Light Reading
As Asian business mysteriously disappears, forecasts of a bad Q3 and a worse Q4 pulverize the stock by 30%

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
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
LRTV Huawei Video Resource Center
The Inaugural Optical Innovation Forum in Nice

9|2|14   |     |   (0) comments


More than 170 attendees from network operators, service providers, analyst firms, and component companies from around the world convened in Nice in June for the inaugural Optical Innovation Forum, co-produced by Huawei and Light Reading.
Wagner’s Ring
Data Centers Drive Telcos Into the Future

8|28|14   |   2:20   |   (2) comments


Data centers are at the heart of key trends driving telecom -- network virtualization, the drive for increased agility, and the need to compete with OTT providers.
LRTV Custom TV
Why SPs Should Consider Cisco's EPN

8|27|14   |   5:40   |   (0) comments


Sultan Dawood from Cisco discusses Cisco's EPN, which enables SPs to build agile and programmable networks delivering new network virtualized services using Cisco's Evolved Services Platform (ESP).
LRTV Huawei Video Resource Center
Huawei’s Showcase @ Big Telecom Event 2014

8|26|14   |   2.56   |   (0) comments


SoftCOM is Huawei's framework for telecom business and network transformation. Haofei Liu, Solution Marketing Manager, Carrier Business Group, Huawei, showcases Huawei's SoftCOM architecture in this video.
LRTV Huawei Video Resource Center
Huawei @ BTE 2014: Director of Integrated Solutions on SoftCOM & NFV Monetization

8|26|14   |   4.43   |   (0) comments


Libin Dai, Director of Integrated Solutions, Carrier Business Group, discusses Huawei's SoftCOM and NFV monetization. Huawei believes that NFV monetization should be service-driven rather than network-driven, and that operators should have network transformation, service transformation and a compatible and collaborative ecosystem in place in order to deploy NFV.
LRTV Huawei Video Resource Center
Huawei @ BTE 2014: Director of US NFV Lab on CloudEdge & the Future of NFV

8|26|14   |   4.06   |   (0) comments


Sean Chen, Director of US NFV Lab at Huawei, discusses Huawei's new approach to NFV in open collaboration. Huawei believes that through Proof of Concept tests, it could help operators learn and communicate with the industry more effectively. Sean believes that successful implementation of NFV should have its values reaching to end users and discusses how Huawei's ...
LRTV Huawei Video Resource Center
Huawei's Highlights @ Big Telecom Event 2014

8|26|14   |   3.34   |   (0) comments


At the Big Telecom Event in Chicago Huawei showcases its high-level strategy, the SoftCOM architecture, which helps operators reduce the cost of ownership of their network infrastructure and generate additional revenue in the ICT service environment. Huawei showcases over 30 pilot programs from across the globe, focusing on the industry-leading commercial ...
LRTV Custom TV
VeEX – Live from the Show

8|21|14   |   5:58   |   (0) comments


An overview of VeEX Test and Measurement solutions including TX300S multi-service test set with VeExpress cloud-based management system, UX400 universal modular platform supporting 100G testing, and the redesigned RXT modular platform.
LRTV Custom TV
Transitioning CE 2.0 Networks Into the SDN & NFV Era With Telco Systems

8|19|14   |   5:19   |   (0) comments


Telco Systems' Ariel Efrati (CEO) and Moshe Shimon (VP of Product Management) discuss virtualization and how the company's new Open Metro Edge solution utilizes the SDN and NFV concepts to accelerate and orchestrate service delivery through its innovative product portfolio and software applications.
LRTV Custom TV
NFV Myths: Is NFV Still Several Years Away?

8|11|14   |   1:13   |   (0) comments


Some say that NFV (network functions virtualization) is still several years away from being implemented on mobile operator networks. This isn't the case. Operators can get started on their paths to NFV now, as this short video from Skyfire shows.
LRTV Custom TV
A New Security Paradigm in SDN/NFV

7|28|14   |   02:54   |   (0) comments


Paul Shaneck, Global Director Network Solutions for Symantec, discusses the evolving virtualized network, explaining how Symantec is leading the security discussion as it relates to SDN and NFV, and helping to ensure the network is protected and compliant.
LRTV Documentaries
Sprint's Network Evolution

7|24|14   |   14:59   |   (0) comments


Sprint's Jay Bluhm gives a keynote speech at the Big Telecom Event (BTE) about Sprint's network and services evolution strategy, including Spark.
Upcoming Live Events!!
September 16, 2014, Santa Clara, CA
September 16, 2014, Santa Clara, CA
September 23, 2014, Denver, CO
October 29, 2014, New York City
November 6, 2014, Santa Clara
November 11, 2014, Atlanta, GA
December 9-10, 2014, Reykjavik, Iceland
June 9-10, 2015, Chicago, IL
Infographics
A survey conducted by Vasona Networks suggests that 72% of mobile users expect good performance all the time, and they'll blame the network operator when it's not up to par.
Today's Cartoon
Hot Topics
Rogers, Shaw Take Aim at Netflix
Mari Silbey, Independent Technology Editor, 8/26/2014
Utilities to Pump $11.2B Into Smart Grid – Study
Jason Meyers, Senior Editor, Utility Communications/IoT, 8/26/2014
Nokia's Maps Land on Samsung Devices
Sarah Reedy, Senior Editor, 8/29/2014
Now Google Planning Drones-to-Go
Dan Jones, Mobile Editor, 8/29/2014
Music to My Mobile
Sarah Reedy, Senior Editor, 8/28/2014
Like Us on Facebook
Twitter Feed