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Chip IPOs: 'Tis the Season?

Light Reading
News Analysis
Light Reading
6/29/2004

It seems that tech IPOs – and particularly chip-company IPOs – are hot again. Why, exactly? More on that later.

But first, it's clear that the healthiest tech market in a few years is triggering the launch of smaller IPOs from the semiconductor sector: For example, Ikanos Communications Inc., NetLogic Microsystems Inc., Volterra Semiconductor Corp., and Jazz Semiconductor, a Conexant Systems Inc. (Nasdaq: CNXT) manufacturing spinoff, have all filed to go public (see NetLogic Sets IPO Terms and Ikanos Catches IPO Fever).

Then there's the much bigger IPO of Freescale Semiconductor Inc., the Motorola Inc. (NYSE: MOT) semiconductor spinoff. Last week Freescale released the numbers behind its IPO: The company plans to sell 121.6 million shares at between $17.50 and $19.50 apiece.

The disturbing thing is that this IPO cycle was supposed to bring a heightened quality filter – as in, profitability. But so far, most chip players that have filed are losing money. Even 802.11 chip vendor Atheros Communications Inc. (Nasdaq: ATHR), which enjoyed a successful IPO, hadn't turned a quarterly profit at the time of its filing. Only Freescale shows profits, and then just barely. The company was in the red until recently, reporting a $366 million loss in 2003. For the quarter ended April 3, Freescale turned it around, with profits of $106 million on revenues of $1.4 billion.

Of course, there's pressure to keep the IPO machinery going: Venture capital firms need some kind of payoff so they can launch a fresh set of investments. "Right now we kind of have our arteries clogged. The money isn't going back to the heart," says Julien Nguyen, partner with Applied Materials Ventures.

A blocked artery sounds potentially painful – and it is. But after the well-documented sins of the bubble, money losers aren't supposed to go public. The usual yardstick is to show two quarters of profitability before trotting out to the public markets. So what gives?

It could be that some companies are trying to beat a sector downturn. One theory is that the semiconductor cycle has hit a peak, making this summer the right window for a chip IPO.

"There is a minority opinion that the semiconductor cycle has already peaked," says Dushyant Desai, analyst with CE Unterberg Towbin. In part, the theory says inventories have filled up, taking away the easy post-downturn sales and leading to a flattening of demand.

Desai sees differently: Chips overall should do well, he thinks, with pending rollouts of high-end PCs and the next cycle of 802.11-enabled notebooks. And wireline communications chips "are on an even keel" of sustainable growth, he says. Still, he thinks some companies, seeing the mixed forecasts for semiconductors and perhaps suffering from post-9/11 paranoia, might be deciding to float an IPO while the going is good.

Chip IPOs aren't a slam dunk, however – not when compared to hotter areas such as VOIP (see Session Controller IPO Scores Success). Chinese firm Semiconductor Manufacturing International Corp. was a particular disappointment, sinking immediately upon debuting at $17 per share in April and lately languishing in the $11 range. Meanwhile, Atheros is still trading below its offering price.

So, despite the IPO activity, some venture capitalists expect to bide their time until next year. "We really see this year as building the revenues, because you want to show a few good quarters first," Nguyen says.

— Craig Matsumoto, Senior Editor, Light Reading

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