Zultys Unplugged?

Comedian Bob Hope once said a bank is a place that will lend you money if you can prove you don’t need it. That axiom didnt hold true for Zultys Technologies, which did need the multimillion-dollar investment it was slated to receive from an unnamed investor last week to fund its fast-paced growth. The deal evaporated on July 25 when Zultys, expecting a formal term sheet, instead watched the investor pull out of an agreement for extension capital.

That was a big shock to everyone and at that point, we were forced to make a reduction in workforce globally, said Ian Milnes, founder and president of Zultys, which makes IP PBXs, IP phones and peripherals for SMBs. The company has an extensive partner ecosystem.

Milnes does not know why Citigroup ducked out of the transaction. They said they have other deals they need to focus on, he said. Ill never know what that means. It doesnt mean anything.

So, with no official announcements, five-year-old Zultys on July 26 laid off 75 percent of its workforce and, at least for now, has stopped developing new products. However, it continues to ship, sell and support its existing portfolio, said Milnes. All of our sales offices outside the U.S. are fully operational, he explained, adding that some sales and support personnel remain in the Sunnyvale, Calif., headquarters.

Milnes, in the meantime, is on the prowl for less cash than the Citigroup deal would have provided, hoping to make Zultys more appealing to a wider range of investors. Since dismissing many of its employees, he said the company now is profitable.

And yet, discerning the real status of Zultys is difficult. Milnes tries to put a positive spin on the companys shuttered day-to-day operations, but analysts are not optimistic about the companys quiet shutdown. [C]onflicting reports indicate that the company has completely ceased operations, but also that it is supporting its products and continuing sales efforts, said Brian Riggs, senior analyst, enterprise communications for Current Analysis Inc. This will spook both existing customers and the international network of resellers on which sales depend. As a result of the uncertainty, some distributors and resellers have cut ties with the vendor. Several did not return calls for comment. Still others including Alltel, which is now Windstream, CT Distributing and Xiologix LLC, a VAR are sticking with the company for now.

VoIP termination provider BandTel LLC, for one, has had little choice but to distance itself from Zultys. In early July, the companies partnered in a move that was to allow Zultys channel partners to sell BandTels VoIP product, and in turn, make Zultys PBX systems available to BandTels enterprise and call center customers. But when BandTel executives got a call from their Zultys salesperson that the company was about to capsize, it was time to dissolve connections.

Heres what we know, said Ranee Spina, BandTels director of marketing. We thought they might have been shaky a few months ago. After several days of back-and-forth, hearing Zultys had ceased operations and then was back up and running, BandTel was told everybody was terminated, Spina said. At that point, the company decided it was not putting any more time or energy into it, she said.

Indeed, Spina noted, BandTel had spent a substantial amount of money creating materials to market the partnership, and was disappointed the efforts were for naught. I just wish that there would have been a return on the investment, she said.

BandTel which is developing its channel partner program already has signed with Allworx to replace its deal with Zultys, Spina said. The company also works with VegaStream, AudioCodes and Digium, inventor of Asterisk.

Zultys has been a well-regarded player in the telecom industry and news of its reversal of fortune has caught people off guard, especially since, as recently as May 2006, it had boasted of revenue doubling annually, said analyst Riggs.

I think its a big surprise to many people, agreed Chris Dunk, co-founder, president and CEO of BandTel. I think that [Zultys] had started to make some nice inroads into the marketplace and I know that a number of customers were very pleased with their solution, so its a bit of a surprise that things would change so quickly.

The time certainly is ripe for Zultys competitors to take advantage of the companys circumstances, Riggs said. They have an optimal opportunity to instill fear, uncertainty and doubt in customers considering Zultys products as the basis for their IP telephony systems, he said. This will give them a considerable amount of near-term leverage in both swinging new deals their way and convincing resellers to lead with their telephony systems rather than those of Zultys.

One company that intends to stay with Zultys is Xiologix, an Oregon-based solutions provider that works with end users in education, health care and business. Greg Still, managing partner for Xiologix, predicted Zultys will rise from the ashes, as it were, and either find the funding it needs or sell, giving a buyer a heck of a deal.

Analyst Riggs concurred. Outside investors are the only way out of Zultys current imbroglio, he said. The company must get immediate financial backing or risk ending its bid as a provider of telephony systems to SMBs and enterprises.

Despite a dim view of the situation from analysts, I think the product will survive, Still said. Anyone out there with money from a VC standpoint would be absolutely idiots if they didnt purchase the technology. Zultys has real technology, it really works and so thats why Im not alarmed.

Still said he has informed his customers with Zultys systems about the companys troubles. He is not selling Zultys products to new customers; rather, he, like the rest of the industry, is waiting to see what transpires. Still said as long as he and his clients continue getting the support they need on existing systems, he wont worry.

This is a really good product and I hope and believe that somebody will pick it up, he said.

BandTel LLC www.bandtel.com
Current Analysis Inc. www.currentanalysis.com
Xiologix LLC www.xiologix.com
Zultys Technologies www.zultys.com