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Investor's Business Daily
(978) 851-1100 starentnetworks.com Lead underwriters: Goldman Sachs and Lehman Bros. Offering price: $9-$11 Expected date: week of June 4 Ticker: STAR THE BUZZ
If it never stops, that'll be just fine with Starent Networks. CEO Ashraf Dahod says he foresaw this trend back in 2000, leading him to found a company devoted to helping mobile phone providers handle the multimedia demands of their users. Nowadays most companies retool their routers and add on to their infrastructure as needed, but Starent offers a platform designed from scratch for the third-generation (3G) age. In a way, Starent is the wireless version of such recent IPOs as BigBand Networks (NasdaqGM:BBND - News), Riverbed Technology (NasdaqGM:RVBD - News) and Allot Communications (NasdaqGM:ALLT - News), all offering different technologies to handle the exponentially increasing amounts of data flowing through networks. "Starent's key technologies have to do with the problems of bandwidth and quality of service," said Albert Lin of American Technology Research. "If you're streaming video and there are glitches or delays, the value of the service goes down dramatically." Like other tech upstarts, it faces an uncertain future, but it's gotten off to a respectable start by landing some major telecoms as clients. THE COMPANY Starent was founded in 2000. It made its first sale in 2003 to China Unicom (NYSE:CHU - News), which had ample reason for an upgrade. "Every mobile user in China sends or receives about 800 text messages a year," said Li Tang, analyst with Pacific Crest. "China Unicom is actively preparing for future 3G applications." Since then, Starent has pitched itself mainly to top-tier wireless telecoms around the world. Its main buyers are Verizon Wireless, Samsung Electronics and Itochu Techno-Solutions. Until recently, many of its products were resold by Nortel Networks (NYSE:NT - News), but the two firms parted ways in March. Starent sells a core platform called ST16, along with associated software and services. In the company's roadshow, the CEO described the platform as combining the attributes of a server and a router. It can handle multiple radio technologies, such as UTMS and CDMA, and also can "intelligently" manage different types of data for a seamless flow. It can complete up to 6,000 calls per second. A new version of the platform called ST40 should be out in the third quarter. It will be able to handle Wi-Fi and WiMax and to complete up to 15,000 calls per second. Although based in Massachusetts, the firm has a large number of workers in India, especially in research and engineering. This helps keep costs down, according to management. RISKS/CHALLENGES The resale deal with Nortel had provided 40% of revenue. Starent's prospectus confidently predicts that revenue won't be affected because it expects to cut new deals directly with Nortel's customers. However, such deals are still hypothetical. Even outside of Nortel, the customer base is highly concentrated. Verizon Wireless provides another 40% of revenue, and the top five customers together account for over 90%. Starent is dealing with some hulking competitors, including Cisco Systems (NasdaqGS:CSCO - News), LM Ericsson (NasdaqGS:ERIC - News), Nokia (NYSE:NOK - News) and UT Starcom (NasdaqGS:UTSI - News). With less money, experience and name recognition than its rivals, Starent is betting everything on the superiority of its technology. The question is how the new platform will sell. Quarterly results have been lumpy and will probably continue to be so, especially given that Starent does not recognize revenue until customer acceptance. THE RESULTS Revenue has ramped quickly since the first sales in 2003, and the firm turned profitable in 2005. In the first quarter of this year, sales jumped 92% to $27.6 million while net income surged to $2.3 million from just $252,000 in the year-ago quarter. USE OF PROCEEDS Starent expects to receive $82 million from its offering of 10.5 million shares. It will use the money for general corporate purposes. THE MANAGEMENT Ashraf Dahod President, chief executive and chairman Co-founded the company in 2000. Previously he founded three other companies, all devoted to networking gear and all of which have been bought by larger firms. John Delea Vice president of finance and administration Joined in 2002 and was also CFO until February. Previously he served as CFO of Quantum Bridge Communications and NetGenesis. Paul Milbury Vice president of operations and chief financial officer Joined in February from Avid Technology (NasdaqGS:AVID - News), where he was CFO for seven years. He spent most of his previous career at Digital Equipment, now part of Hewlett-Packard (NYSE:HPQ - News).
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