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Clarent strong amid Net telephony challengers

Despite heavy competition from Internet equipment heavyweights, Clarent's success in the growing Internet telephony equipment market stems from the company being first out of the gate.

    Although Clarent isn't yet a household name, the company has found itself swept up in the latest craze for Internet equipment start-ups on Wall Street.

    Stock in Clarent, which makes technology that allows phone calls to be made over the Internet, has nearly doubled to peak at $80 in the last month, following a series of high-profile deals and partnerships.

    Despite stiff competition from heavyweights Cisco Systems, Lucent Technologies, Nortel Networks, and start-ups such as VocalTec, Clarent has been successful in the growing Internet telephony equipment market--primarily because it was one of the first firms in the market, analysts say.

    Clarent stock chart "Clarent benefited from having first mover advantage and now they're clearly a leader in the voice-over-IP [Internet Protocol] equipment market," analyst Mark Winther of International Data Corporation (IDC) said.

    Clarent's success also coincides with the infatuation investors have with Internet start-ups, such as Net-based equipment makers Juniper Networks and Sycamore Networks, analysts say.

    Yet the company does face formidable competition in the future, as the market for telephone calls over the Internet is expected to grow from $290 million this year to $1.8 billion by 2003, according to IDC.

    Clarent not only sells the hardware that allows users to make calls over the Net, but it also provides software that lets telecommunications carriers manage calls, monitor a network, and handle billing and subscriber information.

    The company, which counts AT&T among its biggest customers, recently struck deals with telephone companies in Spain, Russia, and China. Siemens recently announced it plans to resell Clarent's products under its own brand name. And Cisco announced it is making its rival hardware equipment compatible with Clarent's hardware, so its customers can take advantage of Clarent's telephony management software.

    Following these deals, Clarent recently announced that its third-quarter revenue quadruped to $13.2 million, up from $3.3 million a year ago.

    Challenges ahead
    But while Clarent's revenue has increased, its share of the service provider market has fallen thanks to competition from Cisco and Lucent. According to Synergy Research Group, in 1998 Clarent sold $13.5 million in Internet telephony equipment, and claimed 16.7 percent of the total market. During the first half of 1999, however, the company's sales increased to $14.6 million but it's market share fell to 4 percent.

    In contrast, Cisco so far this year has made $116.6 million in telephony equipment sales, claiming 36 percent of the market, while Ascend has garnered $98.3 million in sales, or 30 percent of the market, according to the study.

    The numbers reflect the growing influence of the larger players in the market, as last year, Cisco made only $21.6 million from telephony sales, while Ascend grabbed $11.3 million, according to the study.

    Analysts say Clarent may be able to secure customers from the new crop of emerging telecommunications providers. Cisco and Lucent have an edge among its existing customers, such as Internet service providers, as they can simply add Net telephony features to their existing equipment.

    Nevertheless, analysts believe Clarent will continue to thrive in the nascent market. Several Wall Street analysts rate the stock a "buy."

    "They will continue to show pretty dramatic revenue growth and continue to close good-sized deals with carriers," Pete Dailey said, an analyst at industry consultants Frost & Sullivan.

    IDC's Winther, however, believes the company is an attractive acquisition target and will eventually be bought out by a larger player looking to acquire telephony technology.

    "They're a small player. They can't throw around the resources like Lucent and Nortel can," he said.

    But Heidi Bersin, the company's senior vice president of marketing, believes the company will continue to compete and win its share of customers. Clarent's focus will remain with Internet service providers, but will soon change to accommodate businesses that want to take advantage of Internet telephony and the emerging DSL and cable modem market.

    "We're in with some of the bigger phone companies in the world, and…once you're in with them and the technology delivers, it becomes part of the network and they'll [continue to] buy from us," she said. "They like to buy from several vendors to balance the risk. They'll buy from us and Lucent, us and Cisco, us and Nortel."