Private equity firms KKR and Sequoia have unveiled Aricent, their $900M telecom software business

October 26, 2006

4 Min Read
Aricent Crashes Telecom Software Party

The world of telecom software, already developing into a scrap between a number of big hitters, has a new major player, Aricent Inc. (See Aricent Comes Out.)

But this isn't an ambitious startup. Aricent, which has 6,700 staff and annual revenues of $300 million, is the new name for Flextronics Software Systems (FSS) , a business unit created in 2004 by Flex (Nasdaq: FLEX) following the acquisition of a number of software development, outsourcing, and OSS firms, including Hughes Software Systems. (See 2004 Top Ten: Signs of Recovery.)

In April this year Flextronics sold 85 percent of FSS to private equity firms Kohlberg Kravis Roberts & Co. (KKR) and Sequoia Capital , retaining 15 percent ownership, with the deal closing September 4. The acquisition valued Aricent at $900 million.

The move comes as the telecom software sector undergoes major consolidation, with Amdocs Ltd. (NYSE: DOX), IBM Corp. (NYSE: IBM), and Oracle Corp. (Nasdaq: ORCL) the latest companies to bolster their capabilities and offer a wide range of products and services, including development and integration. (See Oracle Buys More OSS With MetaSolv, VCs Cash In on Cramer, and IBM Tiptoes to Telecom With Micromuse.)

And KKR and Sequoia aren't the first private equity players to spot the sector's potential: Providence Equity Partners and Warburg Pincus acquired Telcordia Technologies Inc. for $1.35 billion in March 2005. (See HQ Sale Funds Telcordia Deal.)

Now Aricent, which has more than 350 customers -- including Alcatel (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO), Ericsson AB (Nasdaq: ERIC), Juniper Networks Inc. (NYSE: JNPR), Lucent Technologies Inc. (NYSE: LU), Motorola Inc. (NYSE: MOT), Nokia Corp. (NYSE: NOK), Nortel Networks Ltd. , Sprint Corp. (NYSE: S), Telefónica SA (NYSE: TEF), and Vodafone Group plc (NYSE: VOD) -- is aiming to capitalize on the increasing trend by vendors and service providers to outsource product and back-office software development.

It's the services side of the business that is driving Aricent's growth, says Ajay Gupta, VP of the firm's wireless and convergence business unit. He says about 85 percent of the firm's revenues, which he says are growing at 30 percent per year, come from services, while the remaining 15 percent comes from software licenses. The company, though, is aiming to generate 20 percent of its sales from products in the future.

Those products include protocol stacks, pre-tested software components for telecom equipment products, and mediation systems for billing and service provisioning packages. (See FSS Unveils SigASN, FSS Rules SIP, and Flextronics Offers IPv6 Switch.)

The main bulk of Aricent's business, though, comes from creating virtual R&D labs, staffed by hundreds of Aricent employees, that cater for the specific development needs of the customer. For Tier 1 customers such as Alcatel, Nortel, or Nokia, these teams can be as large as 750 to 1,000 people, while for mid-sized players such as Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) or Tekelec , they would have up to 400 on staff.

As with any part of the telecom development world at present, Aricent is promoting its IP Multimedia Subsystem (IMS) capabilities. Gupta says the company is building IMS client software for device manufacturers and software modules for IMS application servers for equipment manufacturers.

Vendors generate most of Aricent's business, accounting for about 90 percent of revenues, but Gupta says the carriers represent the firm's fastest-growing part of its business. Here, the company works with the operators to develop back-office capabilities, often helping to integrate systems from partners such as HP Inc. (NYSE: HPQ).

Aricent isn't alone. It's one of a large number of outsourcing and development specialists hoping to lure vendors and carriers with the offer of fast and cost-effective software development, and, like many of its rivals, it has operations in India. (See Who Does What: Outsourcing to India.)

That puts Aricent in head-to-head competition with another fast-growing development house, Wipro Ltd. , as well as other firms that are also experiencing significant growth. (See Wipro Boosts Profits, Moto, Wipro Form JV, Wipro Sweeps Across Europe, Tech Mahindra to IPO, and Sasken Reports Q1.)

Other major competitors include the big systems integration firms such as Accenture , and regional players, such as European software development and integration house Tieto Corp. .

Gupta, though, says Aricent differs from many large rivals by being completely focused on the communications sector and having a global presence: As well as its corporate center in Palo Alto, Calif., the company has offices in China, Finland, Germany, India, Italy, Japan, South Korea, South Africa, Ukraine, and the U.K.

— Ray Le Maistre, International News Editor, Light Reading

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