, he says, dominates carrier network-to-carrier network SBC applications.

Here, Mitchell can not agree, noting that two of Acme's largest customers use the gear for network-to-network session border control applications. “We’re in some of the largest [carrier] interconnect peering deployments going today,” he claims.

Mitchell also believes NexTone serves a different type of carrier: “NexTone has something like 500 customers, but they’re historically in the Tier 3, Tier 4 operator space, and that’s where NexTone’s strength lies, and that’s where the bulk of their customers are." He says Acme has roughly 300 carrier customers, 95 of which are Tier 1s.

For now, the VOIP equipment market appears to be growing quickly enough to support the SBC players that remain active. Industry analyst group Infonetics Research Inc. projects that worldwide service provider revenues for VOIP and IMS equipment will more than double between 2005 and 2009, from $2.5 billion to $5.8 billion.

— Mark Sullivan, Reporter, Light Reading

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