Polaris is delivering 'new generation' optical transport switching systems for the metro core network that combine the functions traditionally performed by Add-drop Multiplexing (ADM) and Digital Cross-connect Systems (DCS). Polaris launched its solution at NFOEC 2002 and currently has four committed trial customers in the U.S.

Mr Kao commented that despite the prevailing market conditions, Polaris has not encountered difficulties in raising funds to date, to the extent that funding rounds have been over-subscribed. Mr Kao added that the situation with regards to venture capital is similar to that seen in the optical equipment market - investment is still forthcoming under the appropriate circumstances.

The company is confident that, from a financial perspective, its future is secure in the medium term. Mr Kao noted that it is planned to retain at all times a six-month reserve of cash, based upon the ongoing cash-burn rate of the company. Bearing in mind this proviso, limited additional funding will be sought, if necessary, during the period leading up to break-even point.

Polaris aims, with its new generation solution, to integrate seamlessly into existing transport networks, and thereby 'cap and grow' as well as replace, legacy wideband, broadband and super-broadband DCS products. Mr Kao noted that the total market for this class of product currently is in the steady order of $3 billion annually, for the U.S. alone. The 'cap and grow' strategy is based on service providers deploying the Polaris product in tandem with legacy equipment. Over time, as the legacy equipment is retired, the Polaris product will gradually replace 'traditional' equipment.

Using the Polaris solution, the value proposition taken to service providers centres on the immediate dramatic reduction of capital and operational expenditure. Mr Kao stated that it is estimated the product will pay for itself within twelve to fifteen months in a typical installation. Furthermore, the solution brings to service providers new-generation 'future proofing', thus making the network ready to deliver new broadband services.

Polaris Networks is presently out on its own in targeting the metro DCS market with its solution: optical transport switch (OMX) and IntelliOp Element Management System (EMS). Mr Kao commented that companies offering MSPP systems have, to date, focused exclusively on the metro edge-ADM market and the metro core segment remains underserved.

"There are presently no other start-up companies offering comparable products in this sector - certainly in terms of product density, scale and functionality. The major players in the legacy DCS sector today are Alcatel (1631 SX) and Tellabs (5500), each with a massive installed base that is becoming costly and difficult to manage. Polaris Networks' key strength is the utilisation of new technology, offering intrinsic cost, performance and size advantages."

Mr Kao noted that, as a rule of thumb, new products demonstrably delivering a ten-fold increase in performance-per-dollar over traditional systems, will prompt their adoption by service providers.

The system incorporates a high level of software-driven intelligence, which increases flexibility, simplifies operations and automates provisioning processes, in particular through enabling end-to-end service provisioning. Present DCS systems require that services be provisioned manually, node-by-node, entailing substantial time and expense for the service provider.

Commenting on the capabilities of the system, Mr Kao said, "A service provider provisioning a DS-1 service, for example, would traditionally need to configure manually the ADM and DCS equipment at each node on a route, which will ultimately increase the cost of the service to the end-user. Using Polaris Networks' new generation equipment, this procedure becomes dramatically easier using an automated 'point and click' operation. This can be taken a step further, with the end-user - the service providers customer - provisioning services for themselves, as and when required, via a web-based interface."

End-to-end provisioning of services is viewed by Polaris as key to optimising service providers revenue opportunities - not only through expanding the range of services that may be offered, but also enabling differentiation of services, and, not least, by reducing operating costs. Discussing the possibility for expanding the range of services offered, Mr Kao explained that, with current DCS systems, provisioning of a service such as Internet leased-line over SONET, would require additional network equipment - with Polaris' solution this is not necessary.

The Polaris platform is able to cross-connect traffic of practically any type in its native form. Initially it will switch and groom VT1.5, DS-1, STS-1, STS-Nc and TDM-based circuits. The system subsequently will allow a smooth migration to multiservice - the ability to natively support packet or cell-based traffic. Fundamentally, the system treats traffic of any type in the same way, simplifying the traditional multi-layered network architecture in the process. This migration is seen as essential given the market shift towards data-centric services, where users will be accessing networks via broadband, always-on, connections. Such usage will result in dramatic fluctuations in traffic flow, demanding dynamic network management.

Product testing

Polaris Networks' has trial agreements in place with four U.S. service providers and has initiated laboratory-based testing. These service providers will conduct rigorous testing programmes upon the system, assessing reliability, serviceability, specification, features, functionality and interoperability. The product is due to be ready for customer trials in the fourth quarter of 2002.

With regard to the selection of service providers for product testing, Mr Kao said that a mix of large traditional service providers and smaller next-generation service providers was selected. This will validate the wide applicability of Polaris' solution. Mr Kao also noted that some service providers are more forward looking than others, and more eager to adopt innovative technologies for their competitive edge, irrespective of whether these originate from an established or a start-up company. A secondary factor can be prior experience of a service provider's key staff of having worked with personnel in a start-up company, particularly if developed via an established system vendor.

