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Optical/IP

Octasic, STMicro Team Up

Having found a niche in the VOIP market, chip startup Octasic Inc. is hoping to hit the big time with a partnership announced this week.

The company has been working with European chip giant STMicroelectronics NV (NYSE: STM) for about a year, but the relationship wasn't publicly disclosed until Monday (see STM, Octasic Partner on VOIP Chips). For Octasic, the deal could be the ticket to a bigger market and greater recognition.

The 72-employee, Montreal-based startup has been around since 1998, picking up $11.5 million in funding from investors including Canadian firm Novacap Investissements Inc. (see Octasic Enjoys $11.5M Round). The company last raised money in 2002 and hasn't yet had to go back: "We're very profitable right now," with revenues "north of $10 million," says Fabio Gambacorta, vice president of sales and business development.

But Octasic's market has been limited. The company makes echo-cancellation chips, which are important for preserving voice quality on wireless and VOIP connections. Octasic doesn't have an entree into enterprise equipment, though. Instead, its chips aimed for infrastructure equipment, starting with 128-channel implementations and eventually moving down to 32 or 64 channels (see Octasic Expands Echo Cancellation).

ST could help Octasic dip down to the eight- or 16-channel level by making the parts inexpensive enough to sell to enterprise customers. "We could do that before, but the cost was prohibitive," Gambacorta says.

ST's first job, though, was to build a lower-power Octasic chip, still targeting high-channel counts, that would be more attractive from an engineering viewpoint. That chip is set to ship later this quarter.

ST could also help with Octasic's eventual plans to merge its echo-cancellation technology with its codec and packetization chips. On the business side, the bigger company gives Octasic a better shot at cracking Tier 1 accounts that previously "looked at us as a high-risk option," Gambacorta says.

The overall market for echo cancellation is doing well thanks mostly to the wireless sector, says Will Strauss, analyst with Forward Concepts Co. Most of that work is done by software running on digital signal processors (DSP) from the likes of Texas Instruments Inc. (NYSE: TXN).

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) sells systems for echo cancellation, although it prefers the term "voice quality enhancement" (VQE). Its revenues for that gear are down from last year -- $15 million for the first quarter of 2005 versus $23 million for the same quarter in 2004 -- but a spokesman says that's due to a large international order skewing the 2004 figures (see Tellabs Reports Q1 Revenue Rise ).

Octasic's more visible success has come not in wireless, but in VOIP. The company's first sale was to Santera Systems, which was acquired by Tekelec Inc. (Nasdaq: TKLC) in 2003, giving Octasic a marquee customer with VOIP credibility (see Tekelec Tests Softswitch Waters and Tekelec Selects Octasic).

"For a little company, they've done very well," Strauss says. "Everybody's trying to get into the action for VOIP now, so the prospects for Octasic are pretty good."

— Craig Matsumoto, Senior Editor, Light Reading

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