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ArrowPoint IPO Shoots Higher in Debut


By Hal Plotkin
Silicon Valley Correspondent

Shares of ArrowPoint Communications Inc. {ARPT} have soared in their debut, and analysts say the firm has a bright future ahead of it, in part, because it has caught its bigger rival, Cisco Systems Inc. {CSCO}, asleep at the switch.

ArrowPoint’s stock shot up to 101 Friday, after pricing its 5 million share offering at $34 on Thursday night. The offering price was above the company’s revised price range of $30 to $32, and well above its initial filing zone of between $15 and $17.

“The buzz is this will be one of the premier IPOs of the next few weeks,” says Ron Westfall, senior analyst at Current Analysis, in Sterling, Va. “ArrowPoint’s prospects look pretty solid. They’ve already established themselves with over 200 Web-hosting and content-provider customers, and that will continue to grow.”

Acton, Mass.-based ArrowPoint makes highly advanced intelligent Web switches that are fast becoming the switching hardware of choice for leading Web-hosting and online content providers such as San Jose, Calif.-based Exodus Communications Inc. {EXDS} and NaviSite Inc. {NAVI}, based in Andover, Mass.

Analysts say ArrowPoint’s switches do a better job than competing switches and appliances sold by Cisco Systems when it comes to helping Web-hosting firms and others determine exactly what kind of information is being requested by end-users and then routing those requests to the servers or data caches best able to deliver the information most quickly. In an even more-critical advance, the ArrowPoint switch can also immediately direct the replication of frequently requested files and distribute them on a large number of servers to eliminate potential online bottlenecks before they occur.

“There are a lot of other companies that are claiming they can do the same thing,” says Stan Schatt, vice president at Giga Information Group, based in Carlsbad, Calif. But those claims are still mostly unsubstantiated. The ArrowPoint solution isn’t the fastest load-balancing technology out there. But it does have a reliability advantage, which is critical for most customers.”

Several recent user surveys, for example, show that many online Web surfers will abandon a site if it doesn’t begin to serve the information requested within about eight seconds. “Reliable delivery of data is the key to success for all the online sites, particularly e-commerce sites,” Schatt says.

“ArrowPoint’s sales to Exodus and NaviSite are an excellent endorsement,” adds Michael Speyer, an analyst with the Yankee Group, based in Boston. “They have a great product, and those kind of customer wins are very, very important.”

Analysts say the post-IPO performance of ArrowPoint competitors Alteon Websystems Inc. {ATON} and Foundry Networks Inc. {FDRY} demonstrates market receptivity for ArrowPoint’s pending IPO. Both firms sell competing load-balancing Web switches that, while screamingly fast, don’t yet have all the features offered by ArrowPoint’s latest product.

San Jose, California-based Alteon WebSystems went public on Sept. 23, with shares priced at $19. Sunnyvale, Calif.-based Foundry Networks went public on Sept. 27, with shares priced at $25. Both stocks have recently been trading substantially above their offering prices.


Alteon WebSystems Post-IPO
Stock-Performance Chart


Foundry Networks Post-IPO
Stock-Performance Chart

On critical scalability issues, though, analysts generally give ArrowPoint the edge.

“Some other vendors have taken an appliance approach to this, which means they have to deploy more and more appliances as the traffic grows,” Westfall says. “Meanwhile, Cisco is working on building the same functions into its existing switches. But ArrowPoint is the only one that has been focused on this from the beginning. Even when Cisco does integrate this into their switch, it does not mean it will perform as well as purpose-built products.”

ArrowPoint’s switches automatically scale themselves, sending commands to linked servers to dynamically change the content they have available to meet constantly changing user demands.

“ArrowPoint built its system with a deeper analysis of content requests,” says Esmerelda Silva, director of networking research at International Data Corp., based in Framingham, Mass.

That focus, Silva says, puts ArrowPoint in the position to hold off Cisco Systems even after Cisco begins offering a switch with similar features sometime later this year, as expected.

“The fact that Cisco is rushing to market with a product tells you how important a market this is,” Silva says. “But it’s not going to be a lock for Cisco. It’s very hard to displace a vendor that has met the requirements a customer has once a vendor has gotten established with a large service provider. The chances of Cisco displacing them are pretty slim.”

“There are a large number of service providers that won’t go with Cisco,” adds Stan Schatt, of the Giga Information Group. “Cisco has taken a very proprietary approach. Cisco products work best in an all-Cisco environment. The service provider community, however, is very technically savvy and they tend to go with whoever has the best-of-breed product. That’s why you’re seeing them willing to go with smaller companies with better technology. They really don’t have a choice. They have to do that to stay competitive.”

“We selected ArrowPoint because they are a leader in content-smart Web switching,” says Scott Emo, director of product marketing at Exodus Communications, after his firm announced it would be using ArrowPoint switches early last week. “Through our relationship with ArrowPoint, Exodus will be able to provide customers with one-stop shopping for best-of-breed e-commerce solutions.”

Analysts say ArrowPoint’s solution allows Web-hosting companies such as Exodus to offer more precise service-level guarantees to their customers along with better, more-reliable delivery of their online content.

“Those firms don’t want to go with the biggest supplier,” Silva says. “They need to go with the best supplier.”

Some analysts warn, however, that the situation could begin to change if and when Cisco does get up to speed with competitive offerings.

“In terms of acquisitions, we’ve seen Cisco give the appearance they are napping before,” Westfall says. “But then the market matures and Cisco swoops in. If Cisco was to actually step in and buy a company like Alteon or ArrowPoint that would be bad news for any other switch vendor. But ArrowPoint’s customer wins are certainly a clear validation of what they’re doing and bodes well for their long-term prospects. It also makes them a very attractive acquisition target, if not for Cisco, then for another large company that needs this technology.”

ArrowPoint posted a loss of $12.6 million on revenue of $12.3 million in 1999, as compared with a loss of $9.4 million on revenue of $201,000 in 1998.

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