Testing cycles will vary according to Mr Kao. While sometimes a large traditional service provider can take up to six months to complete the product test and certification cycle, a new generation service provider will generally complete the process within two to three months and provide a much quicker time to revenue for vendors. Mr Kao noted that by having a mix of traditional and new service providers allows Polaris to establish a balanced revenue plan. It was noted that service providers are now highly conscious of the market-readiness of any new products accepted for testing, requiring products that are ostensibly ready for field deployment in order to cut to a minimum the length of the testing phase. In a healthier market climate, such considerations are not a significant issue.

Having already received strong interest from the international market, the company expects to kick off trials with service providers in Europe and Asia during 2003. Mr Kao explained that one reason behind initiating efforts first in the U.S. is that deployment in the domestic market will be easier to manage and act as an endorsement base for those international service providers looking to deploy the product. Mr Kao believes European service providers in particular tend towards conservatism with respect to new companies and technologies.

However, the international market is of key importance to Polaris, particularly given the present state of the U.S. market. The preponderance of metro core networks in the European region in particular makes this an attractive market while international service providers such as those in Korea and China are also viewed as target customers.

Polaris expects to begin realising revenue from the sale of its product by early second quarter 2003. The company has forecast revenue targets for 2003 and 2004, which it remains confident are attainable. Mr Kao stated that 2003 would be the commercial ramp-up year for Polaris Networks, adding, "Success with the four customers currently testing our product will, it is hoped, get the ball rolling so far as system deployments are concerned. Once the system is deployed and operational in a major service provider network, sales will accelerate as further companies accept the viability of the product and 'fast track' testing and trial procedures."

Summing up the company's view of progress so far, Mr Kao stated that Polaris has confidence in its product and is encouraged by service provider's reactions to it. In addition, the market for this class of equipment is believed to be buoyant, and certainly healthy relative to the optical equipment market as a whole.

"We feel that the service providers are prepared to invest in this type of product. In support of this view, we are already seeing customer traction, basically, because our product can help the service providers to address the fundamental challenge that they now face - reducing operating costs. Investment is not frozen throughout the optical equipment sector - service providers are prepared to invest where they are convinced that it is in their interest to do so."

Market size

Discussing the size of the market opportunity for Polaris, Mr Kao cited a figure of $3 billion for the DCS equipment sector in the U.S. for 2002 - representing a substantial drop from its peak in 1999 at $4 billion although improved from the low of 2001. This sector has reportedly typically experienced annual growth, by revenue, of between 10% and 15%, although showing negative growth during 2001 and 2002. Mr Kao said that the fundamental driver for this sector of the market is believed to be a continuing and growing demand for capacity from end-users - the enterprise sector - combined with under capacity in the metro portion of the network.

To date, the bulk of the DCS equipment market has been accounted for by two system vendors - Alcatel and Tellabs. Together, these two companies claim a share of this sector totalling around 75%. Tellabs focus is the wide-band segment of the DCS market; the broadband and super-broadband segments - together accounting for approximately 20% of the total - are the province of such companies as CIENA.

In the U.S., approximately 80% of the expenditure on DCS equipment derives from the 'big six' (subsequent to the collapse of Woldcom) service providers. Commenting on this, Mr Kao stated, "At Polaris Networks, we are aiming to grab a piece of this market, and we are confident that we will do so. Signing up one of the major U.S. service providers will get us rolling."

In addition, there is now less competition in the market, with far fewer players active in the system vendor space, and with many of the survivors, principally the major system vendors, preoccupied with rationalising their businesses and bolstering quarterly results. The situation with respect to funding is also viewed as playing in Polaris Networks favour; with funding from venture capital companies scarce, companies that do attract investors will be in a stronger position.

"Polaris Networks has successfully secured funding, most recently in March 2002. In the present environment, I believe that venture capital companies will be reluctant to fund more than a handful of companies in any one market sector, which therefore means that fewer companies will be able to enter the market. This situation is very different to that of two years ago, when the industry was awash with money and there would be numerous start-up companies competing for the same business."

Discussing the run-up to the present industry slump, Mr Kao noted that a number of factors combined to inflate expectations and distort the market:

"Two to three years ago forecasts for bandwidth demand were sky-high, the dot coms had exploded onto the scene, stock markets were booming, IT spending had rocketed due to Y2K concerns, and investors were practically falling over each other to give money to start-up companies. These factors had a profound effect on the telecommunications industry. One result was that the industry in general was focused on new, sexy technologies, products and services, while neglecting more traditional areas. At Polaris, we have remained focused on a traditional, core, product - the digital cross-connect. This has proven to be a wise strategy because service providers have continued to buy this type of equipment."

Today, the DCS segment stands out as one of the few healthy sectors of the optical equipment market, and as a result is now attracting the attention of companies focused on other market segments. The closest potential competitors to Polaris are those companies with MSPP platforms developed for the ADM market. However, Mr Kao believes that in the present climate, a majority of these vendors probably lack the necessary resources to complete such a manoeuvre.

In conclusion, Mr Kao said that, within the company, the atmosphere is very positive, with considerable excitement and anticipation with regard to Polaris Networks' prospects, particularly once the telecommunications market as a whole begins to recover. Polaris Networks core strength is felt to be its strong management team, which, it was noted, has considerable experience in the planning and execution of a high-tech product launch. Mr Kao reiterated that the market opportunity is huge, although adding that this fact clearly indicates that the major system vendors will also be eyeing this sector.