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Optical/IP

Ikanos Catches IPO Fever

If you're a small specialty chip company that's losing money – then hey, it may be time to IPO.

Last week, chip maker Ikanos Communications Inc. solidified the trend of such young chip companies testing the public market, looking to raise as much as $85 million in an initial public offering, according to S-1 papers filed with the U.S. Securities and Exchange Commission (SEC) on June 24 (see Ikanos Files for IPO).

Another small, money-losing specialty chip maker, NetLogic Microsystems Inc., which makes search-engine chips, filed for IPO back in April (see NetLogic Sets IPO Terms and NetLogic Files for IPO).

Ikanos specializes in very-high-speed DSL (VDSL), a high-speed but short-reach technology that runs over copper. Its primary market has been in the fiber-to-the-premises (FTTP) craze, where Ikanos can provide the connection for the last stretch of distance, where fiber can't be installed economically.

As 50-Mbit/s connections have gained popularity in Japan and Korea, Ikanos has seen its revenues take off. According to the S-1, sales shot up during the December quarter to $13.0 million, from a previous quarterly high of $5.8 million. Ikanos picked up another $14 million in revenues for the March 2004 quarter.

But Ikanos continues to lose money – $29.9 million in losses, or $3.60 per share, on $29.0 million in revenues for the year ending December 31, 2003. Its reserves of cash and equivalents totaled $17.7 million as of March 31.

Looking a little deeper into the figures, it appears that Ikanos is practically giving away its chips. The cost of producing the product appears to be only marginally less than the revenues generated. For instance, in 2003, "cost of revenue" was $28.6 million, while revenue itself only just topped $29 million.

What's more, under "risk factors," the S-1 states the company may have to lower prices even further to attract new customers or retain existing ones.

Ikanos also has problems with customer concentration. Right now, most of the company's revenue has come from just two customers: NEC Corp. (Nasdaq: NIPNY; Tokyo: 6701) is its largest customer, accounting for 44 percent of revenues so far in 2004; Sumitomo Electric Industries Ltd. accounted for 24.1 percent in the same period.

This situation could change, if all design wins turn into significant paying customers. Ikanos claims its products have been designed in at no fewer than 15 OEMs, including Huawei Technologies Co. Ltd., Marconi Corp. plc (Nasdaq: MRCIY; London: MONI), Salira Optical Network Systems Inc., Siemens AG (NYSE: SI; Frankfurt: SIE), UTStarcom Inc. (Nasdaq: UTSI), ZTE Corp., and ZyXEL Communications Corp.

Neither the number of shares to be issued nor the expected price range was disclosed in this filing. The company has applied for a Nasdaq listing under the symbol "IKAN."

— Pauline Rigby, Senior Editor, Light Reading

[email protected] 12/5/2012 | 3:01:45 AM
re: Ikanos Catches IPO Fever
Dear:

I saw your post regarding Ikanos. Since they filed
for IPO again, I would like to find out what you
think about their chances? Is VDSL market poised
for success in US? Are their margins high enough to
stay in business w.r.t Broadcom, Infienon, connexant?

Thanks.
rswitch 12/5/2012 | 1:28:14 AM
re: Ikanos Catches IPO Fever While true that 2003 numbers show $29M revenue for $28M cost of sales, the equivalent numbers for 1Q2004 show $14M sales for $11M cost of sales. One can argue that these are not great numbers either, but at least the trend seems to be positive.
TooTall 12/5/2012 | 1:28:01 AM
re: Ikanos Catches IPO Fever I am a competitor, so take this as you will.

Ikanos just eliminated all Press Releases from their web site... why? They trying to disavow any knowledge of their former claims as people research their IPO?

Whatever came of the investigation of Millinet for corruption regarding sales of Ikanos-based systems to KT? Ikanos has listed these guys as one of five top cusotmers on their IPO filing. Anything here the investing community ought to know about?

The IPO filing shows a high degree of uncertainty when it comes to real future profits... their ASPs are >50% above what others charge for competing VDSL technology and only their eating their gross margin (looks pretty slim to me) nets them sales. As I understand, Semiconductor sources need a higher gross to cover R&D and such and at 10-20% margin Ikanos cannot cover their real costs. Only way they can win is to hope to eliminate competition and then raise prices dramtically, which will place them at least 5-7 times cost of ADSL2+ chipsets, which means Ikanos will lose no matter what. They'll never be profitable, IMHO. This seems to me a poor investment at a time when the markets seem in no mood for such extreme dreams.
rs50terra 12/5/2012 | 1:27:53 AM
re: Ikanos Catches IPO Fever If one believes Ikanos claim that they have sold 3M ports and reads the total revenue the company had, it's easy to calculate the price per port: about $16/port.

According to TooTall, this is 50% more than their competitors.

Is it true that the ASP for VDSP transceivers is $10- $11?

Is the cost of ADSL2+ $2.5 - $3 per port?

I would be very curious to know which DSL vendor has discovered the way to make a profit on $3 per port.

I wonder if you could be kind enough to enlighten me.

Thanks.
paolo.franzoi 12/5/2012 | 1:27:52 AM
re: Ikanos Catches IPO Fever
ADSL2+ chips are more like $10/port Tip/Ring to Utopia (including external components from the chipset).

seven
TooTall 12/5/2012 | 1:27:44 AM
re: Ikanos Catches IPO Fever Claims of 3M shipped are a bit exaggerated, IMHO.
Ikanos having hidden their Press Releases on their web site seems to confirm... they do not want to be caught out regarding their claims.

Believing their 3M claim does make their ASP seem reasonable, though, and I believe they have sold for these numbers, just they are then losing money on the deal. More than likely they are selling in the $20-25 range on average and have done a 2M volume.

By the way, as I understand the matter, ADSL2+ per port chipset pricing to higher volume accounts is ~$6-7/port DLSAM side and ~$5-6 CPE side. I see Ikanos needing to be at 5 to 7 times this to be profitable, yet they won't sell much.

As to ASP for QAM VDSL... I do not argue with the numbers posted and I believe QAM sources are profitable with their VDSL.
Therfore, Ikanos stating in their IPO filing that they are under price pressure from their VDSL competition, and realistically QAM is the only other VDSL player, then goes to a conclusion that Ikanos will always be unprofitable. That's a tough one in today's "must be profitable" IPO market.
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