Optical/IP Networks

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

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