RAJ SHANMUGARAJ - ASTRAL POINT COMMUNICATIONS
CEO Interview - published 11/13/00

DOCUMENT # LAD204

RAJ SHANMUGARAJ, Founder, President and Chief Executive Officer of Astral Point Communications, Inc., has more than 20 years of experience in the networking and telecommunications industries. Prior to founding Astral Point in September 1998, he served as Vice President of Systems Products at PictureTel, Vice President of Engineering at MultiLink (which was acquired by PictureTel) and Director at Motorola Codex. Mr. Shanmugaraj holds an MS in Electrical and Computer Engineering from the University of Iowa and a BS in Electronics and Communications from the University of Madras.

Sector: Networking & Communications Equipment

TWST: Could we start with some history and a quick overview of Astral Point?

Mr. Shanmugaraj: The company was formed September 1998. We raised our first round in January 1999. We spent a lot of time during the early stages, before the first round, talking to a lot of the leading carriers and the leading thinkers in the carrier community to understand taking our product concept, which was in the metro bandwidth management space, and really diving into it, trying to understand what the problems are that they face on the tactical side of the network and incorporating a lot of that feedback into the product concept. So what you see in our product is a combination of some very tactical features that can be used to deploy bread-and-butter services today, as well as a combination of the emerging services that are required for the carrier to be very successful in the future. We’ve raised about $113 million to date, and every one of our management team has been in the business for about 20-plus years. So it’s a very experienced management team, with a combination from IP switching experience, all the way down to DWDM. So we cover the entire span of the protocol stack.

TWST: What is the product? What are you bringing to the marketplace?

Mr. Shanmugaraj: The product is what you call an optical services node. It’s basically the first in a family of what we call multi-service, metro-optical bandwidth management devices. It plays the role in the network as a substitute for a combination of SONET ADMs, digital cross-connect, optical add/drop multiplexers, and IP and ATM aggregation and grooming of services. So it’s a direct substitute for combining these multiple elements into a single network element.

TWST: What’s the benefit of doing that?

Mr. Shanmugaraj: I think what I would like to do is go back a step to where I think the market is and what’s happening in the market space. The core of the network, the core meaning the communication links in the long haul network, are all going optical. As the core gets optical, that quickly implies two things. One is that it becomes very high speed, capable of switching and transporting lots and lots of traffic. What that means is that the services, the intelligence, moves right to the edge. Because once you get optical you don’t have the capability of doing packet-by-packet services, or cell-by-cell services, or digital cross-connect services that one is used to doing today. If you look at the whole network, it’s going through a complete transition or inversion. The core is becoming optical and dumber, and very large volumes and the edge is becoming much more multi-service and intelligent. It’s where the electronic meets the optical, a transition from converting all the bread-and-butter services and the emerging services. The DS-1 and DS 3/1/0 cross-connect services, as well as ATM and IP services are all relegated to the edge. We are just in the very early stages of that kind of a network transformation. Clearly, a device like ours plays right into that because on the one end, we take anywhere NxDS-0 up to OCN services, and on the other side we get all the way up to 0-192 optics out of the box. So we are controlling the migration of the network. Some of the key benefits are scalability, provisioning speed, service richness and the economics. Our class of product costs 15%, 20% of the cost of the three or four different elements that are required to get the same level of functionality. Space and power are very big issues for any one of these carriers. They’re running out of COs and co-location cages. It’s very fast and easy to provision services. So it’s a point and click completely distributed environment, where they don’t have to go from one device to another. The faster they provision services, the faster they get revenue. The other piece of it is scaleability. Because they have integral optics, you never worry about running out of capacity on the fiber.

TWST: Is there anything like this in the marketplace?

Mr. Shanmugaraj: We are the first in this class of a networking device. I think there is an earlier generation product, like a Cerent, which does a few aspects of what we do, and then there’s a lot of slideware companies.

TWST: Do you have a first-mover advantage?

