Light Reading

Ikanos Catches VDSL Blues

Craig Matsumoto
News Analysis
Craig Matsumoto
10/5/2006
50%
50%

Shares in DSL chip vendor Ikanos Communications Inc. (Nasdaq: IKAN) fell off a cliff this morning after the company lowered its third-quarter and fourth-quarter earnings estimates yesterday.

Ikanos shrank its third-quarter forecast to the range of $36 million to $37 million, compared with the firm's previous forecast of $40 million to $43 million. Worse, the company said its fourth-quarter revenues would fall even further, landing between $24 million and $26 million.

Ikanos stock was down $3.52 (32.2%) at $7.42 in morning trading.

What went wrong? All sorts of things. First, Ikanos had trouble with its new, fifth-generation VDSL products. During a conference call with analysts yesterday, Ikanos officials said the new chips had manufacturing problems, creating delays in shipping.

As for that troublesome fourth-quarter number, it's the result of order delays all over the place, although Ikanos insists all the problems are temporary.

Carriers in Japan are working through their equipment inventory, Ikanos officials said -- meaning there's an oversupply that will decrease demand from that country during the fourth quarter.

"Carriers in Japan tend to purchase more equipment than deployed and adjust for the surplus equipment in one particular period," CFO Daniel Atler said on the call. "In Japan, we think this is largely over with at the end of Q4," he later added.

Japan accounted for 37 percent of Ikanos's revenues, more than any other region, in the quarter ended June 2006 -- so a hiccup there means a big headache for the company. Korea and France ranked second, at 26 percent each. And Ikanos indicated that Korean sales might slow during the fourth quarter as well.

VDSL rollout delays in Europe will add to Ikanos's fourth-quarter troubles, analyst Anton Wahlman of ThinkEquity LLC wrote in a report this morning. He thinks this stems from regulatory issues -- specifically, the possibility that European carriers will be forced to lease infrastructure to competitors.

Wahlman didn't give specifics, but yesterday, Dutch regulator OPTA released a report suggesting regulations that would force carrier KPN Telecom NV (NYSE: KPN) to open its network to rivals, or at least let them lay fiber next to its own.

Speaking on the earnings call, Ikanos CEO Rajesh Vashist said KPN was pushing back its VDSL deployment plans. "That was significant for us because we were expecting to ship both CO and CPE into those areas," Vashist said.

Want more? How about this: Ikanos was working with Chunghwa Telecom Co. Ltd. (NYSE: CHT) on a deployment in Taiwan -- and that's been delayed, too, according to Vashist. "All the factors have sort of come together in Q4. The only place where we have not seen delays is in the United States."

Wahlman still considers Ikanos a cheap buy. And he expects the company to continue expanding beyond DSL, following up its purchase of gateway chips from Analog Devices Inc. (NYSE: ADI) early this year. (See Ikanos Goes for the Gateway.)

"We continue to believe Ikanos is likely to make more acquisitions to broaden the product appeal. In particular, we believe FTTH is the key target," he wrote, citing BroadLight Inc. , Centillium Communications Inc. , and Teknovus Inc. as the top candidates.

Ikanos went public about a year ago and enjoyed the same run-up that boosted most tech stocks, peaking at $24.97 early this year. It's been mostly downhill from there. (See Ikanos Prices IPO .)

Ikanos becomes the lastest chip company to issue an earnings warning this quarter, following Hifn Inc. (Nasdaq: HIFN), Marvell Technology Group Ltd. (Nasdaq: MRVL), PMC-Sierra Inc. (Nasdaq: PMCS), and TranSwitch Corp. (Nasdaq: TXCC). (See Hifn Lowers Q4 Forecast, Feeling Less Marvell-ous, PMC Lowers Forecast, and TranSwitch Lowers Forecast.)

The third calendar quarter is traditionally weak for the sector, analyst Tim Kellis of Stanford Financial Group points out. Moreover, the runup in semiconductor business early this year led to an inventory oversupply, a typical occurance in the chip world that often culminates in revenue setbacks.

Beyond the chip sector, a handful of other telecom firms, including JDSU (Nasdaq: JDSU; Toronto: JDU), have lowered their forecasts recently. (See JDSU Shoots Low, Carrier Access Revises Estimates, PT Warns on Earnings, and Zhone Gets Zhinged.)

— Craig Matsumoto, Senior Editor, Light Reading

(7)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
Pete Baldwin
50%
50%
Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 3:38:42 AM
re: Ikanos Catches VDSL Blues
Analysts weren't happy with all this, of course, and a couple even asked (more like demanded) whether Ikanos shouldn't put the brakes on forward-looking development and concentrate on reining in opex now.

