Optical/IP Networks

NetLogic Files for IPO

IPOs are making a comeback, but at what strength? Chip startup NetLogic Microsystems Inc. seems to be testing the theory to its breaking point, filing for an IPO despite substantial losses and only one year of revenues exceeding $10 million.

Merrill Lynch & Co. Inc. is the lead underwriter; the size of the IPO has yet to be determined.

Among the revelations in the papers filed with the SEC today: NetLogic still suffers from astounding losses, and 11 percent of the company is in the hands of its biggest competitor.

In June 2002, NetLogic issued a convertible promissory note for $30 million to Integrated Device Technology Inc. (IDT) (Nasdaq: IDTI), which was translated into 6.2 million shares of NetLogic preferred stock in October 2002, the prospectus says. As a result, IDT holds an 11.2 percent stake in NetLogic, making it the largest shareholder behind founder Norman Godinho (23.4 percent) and Godinho's family trust (21 percent). The largest venture-firm share is held by Sevin Rosen, at 10.2 percent.

The companies share a heritage, as Godinho was a founder of IDT. Moreover, former IDT CEO Leonard Perham is NetLogic's chairman. It's possible that the company ties stop there. "Whatever relationship there is, it's probably at the board level rather than at the strategic level or product level," says Jag Bolaria, an analyst with The Linley Group.

NetLogic officials, citing the quiet period surrounding an IPO, declined to comment.

NetLogic makes search-engine chips, a niche product that combines a microprocessor with content-addressible memory (CAM). The latter is a pricey type of chip that comes in handy for storing large IP-routing tables.

The largest CAM customer is Cisco Systems Inc. (Nasdaq: CSCO), and much of that business has gone to IDT until now. NetLogic -- perhaps with IDT's help -- cracked Cisco's ranks last year, to the point where Cisco represented 33.5 percent of NetLogic's 2003 revenues and 64 percent of its first-quarter 2004 business. Most of those sales are actually made to contract manufacturer Solectron Corp. (NYSE: SLR), which uses the devices on linecards built for Cisco.

The deal with Cisco involved a custom chip, according to the NetLogic prospectus.

Without that deal, NetLogic wasn't anywhere near IPO candidacy, as its revenues were low and its losses high:

Table 1: NetLogic's Track Record
1999 2000 2001 2002 2003
Revenues ($M) 0.2 1.7 2.0 2.9 13.5
Net Loss ($M) (5.2) (8.1) (15.3) (19.9) (32.0)
Source: NetLogic

Last year's losses include an $11.4 million writedown of inventory, a glitch related to the Cisco business. Cisco shifted to more stringent testing methods, causing a batch of the NetLogic product to get rejected. NetLogic's prospectus says the problem has been corrected.

The company picked up $8.3 million in revenues for its first quarter of 2004, which ended in March, but also racked up $5.4 million in losses.

Bolaria thinks the revenues will come as a surprise to many. "NetLogic was one of those companies that held everything close to its vest," he says. "I was expecting they would reach $10 million a quarter maybe late in the year, but it looks like they're closer to it than that."

Even with its losses, NetLogic could make a case for an IPO, Bolaria says. Revenues of $10 million per quarter, times the usual valuation of 3x sales for even a mediocre company, result in a $120 million valuation. With some companies able to get valuations of 6x, a $250 million valuation isn't out of the question, he says.

Search engines are a small sector of the chip world -- even smaller for those without a Cisco connection. Several companies have dropped out of the sector entirely, leaving IDT and Cypress Semiconductor Corp. (NYSE: CY) to dominate the market, with startup SiberCore Technologies still in the mix (see Mosaid Cans CAMs). There's also the fact that some companies, including Cypress, are investigating ways to replace CAMs with cheaper memory chips, using algorithms to mimic a CAM search. The idea is still in its early stages but could seriously shift the competitive landscape if it catches on (see Search Engines Face Software Challenge).

For now, NetLogic can still claim to have an edge. "Their technology's typically been ahead of most of the community," Bolaria says.

NetLogic employs 78 and has raised $94.8 million in four rounds of funding. The company has $23.5 million in cash but $16 million in debt, according to the S-1.

— Craig Matsumoto, Senior Editor, Light Reading

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