Whither Wireless IPOs?
The Kirkland, Wash.-based operator's $25 shares debuted nicely at $27.25 on Nasdaq Thursday but were slightly off the set price by the end of the day. This slight drop translated into freefall on Friday and into Monday, possibly as investors read the prospectus and realized that it will be a long, long time before Clearwire makes any real profits. The stock was down to $21 in afternoon trading on Tuesday. (See Clearwire's Bubble Bursts.)
In a just world, Clearwire's pummeling shouldn't have any knock-on effect for either Aruba or Starent. Both are reasonably well regarded companies that have spent years carving out decent niches for themselves – against massive competitors – in the enterprise wireless LAN and cellular markets, respectively. But nobody ever said life was fair. My sense is that Clearwire was seen by some as a barometer for the wireless IPOs to follow. And the mercury level just dropped way down.
Nonetheless, these flotations should be judged on their own merits – for better or for worse.
Starent is easily the better prospect on paper. The Tewksbury, Mass., company, which makes mobile gateways for delivering data and multimedia services over cellular networks, turned a profit in 2006. It reported revenues for the year of $94.4 million with a net income of $3.6 million. Starent, which started in 2000, says it has more than 60 mobile operator customers around the globe, including big names like Verizon Wireless .
Starent's market picture looks rosy, too. Delivery of (and billing for) data and related wireless multimedia services is becoming a larger cash cow for the carriers. Verizon, for instance, saw wireless data revenues up 63 percent in 2006.
For Aruba, the prospects are somewhat cloudier. The firm has been entrenched as the No. 3 supplier of enterprise wireless gear – after Cisco Systems Inc. (Nasdaq: CSCO) and Motorola Inc. (NYSE: MOT) – for more than a year now, and grew sales 66 percent in 2006, according to Synergy Research Group Inc.
In its latest S-1 amendment, however, the firm reveals it took a net loss of $11.7 million on total revenues of $51.2 million for the six months ended January 31, 2007. Revenue for the quarter ended in January was $26.6 million, up 7.7 percent compared to the previous quarter, but net losses grew to $7.2 million, up from $4.5 million in the previous three months.
Aruba also has close ties with its OEM partner, Alcatel-Lucent (NYSE: ALU), and these rebadged boxes appear to be a big part of the driver behind Aruba's growth. Aruba had this to say in its filing:
"For the fiscal year ended July 31, 2006, and the six months ended January 31, 2007, Alcatel-Lucent accounted for approximately 15 percent and 21 percent of our total revenues, respectively."
The questions potential investors should be asking about Aruba are simple but cut to the heart of the matter. When can the company cut its loses and turn a profit? How will it decrease its dependence on a single major OEM? And how will it compete long-term against Cisco in a market that the networking giant dominates?
So far, Aruba has managed to establish itself as the top startup in the enterprise wireless LAN market, no small feat in a niche crowded with also-rans and long defunct coulda-beens. The issue is how – or indeed if – it can grow beyond that. This is a fast-moving market with room for growth, and it is certainly possible Aruba could increase its share considerably. It's just not clear to me what Aruba can do to further differentiate itself from Cisco and others as this market becomes increasingly high-volume and low-margin.
We'll get to see how Aruba does in its IPO by the end of March.
Nonetheless, neither Aruba or Starent requires taking the kind of large, long-term bet that Clearwire represents. It's pretty obvious that Craig McCaw's latest venture will need billions more to build out a mobile WiMax network – technology, I might add, that isn't commercially available yet – while facing stiff competition from cable, DSL, and other WiMax networks.
— Dan Jones, Site Editor, Unstrung