Not sure I agree with that. From a bean-counting, public-company standopoint, it might be the right thing to do, but Ikanos seems to be poised to grab serious chunks of territory in broadband. Wouldn't a few tough quarters be worth it if the company has a shot at being a powerhouse?
paolo.franzoi
50%
50%
paolo.franzoi,
User Rank: Light Beer
12/5/2012 | 3:38:40 AM
re: Ikanos Catches VDSL Blues

Craig,

The problem is....powerhouse in what?

Remember Centillium? They have been comodotized and the same thing will happen with Ikanos. They already have Broadcom and Infineon to compete with. As prices drop, they need to get on another bandwagon.

Problem is what is this? Centillium tried to take their DSP technology over to the VoIP market - apparently unsuccessfully. What the analysts realize is that Ikanos is probably a nice little group for say TI to buy to be in the VDSL game. But there is not enough here to justify a premium for parts or a stand-alone company.

So, if I were an analyst - I would say purty up that ole piggy and sell 'er off before you become Centillium.

seven
paolo.franzoi
50%
50%
paolo.franzoi,
User Rank: Light Beer
12/5/2012 | 3:38:38 AM
re: Ikanos Catches VDSL Blues

All of those solutions are shipping. The 5th Gen chipset from Ikanos has bugs and they are doing a metal spin to fix it. Thus, their manufacturing problem - its broke.

Ikanos is dead right now. Asia is moving from VDSL already to FTTH - see the drop in Japan as FTTH installs grow. That is the problem there is no follow on for companies like this.

seven
OSXman
50%
50%
OSXman,
User Rank: Light Beer
12/5/2012 | 3:38:38 AM
re: Ikanos Catches VDSL Blues
Craig,

What's your opinion on the potential of VDSL?

After adjusting for IKAN's cash position, you are buying the number 1 VDSL company for under $100mm. If VDSL turns out to see significant deployments, this will be an inordinately cheap price.

I understand that VDSL will be commoditized, but from what I can tell there are nowhere near the same number of players as in the ADSL market. Remember, the ADSL market came on the heels of massive investment in everything telecom. VDSL comes in the wake of a depression that has taken its toll on spending.

As for competitive solutions, I hear that BRCM is nowhere with their solution and that CNXT has some technical issues. Any one in a position to comment?
OSXman
50%
50%
OSXman,
User Rank: Light Beer
12/5/2012 | 3:38:36 AM
re: Ikanos Catches VDSL Blues
OK... metal fix is metal fix. If they do it right, hopefully then it won't be broke.

Don't confuse the lack of revenues to Japan with end market demand there. I am not exactly sure what the issue in Japan is, but it sounded like it may be an inventory correction. Of course, this raises issues about management and whether they were consciously stuffing the channel or just oblivious. Neither answer is particularly encouraging.

Ikanos may be "dead" right now. That's okay because the shares are cheap enough. The important investment question is what will the company look like in 6-9 months? If revenues are back to $40mm, the stock will be a lot higher.
paolo.franzoi
50%
50%
paolo.franzoi,
User Rank: Light Beer
12/5/2012 | 3:38:35 AM
re: Ikanos Catches VDSL Blues

OSX,

NTT is installing FTTH at a rate of 1M homes per year. That is what is wrong. The original deployments were based on VDSL up the risers, but that has issues with the Japanese Government for unbundling. So, NTT is in a mass deployment mode of EPON. DSL installations in Japan have slowed way down.

Revenues will go down as price per line goes down. Ikanos has peaked and it is now on the path to oblivion unless they find a new non-DSL market to enter.

seven
ragho
50%
50%
ragho,
User Rank: Light Beer
12/5/2012 | 3:38:33 AM
re: Ikanos Catches VDSL Blues

OSX,

I love your optimism with Ikanos. Do you work for them?

I do agree that the market for VDSL is still there and will grow, but not in the APAC region. The suburban deployments will largely be FTTX as brookseven suggests. Ikanos has a lot more turf to play in rural America, Brazil, France and Germany.

A metal fix is no metal fix, it's not a pancake flip. Problems at this stage in operations affect large volume production, yield, and most importantly product quality. This is a major hiccup: I've seen this exact issue wipe out supplier relationships entirely.

Ikanos has been at the forefront with VDSL, I definitely give them credit. At this stage, it's a strategic business execution not just an engineering marvel that they need. Hopefully they can put that together and sail smoothly.