Mr. Shanmugaraj: Leadership role. We are the first to earn revenue in this space. We have several trials ongoing with a lot of different carriers. We will be making some more announcements about contracts with multiple carriers over the next few weeks.

TWST: Typically, who is the customer for this?

Mr. Shanmugaraj: It’s any kind of category of service provider. It’s any kind of a local exchange carrier. There is CLEC, competitive local exchange, DLECs, data local exchange, BLECs. It services all the local exchange carriers by being able to provide customer touch points for transporting services. We are also working with a lot of the inter-exchange carriers, which basically provide carrier-to-carrier kind of communications and infrastructure, people like MCI, Qwest, and Williams. The last one is the ILEC community, which is the incumbent local exchange, or the RBOCs. That’s a long process, but we have started working with them as well because they represent a very large market for us, and they have a very big use for our class of product. In addition, we have ISPs that are using our product as well, and some cable carriers.

TWST: Potentially, how big is this market?

Mr. Shanmugaraj: It is huge. The current estimates of this market are about $25 billion-$30 billion by the year 2003. The reality is that if you look at the what the RBOCs are doing, they’re migrating to broadband packet services, and the world is moving to broadband, and moving to broadband in the last mile and more packet-based infrastructure. If you add up the whole evolution of this phase, I think over the next 10 years this could be a $100 billion class market.

TWST: Where’s the money coming from to pay for all this?

Mr. Shanmugaraj: Ultimately, the carriers are going to be building out new infrastructures, and they, in turn, are going to be able to offer better services back to the end user. They’re going to be providing services to all the enterprises and the small businesses. So ultimately, it’s going to be a combination of the carriers building out the next infrastructure and everybody who is going to get bigger, better, faster service pipes.

TWST: Does the market want all that?

Mr. Shanmugaraj: Absolutely. Would you say that anytime you connect to the Internet is fast enough? Of course not! That’s what everybody says, no matter what they have. Data is driving everything. A lot of data growth is being driven by the Internet. Five years ago, I remember the rules with local area networks inside companies was that 80% of the traffic was used internally, which stayed within an enterprise, and 20% of the traffic went outside, meaning that it hit any kind of a public or private network. I think it’s completely inverted right now, where 20% stays in, and 80% goes out. Just look at any of the B2B or B2C networks. Any kind of a model requires the data to be going out into the network. Services like voice-over IP, and DSL, cable modems, are all driving the traffic volume. So that’s why the business not only has to pay for it, but to stay competitive it has to change and scale with the requirements.

TWST: Do you have patents on your approach?

Mr. Shanmugaraj: Yes, we have filed for five patents to date. These are about a year old in the filing process. So, again, the cycle time there is anywhere from 12 to 24 months. A lot of intellectual property of our product is patented.

TWST: We’ve been talking about the potential in this marketplace. What’s going to get the momentum going to move in your direction, or has it already started?

Mr. Shanmugaraj: I think it has already started. I think there are three levels of service requirements. One is the traditional services, which is your usual private line T-1s, frame relay Internet access classes of services. Then you have the consumer and the small business services driving packet services. A lot of that is being driven by DSL, either ATM or IP traffic. Ethernet is taking off in a big way. Then you have the emerging high-bandwidth enterprise services, where they’re looking at OCNx0 services, OC-3, OC-12, OC-48. There’s gigabit Ethernet service. So I think the service mix is already happening in a big way and being driven by a lot of the CLECs and the inter-exchange carriers. We are getting a lot of traction because of the diversity of the traffic mix, and we do it better than the solution that’s available today. Probably the tidal wave would be as the RBOCs and the ILECs start pushing broad band packet, DSL cable technologies to the last mile, and start building out a packet-oriented infrastructure, which plays directly into our product strength. That would be the big one that is going to propel us into a Cisco class of company. But we are seeing a lot of traction, even with the CLECs and the inter-exchange carriers, even today. So I think the transition has already started and is rapidly moving in this direction.

TWST: For investors keeping an eye on the company, what can they use as milestones or benchmarks to judge whether or not you’re succeeding over the next couple of years?

