Four years after it was founded, Veraz Networks Ltd. is about to make good on its promises. If all goes as planned, the company will float on Nasdaq by the of this year. Investment banks negotiating with the company are hinting that it could go public at a company value of $400-500 million. These numbers will make Veraz one of the largest IPOs by a telecommunications equipment company in recent years.
Veraz develops and markets software-based switches (softswtiches) and hook-up solutions between traditional telephony networks and next-generation VoIP networks. The company’s technology, softswitches and media gateways for voice compression, help communications providers deploy customized next-generation networks. These are heavy-duty products, installed in the core of telecommunications providers’ infrastructures.
Veraz is a hotcake among investment banks operating in Israel. In his first interview with “Globes” since taking up his post, Veraz Networks CEO Doug Sabella explains why the company is a success, and why global communications operators are choosing the company’s core equipment instead of products from its giant competitors Alcatel (NYSE: ALA; Paris: CGEP), Lucent Technologies (NYSE: LU), Nortel Networks (NYSE; TSX: NT), Sonus Networks (Nasdaq: SONS), and even Cisco Systems (Nasdaq: CSCO), but he refuses to comment about a future IPO.
Sabella says last year was an excellent one for Veraz. “We doubled the number of our customers. I won’t disclose the company’s level of revenue, but sales of its IP products increased by several hundred percent. We have 350 employees worldwide, and 65% of our business is outside the US. Veraz is a global company that competes head-to-head with the largest companies. It isn’t going to disappear anytime soon.”
Sabella did not say it, but knowledgable Israeli high-tech sources say that Veraz has doubled its sales since 2003, and they estimate the company’s sales at almost $100 million a year. An executive at a consultancy firm said this week, “Investment banks know the markets. A company that obtains a valuation bordering on $500 million has to present a sales graph showing sales of tens of millions of dollars, and approaching $100 million a year. Furthermore, the company has to demonstrate rapid growth; in other words, slaes at least doubling each year. It seems that Veraz meets these conditions.”
Two failures = one success
In order to understand how Veraz got this far, it is necessary to go back three or four years. If Veraz realizes its promise, its story will be one of the most fascinating in Israel’s high-tech industry.
Veraz was basically a merger of two failing companies: ECI Telecom Ltd.’s (Nasdaq: ECIL) NGTS unit and NexVerse Networks, a US VoIP company that failed to take off after burning $80 million raised from prestigious investors. NGTS was no great success either at ECI, which was about to close the unit.
NexVerse had developed a softswitch and NGTS the media gateway. The combined product has turned Veraz into one of the great promises of VoIP communications. Three men created Veraz: Barak Hachamov, Tal Simchony, and Amit Chawla. Hachamov is a serial entrepreneur who in recent years has been involved in the founding of six successful start-ups, including Corrigent Systems Ltd. and Veraz.
Founded in late 2000, Corrigent is controlled by Orckit Communications Ltd. (Nasdaq: ORCT; TASE: ORCT), and is expected to reach $100 million sales in 2006. It is now Orckit’s main source of revenue. It is to Hachamov’s credit that the companies he helped found during the hard years of the high-tech slump are doing quite nicely in the market revival. They are the kind of companies that any Israeli venture capital fund would gladly sponsor.
Simchony was the manager of ECI’s NGTS unit, and was CEO of Veraz until a year ago. He brought the company to the starting gate from which Sabella will now carry on. Chawla was CEO of NexVerse and is now Veraz executive VP global marketing.
Veraz raised $30 million when NGTS and NexVerse merged to create it. The company still has most of the money, and it will probably be able to go public on Nasdaq without needing to raise any more private equity. The company’s investors include Northwest Venture Partners, run by general partner Promod Haque; ECI, which owns 35% of the company; Levensohn Venture Partners; and Battery Ventures.
“Leadership, vision, and risk-taking”
Since the merger, Veraz has seemed unstoppable. The company announces a new customer every month. In late 2004, Frost & Sullivan cited Veraz’s product and team for excellence, citing “leadership, vision, and risk-taking”. “Internet Telephony” magazine awarded Veraz its product of the year award. “Forbes” picked Hacque as the outstanding venture capitalist of 2004 partly because he is a director of Veraz.
In a report published last month, CIBC Israel analyst Avivit Mannet-Kalil wrote what Veraz could not say: “There is a good chance that Veraz will go public towards the end of 2006 .” She estimated the company’s sales of new VoIP softswitches at $28-30 million in 2005. The company fell into the red because of expenses for increasing its growth and preparations for an IPO.
