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UTStarcom Sues Passave

The road to an IPO is bumpy enough without getting sued by a top customer, which is what's happened to chip maker Passave Inc.

On Nov. 17, UTStarcom Inc. (Nasdaq: UTSI) filed a lawsuit asking for $30 million in damages, according to the Silicon Valley/San Jose Business Journal. The suit had also been reported by Israel's Globes in November.

A Passave executive declined to comment on the matter, other than to say the suit is "without merit." UTStarcom did not immediately return a call.

Passave sold EPON chips into UTStarcom, which in turn sold EPON systems to Softbank BB Corp. for the Yahoo! broadband network in Japan. Reports say the suit asks for $30 million in recompense for chips that UTStarcom had to replace, as UTStarcom is alleging there were faults in Passave's early chips.

That trouble started in October 2004, the lawsuit allegedly says. That would be right around the time UTStarcom announced a $60 million deal to build Softbank's Gigabit EPON network. (See UTStarcom Deploys Largest GEPON.)

The lawsuit comes at a sensitive time for Passave, which in August filed for an IPO worth potentially $90 million. (See Profitable Passave Pushes for IPO.) A source familiar with the company says Passave is still behaving as though under the "quiet period" preceding a public offering, which would indicate the lawsuit hasn't caused Passave to cancel the IPO.

UTStarcom, meanwhile, recently docked $40 million from anticipated September-quarter revenues due to problems deploying its mVision IPTV offering to Softbank, an issue unrelated to the Passave chips. The company's stock, which has taken a beating this year, fell even more that day. On top of all that, the SEC has begun an inquiry into the company. (See UTStarcom Stung by Softbank.)

An S-1 filing with the SEC shows UTStarcom was Passave's largest customer in 2004, representing 71 percent of Passave's $21.1 million in revenues for the year. But for the first nine months of 2005, UTStarcom represented just 11 percent of Passave's revenues.

In part, that shift happened because other customers came on strong. For the first nine months of 2005, Passave reported revenues of $30.7 million, 52 percent of that from Mitsubishi Electric & Electronics USA Inc. and 33 percent from Sumitomo Electric Industries Ltd., according to the filing.

As the customer names indicate, Passave has sold primarily into Japan, serving the EPON buildouts there. The startup is trying to expand by providing GPON chips as well. (See Chips Draw PON Plans.)

— Craig Matsumoto, Senior Editor, Light Reading

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paolo.franzoi 12/5/2012 | 2:50:55 AM
re: UTStarcom Sues Passave
If one can sue over broken silicon, it will be interesting to see how this goes. Every device has issues now a days. System OEMs just brace for what can of worms they are opening by speccing in a new device.

seven
materialgirl 12/5/2012 | 2:50:54 AM
re: UTStarcom Sues Passave You can tell USTI management is lieing when their lips are moving. With other customers growing, this sounds like a scapegoat. The can of worms cutomers open is UTSI gear.
Pete Baldwin 12/5/2012 | 2:50:53 AM
re: UTStarcom Sues Passave If one can sue over broken silicon, it will be interesting to see how this goes. Every device has issues now a days. System OEMs just brace for what can of worms they are opening by speccing in a new device.

Good point. The distinction here appears to be that the silicon made it all the way to the end customer (Softbank) before the problem surfaced, and that the replacement was expensive because so many chips had shipped. Whether one should be able to sue over that -- I guess that's up to the lawyers.
paolo.franzoi 12/5/2012 | 2:50:50 AM
re: UTStarcom Sues Passave
I can point to dozens of examples where faulty silicon ended up at customers. Be the first time I have seen anybody sued for it.

My impression by the way is that Softbank has installed very few EPON ports and that the vast bulk of these devices are actually in warehouses. Could this be a UT Starcomm tactic to point a finger at somebody for a failed rollout? I have heard numbers out of NTT as high as 100K per month (and they primarily deploy Passave silicon by the way).

seven
deauxfaux 12/5/2012 | 2:50:48 AM
re: UTStarcom Sues Passave Sure looks like UTSI doesn't know how test, or took some shortcuts and got caught.
rbkoontz 12/5/2012 | 2:50:46 AM
re: UTStarcom Sues Passave Are you questioning the technical capabilities of UT Starcom engineering? How could you make such a blasphamous statement about such an amazingly talented team?

C'mon. Who should be shocked that UT used financial shenanigans to bypass proper R&D qualifications and shove bad product down their biggest customer - and biggest investor's throat!

And - yes - there is a large pile of EPON chips in a warehouse somewhere.

There is a burning bag of dung in Alameda. Somebody step on it and put it out!!!
jcrawshaw 12/5/2012 | 2:50:45 AM
re: UTStarcom Sues Passave Brookseven - can you email me on [email protected]? I am writing a Light Reading Insider and wanted to get your thoughts (off the record).
Many thanks, James Crawshaw - Analyst, Light Reading
Road Trip 12/5/2012 | 2:50:41 AM
re: UTStarcom Sues Passave Sounds very Passave Aggressive to me.
ragho 12/5/2012 | 2:50:39 AM
re: UTStarcom Sues Passave

Word is that Passave may be cash flow positive, which is good for business. Nevertheless, this is bad publicity. Also makes them spend money on lawyers fees, which we know can suck the life out of a startup.

-ragho
Mark Sebastyn 12/5/2012 | 2:50:37 AM
re: UTStarcom Sues Passave Couple of key points here:

"Always ask for anything, your counterpart might be stupid enough to agree."

Without a copy of the agreement between Passave and UT it isn't clear who is in the right. Customers routinely ask for penalty clauses, damages, rights of revocation in both the chip and equipment world. It may be that UT sustained damages worth millions, if that is what the contract stipulated. Startups have been known to reach deep to secure a launch customer.

If I had to bet, I think this story looks like the hundreds of others where immature silicon is rushed into customers hands, and then the finger pointing starts. It also cannot be an accident that UT waited to file suit until the point of maximum leverage.

Full speculation at:

http://nyquistcapital.com/2005...
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