Mr. Shanmugaraj: I think it’s pretty straightforward. It’s delivering features on the product, closing a lot of accounts, closing a lot of big contracts and having revenue growth. So it’s going to be pretty straight forward as they look at it to see whether we’ve been successful or not.

TWST: Is it watching for contract announcements?

Mr. Shanmugaraj: Yes, it’s just customers and product leadership. That’s basically how everybody is judged in this space. In this space there’s a lot hype. There’s a lot of slideware. The key that’s going to differentiate the winners from the losers are real customers, real products, and real revenue.

TWST: Do you have the management team in place that you need?

Mr. Shanmugaraj: Yes, we do.

TWST: In this tough labor environment, how are you getting the personnel you need to support the rapid growth you’re talking about?

Mr. Shanmugaraj: In the past six weeks we’ve hired 45 people in this tough labor market. Part of it has to do with the fact that we are being viewed as a leader in this space, and there’s a lot of buzz created based on that piece of it. In large corporations it’s a very clearly known fact that 20%-30% of the people do 80% of the work. A lot of those people are saying that I can go get a much more well-rounded career in a smaller company where they can be a very big fish in a small pond. I think this started in the California area a long time ago. It started here on the East Coast a while ago, and it’s continuing to happen with a lot of people leaving the bigger companies to come to the smaller companies. But ultimately, it’s a mindshare issue. So we have a lot of buzz about us. We’ve been doing a lot of very focused recruiting on getting the visibility of the people and the candidates.

TWST: Is that working to your benefit?

Mr. Shanmugaraj: Yes, we have been very successful, and we’ve been growing in leaps and bounds.

TWST: Looking at the balance sheet, do you have the funds you need to support what you’re trying to do?

Mr. Shanmugaraj: Yes, just a couple of months ago we closed an $80 million round. As we grow in scale, we’ll be looking for opportunities, including public offerings, to figure out how to keep scaling up, and doing what it takes to be a winner.

TWST: Looking at this business, ultimately, what kind of an operating margin can you generate?

Mr. Shanmugaraj: The goal obviously is to be at a 20% operating margin in the long-term, and it’s going to take us a few years to get there.

TWST: What’s the key to that? Is it strictly volume?

Mr. Shanmugaraj: Yes, I think a lot of it has to do with volume. A lot of it has to do with product evolution cycle, and different aspects of it, but predominantly being driven by revenue and volume.

TWST: What two or three summary reasons would you give an investor to put money into your company today?

Mr. Shanmugaraj: I think the key areas here are that we view the network evolution as a key inflection point in the technology, meaning that the core has migrated to optical. The services and the edge functions converting from electronics in various services to optical is a very big inflection point. There are a lot of technologies that are coming into play there, and clearly, Astral Point is a leader in the distributed bandwidth management strategy, being the first to product, first to revenue, and having a lot of different contracts and accounts that we already have. The management team is very focused. As I said, the breadth of experience is focused on going all the way from 20 years per individual. So I would say that it’s about 100 plus years of experience sitting and driving the company, in terms of what it takes to be successful. The congruence of technologies, combination of IP, SONET, DWDM, makes us unique because of the expertise we have in-house with the management team, as well as with the employees to be a winner in the space, which is what is required to get there. There will be a lot of room for two, three, four companies to be the next Ciscos of the world in the whole optical environment. We obviously view Astral Point as becoming one of those — and there’s a lot of hype, on the other hand because there’s a lot of slideware, and there’s a lot of people chasing. Ultimately, what’s going to differentiate the winners from the losers is having product out first, having revenues, having some pretty good contracts, and getting a lot of traction from the customers. That’s what differentiates the winners from the slideware companies.

TWST: Thank you. (TM)

RAJ SHANMUGARAJ
 Founder, President & CEO
 Astral Point Communications, Inc.
 19 Alpha Road
 Chelmsford, MA 01824
 (978) 367-6000
 (978) 256-1334 - FAX
 www.astralpoint.com
 e-mail: info@astralpoint.com

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