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Nov/Dec 2009 | Volume 1/Number 6
Cover Story

Growing Gains Metaswitch Readies to Move to the Next Level

By Paula Bernier (News - Alert)

MetaSwitch (News - Alert) started life less than a decade ago as the carrier systems division of U.K.-based Data Connection Ltd. But the student became the master, as the division grew to generate more than 80 percent of Data Connection's revenue. As a result, the company decided to put its two divisions under the new banner of Metaswitch Networks.

The company combines the assets of MetaSwitch, best known for its Class 5 replacement solutions, with the network protocols division of Data Connection, whose stacks can be found in the gear of such major suppliers as Alcatel-Lucent (News - Alert), Cisco and Ericsson, among others.

"The two brands that we had, had begun to get confusing for our very diverse customer base," explains John Lazar (News - Alert), CEO of Metaswitch Networks.

The new name offers a more coherent brand based on the name that is more visible, and that is Metaswitch, says Lazar. It also reflects the company's ambition, adds Lazar, which includes becoming a much bigger presence on the communications scene and, eventually, going public.

"We think that we have a base and platform now to drive forward to become a global player and a major player in the communications space," says Lazar, who was promoted from president and COO of MetaSwitch to the CEO of Data Connection in April, taking over for founder Ian Ferguson, who continues as chairman.

At the time, the company revealed its plan to consolidate all of its products and business operations under the MetaSwitch brand. Then, in early October, coinciding with its annual financial report, the company announced the consolidation and the new name, Metaswitch Networks.

Going Soft
The move to brand its two divisions under the Metaswitch name also appears to be an effort by the carrier side of the business to emphasize its play in the application space. In fact, Lazar says that more than half of the carrier systems division's revenues come from applications.

"Our key smarts, our real value proposition, is actually in software development," says Lazar. "That's incredibly important to both our future and our history."

The carrier system division's central product is a softswitch, which is used by hundreds of service providers to deliver a variety of services, including VoIP, legacy TDM and next-generation telephony offerings. But in his interview with NGN, Lazar emphasized the importance of the company's MetaSphere and CommPortal products.

"We have in our MetaSphere application server platform, one of the most flexible, extensible and rich platforms in the industry, and really this comes from our software heritage," he says, noting the product is widely deployed by carriers including tier 1s such as AT&T. "Within the platform our customers are doing the full range of Class 5 services, but then also consumer VoIP, small business services, fixed mobile convergence, next-generation voicemail, find me/follow me service, etc. All of that is shrink-wrapped now." End users – be they residential or business subscribers, or even customer service representatives – can access those applications through CommPortal.

"It's very important for our customers to be able to allow their customers very very flexible ways to access services," he says. "Our CommPortal, which is the customer portal into MetaSphere, allows access to the services from any screen. We supply sets of widgets for a whole set of different environments including Apple, Google (News - Alert) Android, etc. We're also delivering a whole set of mobile applications on the iPhone and the BlackBerry."

To help drive applications onto its platforms, MetaSwitch in April announced the creation of the MetaSwitch Innovators Community. The online portal provides sample code, open source projects, API help and documentation, a sandbox test environment, discussion groups, blogs and the ability to communicate and network with others in the industry.

Investing in the Future
Of course, Metaswitch Networks isn't relying exclusively on its partners and other third parties for innovation. Lazar emphasizes that despite tough economic times, the company remains dedicated to research and development.

"We've continued to make a massive investment in R&D across the whole company," he says.

During the course of the company's past financial year, he says, it plowed $34 million into R&D in an effort to develop new products and services. That's better than the industry-wide norm of investing 10 to 15 percent of revenue in R&D, says Lazar, adding that Metaswitch Networks has $113.7 million in revenue.

The now 500-employee company also has continued to invest in its people, adds Lazar, who says he spends 20 percent of his time on recruitment. Over the past year, between Sept. 1, 2008 and Aug. 31, 2009, headcount in the carrier systems division grew about 20 percent.

The company this year also created for the first time a dedicated CFO position and hired Stephen Halstead to fill the post. Halstead previously was co-founder of Heart Telecom Ltd., a U.K.-based B2B service provider.

And just last month the company announced that Stefan Knight has been named to the newly-created post of vice president of strategic alliances and tapped Steve Gleave as vice president of marketing. Both work in the company’s carrier systems division.

“We didn’t resort to the mass layoffs that many of our competitors or other companies in the industry needed to do,” says Lazar. “We’ve been remarkably careful about expenditure. But we’ve maintained the investment, and that means that during a very difficult year we’ve gained market share, which gives us a great platform to move forward.”