-ragho
Flash Poll
From The Founder
Anshul Sadana answers questions from Steve Saunders, Light Reading's founder and CEO, about Arista's CloudVision, a global cloud network controller for workload orchestration and workflow automation delivering a turnkey solution for cloud networking.
Live Streaming Video
CLOUD / MANAGED SERVICES: Prepping Ethernet for the Cloud
Moderator: Ray LeMaistre Panelists: Jeremy Bye, Leonard Sheahan
LRTV Huawei Video Resource Center
Huawei ONS Product Demo

8|3|15   |   6:01   |   (0) comments


Huawei shows at Open Networking Summit 2015 in Santa Clara how its SDN and NFV solutions embrace openness.
LRTV Custom TV
End-User or Enterprise Benefits to the New IP

7|30|15   |   04:27   |   (1) comment


Andrew Coward discusses what the New IP means to end users or enterprise customers. He explains compelling reasons, including how every customer can get their own network, from the transformation to the New IP.
LRTV Custom TV
Network Visibility & the New IP

7|30|15   |   02:23   |   (0) comments


Mukund Srigopal provides an explanation of what network visibility is and how it is essential as service providers transition to the New IP. In addition, the importance of the network packet broker is discussed.
Between the CEOs
Video Exclusive With Basil Alwan, Alcatel-Lucent

7|24|15   |   26:44   |   (5) comments


Basil Alwan, President of IP Routing & Transport at Alcatel-Lucent, discusses virtualization, cultural challenges, the capex crunch and more with Light Reading founder and CEO Steve Saunders.
LRTV Custom TV
VDF: Enable the Financial With Mobile Money

7|20|15   |   06:53   |   (0) comments


Ian Ravenscroft discusses how operators can expand to occupy the entire digital services value chain through service innovation.
LRTV Custom TV
Telefónica on OSS Transformation

7|20|15   |   06:01   |   (0) comments


Jose Gonzales discusses the details of Telefónica's operation transformation program.
LRTV Custom TV
Judi Achmadi on Huawei's Cloud Storage Solution

7|20|15   |   03:33   |   (0) comments


Judi discusses the key business goals of TelekomSigma's public cloud service and how Huawei's solution helps them address challenges.
LRTV Custom TV
KPN Enlightening Digital Business & IT Transformation

7|20|15   |   06:19   |   (0) comments


Rob de Beer discusses the changes that operators need to make with service innovation now coming from the Internet world.
LRTV Custom TV
Stratus Telco-Grade Cloud Solutions & NFV

7|20|15   |   07:34   |   (0) comments


Ali Kafel from Stratus Technologies addresses high-availability concerns within the telco industry with a solution that enables telcos to provide high-availability and stateful fault-tolerance using a software-based approach.
LRTV Documentaries
The Six Million Dollar Business Man

7|20|15   |   01:52   |   (0) comments


Steve Saunders, publisher. A man barely alive after an acquisition malfunction imploded the company he founded. Gentlemen, we can rebuild Light Reading. Better, faster, stronger.
Between the CEOs
CEO Chat With Anukool Lakhina, Guavus

7|20|15   |   38:51   |   (1) comment


Guavus CEO Anukool Lakhina talks to Light Reading founder and CEO Steve Saunders about the role of operational analytics in the communications services and networking sectors, particularly in relation to IoT.
LRTV Custom TV
IBM's Flash Storage With Intel QuickAssist

7|20|15   |   03:18   |   (0) comments


Intel's Bev Crair and IBM's Eric Herzog discuss how IBM's V9000 Flash Storage System has helped customers around the world. Featuring real-time compression powered by Intel QuickAssist Technology, the V9000 is a next-gen flash storage solution.
Upcoming Live Events
September 16-17, 2015, The Westin Galleria Dallas, Dallas, TX
September 16, 2015, The Westin Galleria Dallas, Dallas, TX
September 16, 2015, The Westin Galleria Dallas, Dallas, TX
September 29-30, 2015, The Westin Grand Müchen, Munich, Germany
October 14-15, 2015, New Orleans Ernest N. Morial Convention Center, New Orleans, LA
November 5, 2015, Hilton Santa Clara, Santa Clara, CA
November 17, 2015, Santa Clara, California
December 1, 2015, The Westin Times Square, New York City
All Upcoming Live Events
Infographics
To keep up with consumers' increasing digital lifestyles, an IT system and operating model overhaul is required using a modern BSS, IES and analytics.
Hot Topics
FCC Plan Could Stymie Rural Broadband
Carol Wilson, Editor-at-large, 8/3/2015
Eurobites: Nokia Seals HERE Sale
Paul Rainford, Assistant Editor, Europe, 8/3/2015
Verizon Small Cells Ready to Rock in Chicago
Sarah Thomas, Editorial Operations Director, 7/31/2015
Like Us on Facebook
Twitter Feed
September 22, 2015
Media Begins With “Me”
Webinar Archive
BETWEEN THE CEOs - Executive Interviews
I was pleasantly surprised when Ericsson recently agreed to let me interview its CEO, Hans Vestberg. Traditionally, mega-companies like Ericsson (or Cisco) have kept ...
Basil Alwan, President of IP Routing & Transport at Alcatel-Lucent, discusses virtualization, cultural challenges, the capex crunch and more with Light Reading founder and CEO Steve Saunders.
Cats with Phones
Comes With Free Phone Stand Click Here
Who says cats don't have any skills?