Updated from 12:38 p.m. EDT
The "vici" in Avici translates from Latin to "I conquered," but
, which went public on Friday, would have to subdue both of its immense rivals,
, before it could truly invoke
famed statement of braggadocio.
Investors have been increasingly attracted to Internet communications equipment makers, as the search for newer, faster and better ways to negotiate the ever-burgeoning traffic on the Web continues. Avici claims to take advantage of that trend with its core router. A router is a device that connects computers and computer systems, moving and directing traffic between them. Though a newcomer to the market, Avici is betting that the technological promise of its product will outweigh the company's rather sparse financial statements in its debut.
Avici, which is 16.6% owned by
, leapt as much as 229% on its opening day, before closing at 96 3/4, up a triumphant 67, or 216%.
The public offering of 7 million shares was priced at $31 a share Thursday night, raising $217 million.
The IPO price reflected strong investor interest, since it was well above the initial range of $18 to $20 a share. However, that price range was raised to $28 to $30 earlier this week when the size of the offering was increased from 6 million shares.
Morgan Stanley Dean Witter
is the lead underwriter of the offering.
Avici is trying to break into a networking market currently controlled by two companies. With a market share of just over 80%, Cisco dominates. And Juniper follows, holding a 15% to nearly 20% market share.
Even so, the market is expected to expand to about $12 billion by 2003, from an estimated $1.5 billion this year and more than $600 million last year, according to telecommunications research firm
. "That's why everyone and their uncle is trying to get into the market," says Raj Mehta, an analyst at RHK.
There is, however, more competition coming from
(which bought Avici's rival,
, last year), as well as from privately held
Charlotte's Web Networks
"It all ties into market opportunity and the need for a data infrastructure. We have at least five years of build-out ahead of us," Mehta said. "There's such a massive need for new equipment. The router is the basic building block of that infrastructure."
Still in Its Infancy
Avici, based in the Boston suburb of North Billerica, Mass., has a tiny slice of market share of less than 1%. But its product only became commercially available in the fourth quarter of 1999. The company says its terabit switch router can move traffic with greater power and at higher speeds than its rivals.
There's little evidence yet of Avici's claims, since the company has only one customer,
, which recently filed for Chapter 11 bankruptcy protection.
Its product, however, is in trials with
Williams Communications Group
Enron Broadband Services
. Williams and Enron both happen to be Avici stockholders. (Enron switched from using Cisco equipment.) Should the trials -- first in a laboratory and then in a live network -- be successful, Williams and Enron have committed to buy $45 million of Avici equipment through 2001. Those trials can take the better part of a year, according to Martin Pyykkonen, an analyst at
CIBC World Markets
. He rates Cisco a buy and Juniper a strong buy, and his firm has no underwriting relationship with Cisco, Juniper or Avici.
has completed laboratory testing of the terabit switch router and will soon enter field trials, which should be completed by the end of 2000, according to Avici's initial public offering registration statement with the
Securities and Exchange Commission
Compatibility Is Key
Another important technical point concerns the software component of Avici's product. It is crucial that Avici's core router be compatible, or interoperate, with Cisco's and, to a lesser extent, Juniper's routers because of their predominance in existing networks.
Pyykkonen questioned whether Avici's software is sufficiently developed for compatibility because if not, it could take some time to do so. "Cisco operates three-quarters of the Internet backbone technology," Pyykkonen said. "Avici's product needs to interoperate with Cisco gear at the software level. It took a two- to three-year research and development effort from Juniper to get their code up to speed."
Mehta of RHK conceded that Avici's software is still maturing, but he is convinced that it is on track to becoming "stable and reliable. We don't have performance metrics, but we expect it to be very competitive," he continued. "We participated in a live trial, so we have firsthand expectations." That trial took place in April.
Though the company's technology is encouraging, its numbers are not. After filing for its IPO on May 18, Avici has been cautious about bringing its shares to market, "the reason being the current market environment is no longer disposed to look kindly upon startups with meager revenues and small customer bases," said Yusuf Haque, an analyst at financial portal
Like many companies that have gone public, the company sustained a loss, of $16.7 million, on sales of $504,000, in the quarter ended March 31.
"It's a bit of a leap of faith to go public with no hard revenue," said David Toung, an analyst at
. He rates both Cisco and Juniper a buy and his firm does not participate in underwriting.
But Avici's financial position may not even matter. Pyykkonen said that it is unlikely to dampen investor enthusiasm for the company's shares, especially with Juniper just crossing into profitability in the fourth quarter of fiscal 1999. "There's a huge gap between credibility and investor perception for dot-coms," he said. "But in this space, the models are pretty well established. The path to profitability is pretty clear and institutional investors understand that path."
The financial outlook is also somewhat positive, with $2.2 million in sales expected for the quarter ended June 30. But the company's loss is expected to grow to $26 million to $27.2 million. "With positive gross margins and sales growing faster than expenses, the company is moving closer to profits than
, which pulled in a successful initial public offering last week," said George Nichols, a stock analyst at
"The crucial variable to watch on first-day trading will be volumes," Haque said. A low volume, under 10 million, is a good indication that IPO investors are keen to hold onto the stock in the aftermarket, he said. "Consider also that optical networking IPOs are often highly valued, and the investor temptation to flip on the first day may be too much to resist if the price begins to skyrocket," Haque continued. "This, therefore, may be a highly volatile stock for the few days subsequent to the pricing."
In all, the stock "should have a great opening, but there's not much business to value right now, beyond the firm's promising technology," Nichols said. "Until Avici expands beyond one customer and one product, valuing its stock will be more art than science."