Profitable Passave Pushes for IPO

The first of the PON chips startups to try an IPO, Passave is hoping to raise $90M

August 25, 2005

3 Min Read
Profitable Passave Pushes for IPO

Building off a success in Japan, Passave Technologies Inc. is taking its passive optical networking (PON) chips to the public markets.

The company filed today for an IPO, and its filing with the Securities and Exchange Commission (SEC) estimates the deal's worth at $90 million.

The IPO is being underwritten by lead managers Merrill Lynch & Co. Inc. and J.P. Morgan Chase & Co., along with CIBC World Markets and Jefferies Broadview.

Founded in 2001, Passave has made its living selling Ethernet PON (EPON) chips. Nearly all of its revenues come from Japan, mostly for equipment going into {dirlink 5|135}'s fiber buildouts.

The business might seem limited, but it's profitable. For the first six months of 2005, Passave recorded net income of $3.3 million, or 10 cents per diluted share, on revenues of $19 million, according to the SEC filing.

Even 2004 was profitable, to the tune of $1.3 million in net income, or 40 cents per share, on revenues of $21.1 million -- and that's after Passave recorded a loss of $1.6 million for the first six months of 2004.

Passave owes pretty much everything to NTT. As a spokesman describes it, the startup's roots lie in founders Victor Vaisleib and Ariel Maislos -- now CEO and president, respectively -- and CTO Onn Haran attending Institute of Electrical and Electronics Engineers Inc. (IEEE) meetings on the Ethernet in the First Mile standard, where the EPON specifications were developed. There, they bumped into NTT officials who asked the trio if they could do this stuff.

They said, "Yes" (wouldn't you?) and Passave bagged its flagship customer.

Passave doesn't sell directly to NTT, instead getting its business from NTT suppliers. Ninety-five percent of Passave's revenues come from Mitsubishi Electric & Electronics USA Inc., Sumitomo Electric Industries Ltd., and UTStarcom Inc. (Nasdaq: UTSI). UTStarcom had the lead in 2004, representing 71 percent of Passave's revenues, but Mitsubishi has been 55 percent of its revenues for the first half of 2005.

With a business so concentrated, Passave is looking to branch out. One possibility is the Korean market, although rival Teknovus Inc. claims to have beaten Passave to at least one substantial win there.

Passave could target the United States, having announced this week a GPON chip; the U.S. RBOCs are at least considering GPON for next-generation deployment, based on a recent request for information (see Chips Draw PON Plans and RBOCs Cast Wide GPON Net). In GPON, Passave would face off against startup BroadLight Inc. and not-so-startup Freescale Semiconductor Inc. (NYSE: FSL).

Passave's largest shareholders are BRM Capital and Eurofund LP, each with an 18.6 percent stake in the company. Vaisleib and Maislos each own 7.9 percent, while {dirlink 2|39} owns 7.4 percent.

The company had $14.5 million in cash as of June 30.

— Craig Matsumoto, Senior Editor, Light Reading

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