A Look at the Numbers
Indeed. Infonetics Research (News - Alert) recently put MetaSwitch for the first time at the top of its global ranking of VoIP vendors for Class 5 softswitch licenses. According to the report, “Service Provider VoIP Equipment and Subscribers Q1 2009,” the company is now the No. 1 supplier of Class 5 softswitch licenses, with 18.4 percent share. In North America, the company maintained its leading position in the same product category, increasing its share to an impressive 60.1 percent.

Greg Collins, vice president of carrier IP telephony research at Dell (News - Alert)’Oro Group, tells NGN that MetaSwitch went from less than 2 percent market share worldwide for softswitches, media gateways, voice application services and session border controllers in the second quarter of 2008 to 3.2 percent market share in that combined space in the second quarter of 2009. In the same category and time span, he adds, the company increased its North American market share, based on revenue, from 6 percent to 10 percent.

The company in mid-September announced Cavalier, a provider of competitive telecommunications services throughout the eastern U.S., would use Metaswitch gear to offer hosted PBX (News - Alert) and unified communications services to the small and midsize business market. The equipment supplier this summer also noted it has garnered business this year from regional U.S. operators including Ben Lomand Telephone Cooperative, which serves multiple counties in Tennessee; Rural Telephone, which is located in northwest Kansas; and Telephone Electronics Corp. of Jackson, Miss.

While Lazar concedes that his company has gained marketshare at Nortel (News - Alert)’s expense, he says it can also be attributed to the fact the Meta-switch continues to deliver quality product, service and innovation.

Metaswitch Networks in early October reported its annual results for the 2008-2009 financial year to Aug. 31. Overall revenue grew 4.2 percent from £59.3 million to £61.8 million ($113.7 million), with operating margins sustained above 20 percent.

Lazar says the company is “extremely pleased” with the results, especially considering that carrier VoIP spending during this time was down by more than 30 percent according to industry analysts.

“I think it’s quite interesting to trace our financial year,” says Lazar. “We started our financial year the first of September 2008, and at the time the economy felt like it was entering a difficult patch. But within a week or 10 days of the start of the financial year, we had Lehman Brothers (News - Alert) going away. The economic crisis has tracked our financial year. So that’s the backdrop.

“During the financial year we’ve managed to grow our company revenue,” he continues. “We haven’t grown it by a huge amount, but we’ve grown by a couple of percent. Revenue growth in the worst economic year in living memory is a huge achievement, and I’m very proud of that.”

The company has also remained profitable, says Lazar, who declined to disclose details on that front other than to say: “We’ve got significant profit.”

Moving Forward
To keep that growth going, Metaswitch Networks continues to expand globally, is moving on the mobile opportunity, maintains its focus on providing solutions for customers in their migration to IP and an IMS core, and is working to help its customers effectively compete with an increasingly diverse group of players.

In June, the company announced a win with EUTEL, an incumbent telecommunications service provider in the Netherlands Antilles, which deployed the Metaswitch carrier VoIP solution to replace its existing legacy TDM switching infrastructure. A month later, the vendor revealed it had new contracts with Santa Barbara Utilities, which provides VoIP services to the Santa Barbara Plantation Resort Community, one of the leading luxury hospitality projects in the Southern Caribbean, and with Technology Bureau, a systems integrator in Argentina that serves Latin America.

But while Metaswitch seems to have a good start in its global expansion, Collins of Dell’Oro Group says it will take time to develop relationships and channels abroad.

Whatever the location of its customers, Lazar says Metaswitch is working to create frameworks for customers so that they can respond quickly to threats from new entrants and otherwise move as fast as possible to take advantage of new opportunities.

The delivery of such solutions, Lazar believes, will help further propel Metaswitch forward to realize more growth and, eventually, a public offering.

“In a very cautious, careful way, based on the economy, we’re looking for growth somewhere between 15 and 20 percent over the year [going forward],” he says. “We may well blow that out. But right now that’s our intention.

“Within that, the very important thing is to have good quarter-on-quarter growth,” he adds. “So what we’re looking for is to make sure our first quarter for this year is significantly better than the first quarter for last year – on the order of 15 to 20 percent as well.”

And while Lazard says the economy makes planning an IPO a very iffy proposition at this point, he brought up the subject of a potential public offering before NGN got a chance to ask the question.

“Looking forward, we have no plans. We’ve not set a date. We’re not actively planning to do anything quite yet,” says Lazar. “But it’s perfectly possible at some point in the future we may decide to actually take the company public.”

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