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Profitable Passave Pushes for IPO

Light Reading
News Analysis
Light Reading
8/25/2005

Building off a success in Japan, Passave Technologies Inc. is taking its passive optical networking (PON) chips to the public markets.

The company filed today for an IPO, and its filing with the Securities and Exchange Commission (SEC) estimates the deal's worth at $90 million.

The IPO is being underwritten by lead managers Merrill Lynch & Co. Inc. and J.P. Morgan Chase & Co., along with CIBC World Markets and Jefferies Broadview.

Founded in 2001, Passave has made its living selling Ethernet PON (EPON) chips. Nearly all of its revenues come from Japan, mostly for equipment going into 's fiber buildouts.

The business might seem limited, but it's profitable. For the first six months of 2005, Passave recorded net income of $3.3 million, or 10 cents per diluted share, on revenues of $19 million, according to the SEC filing.

Even 2004 was profitable, to the tune of $1.3 million in net income, or 40 cents per share, on revenues of $21.1 million -- and that's after Passave recorded a loss of $1.6 million for the first six months of 2004.

Passave owes pretty much everything to NTT. As a spokesman describes it, the startup's roots lie in founders Victor Vaisleib and Ariel Maislos -- now CEO and president, respectively -- and CTO Onn Haran attending Institute of Electrical and Electronics Engineers Inc. (IEEE) meetings on the Ethernet in the First Mile standard, where the EPON specifications were developed. There, they bumped into NTT officials who asked the trio if they could do this stuff.

They said, "Yes" (wouldn't you?) and Passave bagged its flagship customer.

Passave doesn't sell directly to NTT, instead getting its business from NTT suppliers. Ninety-five percent of Passave's revenues come from Mitsubishi Electric & Electronics USA Inc., Sumitomo Electric Industries Ltd., and UTStarcom Inc. (Nasdaq: UTSI). UTStarcom had the lead in 2004, representing 71 percent of Passave's revenues, but Mitsubishi has been 55 percent of its revenues for the first half of 2005.

With a business so concentrated, Passave is looking to branch out. One possibility is the Korean market, although rival Teknovus Inc. claims to have beaten Passave to at least one substantial win there.

Passave could target the United States, having announced this week a GPON chip; the U.S. RBOCs are at least considering GPON for next-generation deployment, based on a recent request for information (see Chips Draw PON Plans and RBOCs Cast Wide GPON Net). In GPON, Passave would face off against startup BroadLight Inc. and not-so-startup Freescale Semiconductor Inc. (NYSE: FSL).

Passave's largest shareholders are BRM Capital and Eurofund LP, each with an 18.6 percent stake in the company. Vaisleib and Maislos each own 7.9 percent, while owns 7.4 percent.

The company had $14.5 million in cash as of June 30.

— Craig Matsumoto, Senior Editor, Light Reading

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Pete Baldwin
Pete Baldwin
12/5/2012 | 3:04:13 AM
re: Profitable Passave Pushes for IPO
Given the PON pricing pressures, I have to admit I'm surprised to see a component vendor making money at it.

Having NTT's blessing probably helps -- you can dictate a better price. Not sure the splitter/triplexer guys will be able to strike deals like that, though.
paolo.franzoi
paolo.franzoi
12/5/2012 | 3:04:12 AM
re: Profitable Passave Pushes for IPO

That makes some very interesting assumptions about price per device. So, lets test it....

1,000,000 Chips at lets say 19 ONT chips per 1 ONT means 950,000 ONTs. Okay for 6 months, that is 7,300 installations a day. Make sense or no?

Remember to do indoor installation of EPON you have to run fiber all the way to inside the premise. If you are in an apartment building, the riser might be an issue.

seven
++++++
++++++
12/5/2012 | 3:04:12 AM
re: Profitable Passave Pushes for IPO

> the first six months of 2005
> revenues of $19 million

In 6 months, that is about 600,000 802.3 EPON chips. Add in their competitor, that is probably >1,000,000 802.3 EPON chips so far in 2005 (first half).
rbkoontz
rbkoontz
12/5/2012 | 3:04:07 AM
re: Profitable Passave Pushes for IPO
Seven,
Sounds like a lot of inventory in the pipeline to me... Just ask UT!
-Most
Pete Baldwin
Pete Baldwin
12/5/2012 | 3:04:06 AM
re: Profitable Passave Pushes for IPO
Jackall -- good point about inventory.

Where does all this leave Teknovus?

Teknovus claims it's coming on strong in Asia and is hoovering up a bunch of non-NTT business, including at least one win in Korea. Passave says that's not the case. We'll see.
jackall
jackall
12/5/2012 | 3:04:06 AM
re: Profitable Passave Pushes for IPO


EPON is being deployed in a very serious way in
Asia.

Where does all this leave Teknovus?

Jack
loose_photon
loose_photon
12/5/2012 | 3:04:05 AM
re: Profitable Passave Pushes for IPO
Teknovus claims it's coming on strong in Asia and is hoovering up a bunch of non-NTT business, including at least one win in Korea. Passave says that's not the case. We'll see.


Passave says they were qualified by KT, and yet KT gave 100% of lines to Corecess who used Teknovus ASIC. Go figure...

I heard that EPON tests were going on in China Telecom now. That brings an interesting question. Originally Passave planned to file IPO in Q1 2006. I wonder why they moved it 6 months ahead. After all, should they get CT business, their valuation would increase significantly. Or do they expect loosing and want to get whatever price they can get now?

Passave didnG«÷t win a single carrier since its competitors came out with ASICs. And their IPO prospectus didnG«÷t paint a bright picture either. How sure they are that the three existing customers would keep buying PassaveG«÷s chips? After all, one of them - UTStarcom has funded another EPON chip start-up last year...
jackall
jackall
12/5/2012 | 3:04:04 AM
re: Profitable Passave Pushes for IPO

That's great information from loose_cannon.

Any thought on whether the IPO announcement is just a ploy to get acquired. If they don't expect the CT business the IPO announcement is a neat way of getting a suitor to the table quicker.

Jack
takoda
takoda
12/5/2012 | 3:04:01 AM
re: Profitable Passave Pushes for IPO

> I wonder how he knew PassaveG«÷s IPO plans

Uh, Einstein, he read the article? I hope your post does not reflect the intelligence (or maturity) of Passave.

Will China Telecom really deploy EPON?


loose_cannon
loose_cannon
12/5/2012 | 3:04:01 AM
re: Profitable Passave Pushes for IPO
Mr. Photon seems to be a well-informed individual. Sounds like he read PassaveG«÷s prospectus very carefully.
Could he be an interested party?
PassaveG«÷s Asian success has already sent home quite a few executives at competitors G«Ű including the founders of Teknovus G«Ű CEO, CTO and VP of Sales.
I wonder how he knew PassaveG«÷s IPO plans G«Ű is he on their board?
But no, surely it canG«÷t be that Mr. Photon works for Teknovus!
If he did he would have known the miniature size of Corecess EPON business. He would have also known that a Korean vendor named Tellion recently announced that it was qualified by KT, using Passave silicon.
He would have also known whoG«÷s ass Passave is kicking in ChinaG«™
But even if he does work for Teknovus, we should not judge him. Jealousy doesnG«÷t typically bring out the best of a person.
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