Daily Archives: April 2, 2012

Avaya IPO? Don’t Count On It

Reports now suggest that Avaya’s pending IPO, which once was mooted to occur this month, might not take place until 2013.

Sources who claim to be familiar with the matter told Reuters and Bloomberg that Avaya has deferred its IPO because of tepid demand amid competition for investment dollars from Facebook, the Carlyle Group, and Palo Alto Networks, among others.

Reconsidering the “Nortel Option

Well, if you are generously disposed, you might believe that particular interpretation of events. However, if you are more skeptical, you might wonder whether an Avaya IPO will ever materialize. If I were making book on the matter — and I’m not, because that sort of thing is illegal in many jurisdictions — I would probably skew the morning-line odds against Avaya bringing its long-deferred IPO to fruition.

Some of you found it amusing when I mooted the possibility of Avaya pursuing the “Nortel option” — that is, selling its assets piecemeal to various buyers — but I can easily envision it happening. Whether that occurs as part of bankruptcy proceedings is another question, though Avaya’s long-term debt remains disconcertingly and stubbornly high.

Despite recent acquisitions, including that of Radvision for $230 million earlier this month, I don’t see the prospect of compelling and sustained revenue growth that would allow Avaya to position itself as an attractive IPO vehicle.

Unconvincing Narrative

No matter where one looks, Avaya’s long-term prospects seem unimpressive if not inauspicious. In its core business of “global communications solutions” — comprising its unified-communications and contact-center product portfolios — it is facing strong rivals (Cisco, a Skype-fortified Microsoft) as well as market and technology trends that significantly inhibit meaningful growth. In networking, its next-biggest business, the company’s progress has been stalled by competition from entrenched market leaders (Cisco, Juniper, HP, etc.), the rise of aggressive enterprise-networking newcomers (Huawei), and a chronic inability to meaningful differentiate itself from the pack.

According to a quarterly financial report that Avaya filed with the Securities and Exchange Commission (SEC) last month, the company generated overall revenue of $1.387 billion during the three months ending on December 31, 2011. That was marginally better than the $1.366 billion in revenue Avaya derived during the corresponding quarter in the previous year. In the fourth quarter of 2011, products accounted for $749 million of revenue and services contributed $638 million, compared to product revenue of $722 million and services revenue of $644 million during the fourth quarter of 2010.

If we parse that product revenue, Avaya’s story doesn’t get any better. The aforementioned “global communications solutions” produced $667 million in revenue during the fourth quarter of 2011, up slightly over revenue of $645 million in the fourth quarter of 2010. Those growth numbers aren’t exactly eye popping, and the picture becomes less vibrant as we turn our attention to Avaya Networking. That business generated revenue of $82 million in the fourth quarter of 2011, a very slight improvement on the $78 million in revenue recorded during the fourth quarter of 2010.

Lofty Aspirations

Avaya can point to seasonality and other factors as extenuating circumstances, but, all things considered, most neutral parties would conclude that Avaya has a mountain to climb in networking. Unfortunately, it seems to be climbing that mountain without sensible footwear and with the questionable guidance of vertiginous  sherpas. I just don’t see Avaya scaling networking’s heights, especially as it pares its R&D spending and offloads sales costs to its channel partners.

True, Marc Randall, who now heads Avaya Networking, has lofty aspirations for the business unit he runs, but analysts and observers (including this one) are doubtful that Avaya can realize its objective of becoming a top-three vendor. Hard numbers validate that skepticism: Dell’Oro Group figures, as reported by Network World’s Jim Duffy, indicate that Avaya has lost half of its revenue share in the Ethernet switching market since taking ownership of Nortel’s enterprise business nearly three years ago. Furthermore, as we have seen, Avaya’s own numbers from its networking business confirm a pronounced lack of market momentum.

Avaya’s networking bullishness is predicated on a plan to align sales of network infrastructure with key applications in five target markets: campus, data center, branch, edge, and mobility. The applications with which it will align its networking gear include Avaya’s own unified communications and contact center solutions, its Web Alive collaboration software, and popular business applications that it neither owns nor controls.

Essentially, Avaya’s networking group is piling a lot of weight on the back of a core business that is more beast of burden than Triple Crown thoroughbred.

Growth by Acquisition?

Perhaps that explains why Avaya is searching for growth through acquisitions. In addition to the acquisition of Radvision this year, Avaya last year acquired Konftel (for $15 million), a vendor of collaboration and conferencing technologies; and Sipera, a purveyor of session-border controllers (SBCs). The Radvision acquisition extended Avaya’s product reach into video, but it probably will not do enough to make Avaya a leader in either videoconferencing or video-based collaboration. It seems like a long-term technology play rather than something that will pay immediate dividends in the market.

So the discussion comes full circle as we wonder just where and how Avaya will manage to produce a growth profile that will make it an attractive IPO prospect for investors. I’m not a soothsayer, but I am willing to predict that Avaya will sell off at least some assets well before it consummates an IPO.

Avaya IPO? Magic 8-ball says: Don’t count on it.

Vello Attempts SDN Makeover

Like a wide-area networking phoenix, Vello Systems rose from the ashes of OpVista, a purveyor of optical-transport systems for cable and telco customers. Leveraging its past in pursuit of a brighter future, Vello now has recast itself as an emergent player in software-defined networking (SDN) and network virtualization.

As one might expect from a company whose roots are in optical transport, Vello is a company in transition, shifting focus and resources from a market opportunity that never fulfilled its promise to one whose promise remains undimmed. Indeed, the company apparently has ample resources at its disposal, with Dow Jones Newswires reporting this past October (I hope DJN doesn’t block access to that URL) that Vello had raised $25 million to continue its transformation from an optical-transport, carrier-oriented vendor to one focused on cloud data centers at enterprises and service providers.

Gridless Optics and “Cloud Switching”

Vello now sells two WAN boxes — it calls them the “CX family of cloud infrastructure systems” — both of which are managed by the CloudMaster software suite.  The CX family comprises the 17-slot, 14-RU CX16000 and the 5-slot, 3-RU CX4000. Vello says the systems are designed to expand 10-gigabit fiber networks to terabits of virtualized capacity, a result the company says is achieved through a combination of gridless optics and “cloud switching” software. The systems are powered by the real-time, Linux-based VellOS, which Vellos says delivers extensive programmability and performance.

In a presentation given a few weeks ago at the Cloud-Net Summit in London, Karl May, Vello’s president and CEO, identified three strategic market opportunities for his company and its products: enterprise Internet services, with early emphasis on content-delivery networks (CDNs) for financial-services companies; public cloud computing, with a focus on data-center internetworking; and enterprise data, where data continuity as a service (DCaaS) is targeted. (Yes, the “aaS” acronyms multiply like rabbits).

Old Wine in a New Bottle?  

May and others at Vello have emphasized previously that those market opportunities aren’t being pursued through a simple repurposing of the intellectual property that Vello obtained from OpVista. In the article published by Dow Jones Newswires, May said that substantial new product development had been done in pursuit of the company’s rejigged target markets.

Vello’s pitch in those markets will be that its technology can deliver low-latency, scalable, reliable, and cost-effective interconnect between data centers. Having secured its $25 million in funding, which was disclosed in an SEC filing, Vello says it won’t need further financing. It claims to be generating revenue from product sales to existing customers, and it says some of its financial-services customers are among its investors.

That said, many of those existing customers were inherited from the defunct OpVista. The challenge for Vello will be to keep those customers onboard, and to add plenty of new ones, as it relegates OpVista to a historical footnote in the company’s history.