Sabella cautiously says, “It could be said that Veraz had good business in 2005 and grew rapidly. We doubled our customers to 700, and we’re managing 35 projects in 50 countries. Our focus is clear: we focus on infrastructure products for the world’s large telecommunications operators, and we want to take part in the transition of telecommunications traffic from traditional to IP-based networks. Our customers are telecommunications operators, as well as the US Department of Defense and the defense ministries of other countries to which we provide media gateways for encrypted communications.
“We also have our traditional product - digital compression multiplexing equipment (DCME) - with which we’ve had handsome success, and for which we have many customers worldwide, even if not on the scale of our IP products, whose growth is measued in the hundred percents. The company has 450 employees, including 100 contract workers in India. We carry out R&D and production in Israel, India, and the US, and we have offices and branches in South America, Africa, the Middle East, and Russia."
Sabella says Veraz and its market will not disappear anytime soon. “VoIP isn’t a fad, nor will it disappear in a few years. It’s a sector that is changing the global communications market. There are quite a few similar examples, such as the digital switches invented in the late 1970s. It took ten years for Nortel, Lucent, Siemens, and Alcatel to take the invention to the market, and they needed more years until they reached a peak in 1997. 20 years altogether. Mobile communications products needed ten years until the market developed, and the same thing is happening in VoIP.”
How does this relate to Veraz?
Sabella: “Companies like Israel’s Bezeq Ltd. (TASE: BEZQ) or Verizon Communications (NYSE: VZ) in the US are going in the direction of VoIP. This process will take between five and sixteen years, depending on the infrastructure and size of the networks. The message is that we’re there, with a working product. We believe that the first stop in realizing the market potential is the international calls infrastructure. The next stage will be end-user services, but that will take much longer, because it’s more complicated.”
Sabella says Veraz’s products are those that make it possible to bring the technology to market. “Our products are the core infrastructure of the next generation. We are currently managing more successful projects than any other player in the field, which is why we’re winning contracts.”
“We’ve had no concrete acquisition offer”
How do explain that a fairly small and new company is beating Alcatel and Nortel in tenders? Large telecommunications operators reportedly prefer buying infrastructure equipment from large established companies rather than from fairly small ones.
“First of all, Veraz is no longer considered a small company. Quite a few of our customers began working with the large players, and switched to us. For example, Bezeq International began working with Alcatel, and switched to us.
“Banks and analysts also ask me the same question. I asked one of our customers, Telecom Corporation New Zealand Ltd. (NYSE:NZT; NZSE:TEL), why they chose us, when they could buy from anyone, from Alcatel to Sonus, our competitors. They told me, ‘If Alcatel or Lucent had a product that worked, we’d choose them.’ Our products work; the others’ products work a little less well. We have customers who tried other equipment, and after 18 months the product didn’t work. We also have more experience with projects.
“Veraz’s products are multi-protocol based, which facilitates installation procedures. Cisco invented the router, making two-way information traffic possible. If you like, we did something similar in the VoIP world. We’re the Cisco of the next-generation telephony world.”
This combination, of a fairly new company that is taking bites out of the profits of the large companies, is a well-known formula in the acquisitions market. Siemens (NYSE:SI; XETRA:SIE), Nortel or Alcatel could write a huge check, and simply buy the competition. Do you see yourselves as a candidate for acquisition?
“I don’t know of any concrete offer, but I know this market. A lot of big companies, such as Lucent and Alcatel, have been building switches for almost 100 years, and the ego of a large company is derived from the number of years it’s been in business. Even if they lose the market, it will take them time to understand that they need outside help. I believe that they will realize this, but until then, we'll take them on and win. Obviously, they’ll have to deal with us one way or another.”
By the time one of the large players decides to sign a check, Veraz could reach the stock market. Sources close to the company say that, in recent months, it has picked up the pace of spending in order to meet the growth in orders and prepare for an IPO.
Will you raise money in the near future?
“We still have most of the money raised in our last financing round. Because of rapid growth, the company is spending more on building inventory. If we need to raise more money, the company’s directors will decided to do so. Meanwhile, the future looks good. We have capital, and, most important, the right product at the right time in a large market that won’t disappear. We think we’re very well positioned in this market.”
There’s no one who can overtake you in the near future?
“There’s no other company in the market that comes near us at this stage. This is a complex and tough market; I find it hard to see a new company suddenly popping up in it.”
Published by Globes [online], Israel business news - www.globes.co.il - on March 15, 2006
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