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The Day Ahead: ONI, Sonus IPOs could be hits

ONI Systems and Sonus Networks should bring a little pizzazz back to the IPO market this week even though both companies are young and undeveloped
Written by Larry Dignan, Contributor

Although many companies are juggling IPO price ranges and hoping investors get interested, ONI had the demand to raise its price range -- in a very tough market. Sonus Networks could do the same.

Fibre optic networking company ONI raised is set to price 8 million shares in a price range of $21 to $23 (£14 to £15.5). And ONI is going public in an environment where the Nasdaq is down more than its up. Shares will trade either today or tomorrow.

All the anticipation isn't unexpected. You can't argue with ONI's pedigree. Goldman Sachs is the lead underwriter, and venture capital giant Kleiner Perkins Caufield & Byers and Sun Microsystems are backers. Meanwhile, New Focus, another optical networking company, made a nice IPO splash last week.

ONI makes equipment, operating software and protocols to help roll out optic networks. Optical networking is huge. Just ask Nortel Networks and Cisco Systems, which have acquired revenue-less optical networking start-ups, Sycamore Network and Ciena.

ONI is young -- its first product shipped in February. Its second product will appear in June. The company, which acknowledged it may need to raise more money after its IPO, has an accumulated deficit of $89.8m. The financials are downright scary. In 1999, ONI lost $46.5m on sales of $3m. For the quarter ending March 31, ONI lost $34m on sales of $3.6m.

But optical networking companies have been able to go from just an idea to a profit quickly. Investors are also betting big on optical networking start-ups in anticipation of takeovers in the future.

Like many other optical networking players, ONI will rely on a small number of customers for its revenue. The company said Williams Communications, COLT Telecom, StorageNetworks, Lucent and Internet Initiative Japan are customers. COLT and Internet Initiative Japan are also shareholders. The customers are currently testing ONI's gear and aren't obligated to buy.

The competition is steep, but investors haven't seemed to care. ONI cited Cisco, Nortel, Lucent, Sycamore, Ciena, Juniper Networks, Alcatel and Tellabs as current or future competition. One of those competitors, Nortel, filed a suit in March against ONI, alleging that ONI's products infringe on five Nortel patents.

Sonus Networks plays in a different networking sandbox than ONI, but could make a strong debut. Sonus is offering 5m shares expected to price between $19 and $21 for trading Thursday. Sonus' products, which include switches, management software and signaling gateways, deliver voice over data networks.

Like ONI, Sonus just started shipping its products and counts Williams Communications as one of its big customers. Sonus has three main customers: Williams, Intermedia Communications and Global Crossing.

Sonus also has blue-chip firms backing it. Sonus has Goldman Sachs as the lead underwriter and Matrix Partners, North Bridge Ventures and Bessemer Venture Partners as VC investors.

As for the financials, Sonus is even less developed than ONI. For the quarter ending March 31, revenue was just $1.1m with a loss of $16m. Sonus also competes with Cisco, Nortel and Tellabs.

Note: Given the current volatility and aftermarket IPO performance, individual investors may want to look before pouncing on the ONI and Sonus IPOs. As usual, do your homework.

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