Mon, Jun 11, 2001 page19

• Unisphere basks in private success as telecoms falter

  Although the telecom sector has fallen out of favor on Wall Street, life has gone on for Unisphere, and pretty well at that

  • By Peter J. Howe / NY TIMES NEWS SERVICE
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  Last summer, Unisphere Networks seemed poised to enjoy the next multibillion-dollar initial public offering for a Massachusetts telecommunications start-up. Then the telecom IPO gate suddenly slammed shut and it has refused to reopen.

  Life has gone on for Unisphere, however. And pretty well at that, analysts and company executives say.

  As it marks its second birthday, Unisphere now has more than 100 customers for its switches, including a big customer base of telephone and Internet carriers outside the troubled US telecom market, particularly in east Asia.

  With 800 employees worldwide now, it has moved from its old Chelmsford home to a suitably impressive new 225,000-square-foot headquarters here, up Route 110 from booming rival Sonus Networks.

  And though privately held, Unisphere disclosed that its first-quarter revenue this year hit US$44.1 million for the period ended Mar. 31, up 46 percent from the previous quarter and nearly matching its full-year revenue of US$49.6 million in the 12 months ended last Sept. It expects to turn the corner to positive cash flow within a year.

  Whatever angst Unisphere and its biggest owner, German high-tech conglomerate Siemens AG, may feel about its IPO held hostage for 10 months and counting, "The company has clearly done well," said Chris Pasko, managing director with Morgan Stanley's East Coast technology group and a veteran of several area telecom IPOs, including Sycamore Networks.

  "One does not need to be public to be a successful company and there are a lot of advantages to being private," said Pasko.

  Having publicly traded stock "certainly does give you acquisition currency" to take over other start-ups with stock swaps, said Pasko. "But it certainly doesn't look like they've been hurt by it and they've certainly continued to grow their business."

  Kevin Mitchell of Infonetics, a telecom consulting and research firm, said in the first quarter of this year, Unisphere owned 17 percent of what Infonetics describes as the "subscriber management router" market globally, up from 8 percent the prior quarter.

  Broadly speaking, this market covers gear that phone and Internet companies use at the "edge" of their networks to deliver voice and data services to people's computers and phones.

  Unisphere ranked in third place after Cisco Systems, with 46 percent, and Redback Networks, with 26 percent, and far ahead of Lucent Technologies and Nortel Networks. Infonetics counted the sector as a US$178 million market last quarter.

  "They have a strong and increasing revenue stream," said Mitchell, who is based in Woburn, Masschusetts. "It might be good publicity to be a public company, but I don't think they need the capital. I don't think they need to raise money to stay alive."

  Among the crowded roster of Interstate 495 telecom start-ups, Unisphere has been one of the most closely watched. That's because of the huge resources Siemens poured into it -- more than US$1 billion spent buying three start-ups -- and the record of company president James Dolce Jr. as one of the brightest lights at area telecom legend Cascade Communications, now part of Lucent.

  In March and April 1999, Siemens spent US$1.05 billion grabbing Dolce's company, Redstone Communications; current Unisphere chief operating officer Tom Burkardt's business, Castle Networks; and a third company, Argon Networks, whose founder, Michael Grady, now holds a top post at start-up Chinook Communications in nearby Lexington.

  Siemens aimed to create overnight a powerful new competitor to Lucent and Nortel, combining Redstone's data capacities, Castle's voice-over-packet technology, and Argon's core routing expertise with its own software-based switch unit in Florida. The company has since abandoned -- and taken a US$127 million writeoff for -- the initial Argon router project, which had widely been seen as less solid than Redstone or Castle.

  At the same time, in the frenzied telecom investing world of 1999, it looked like potentially a smart investment play by Siemens: take three narrowly focused companies that each might enjoy a good IPO on their own and put them into a "greater than the sum of its parts" package to take public.

  In many quarters, scoring the big IPO -- unless you got bought for billions by an industry giant -- was the preeminent mark of success for Massachusetts telecom start-ups last year.

  Avici Systems of Billerica, SpeechWorks International of Boston and Sonus all scored heaps of cash, then enjoyed huge runups after they went public. Then, of course, the market slide wiped out billions from their market capitalizations and made many employees' stock options worthless.

  Unisphere's top executives say they still have high hopes for going public -- but in light of the telecom-stock wipeout of the last six months, they can see ways in which it has worked out just as well to stay on the sidelines.

  Not having a pile of IPO-generated cash, Dolce said, has forced a sharper focus on getting to profitability, instead of "driving top-line revenue growth at any expense."

  Instead of facing the situation of companies like Sycamore Networks in Chelmsford, which recently moved to let employees trade in stock options worth US$100 or more under strike prices for new ones, with the froth beaten out of telecom stocks, Unisphere can plausibly tell prospective new hires their options may well be worth something someday.

  "The pre-IPO situation is great for the new hire," said Burkardt. "Even though an IPO might not be in the immediate future, people want to be associated with a company that's growing and winning. The IPO and market conditions apply to everyone, and when the tide goes up, you can take advantage of that."

  "Employees recognize that the gold rush, the immediate gratification" of seeing stock options fattened by a quick IPO, "is over," said Dolce. "I think people are beginning to revert back to what was important five years ago. It's not only about stock options any more."

  "It's not a bad thing that we're getting back to reality," said Dolce.

  For Unisphere, that reality includes pushing ahead with deals all over the world, from a big German deployment of digital subscriber line technology, to major pacts providing networking gear in China, India and Australia.

  The Republic of South Korea recently achieved a perhaps astonishing feat: It has more DSL subscribers than the entire US and Canada combined, thanks to an aggressive effort by the national phone company to roll out DSL in the densely populated nation. Every one of those DSL subscribers relies on a Unisphere edge router for part of their service.

  "We're in 30 different countries right now," said Dolce. "This industry may have slowed down in the US, but it continues to be a growth business in pockets around the world." Besides its own sales force and Siemens link, Unisphere has over 30 resellers of its gear globally.

  Officially, Unisphere's position about going public is that "we're awaiting more favorable market conditions." It's clearly, however, a front and center issue. One recent day, the whiteboard in Dolce's first-floor corner office was full of inscrutable notes about potential IPO pricing.

  Whenever the sector finally comes back into favor on Wall Street -- probably once the wave of bankruptcies and business failures among phone and Net companies clearly stops -- Unisphere is a company that "will play well on the road," said Morgan Stanley's Pasko.

  "Frankly, we think," said Dolce, "we can be the cork in the bottle" that lets a stream of backed-up IPOs come pouring forth.
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