Atheros IPO, deconstructed

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With all the buzz around wireless LAN technologies, is it any surprise that Atheros filed for an Initial Public Offering with the SEC. Today when I met with some very smart folks on Wall Street, I was told that the IPO was already over subscribed six times. (Ironically Atheros has Intel to thank for all the Wi-Fi buzz. No one could spend more on marketing than Intel has!) Widely recognized as one of the leaders in the Wi-Fi space, Atheros is as good an IPO candidate and with the help of some experts, I have managed to deconstruct the Atheros IPO filing.

bq. The Sunnyvale, Calif.-based company is looking to raise $100 million, according to a prospectus filed Nov. 26 with the Securities and Exchange Commission. The company intends to use net proceeds from the filing to repay about $4 million it borrowed from Silicon Valley Bank and the remainder for general corporate purposes, including working capital and capital expenditures. (ZDNet)

My dear friend Tom Taulli, who is something of an expert on initial public offerings (he literally wrote a book on it) says

bq. The IPO market has emerged from the destruction of the past few years, but this means investors are focusing on firms with profitability. However, I think 2004, investors will ratchet-up their risk tolerance, so long as an IPO has a lot of sex appeal. Atheros appears to fit this scenario. The WLAN semiconductor market is growing at a fast clip and the company is a leader in this highly complex market. Also, it helps that there have been successful semiconductor IPOs this year, such as FormFactor.

Helping Atheros will be some of the momentum that goes with the Wi-Fi market. Allied Business Intelligence reports that the “shipments of chipsets are set to hit 23 to 25 million units this year, up from 7.9 million in 2001.

bq. Taking into account rapid price declines of ICs, a growing confidence in new addressable markets and the immense interest in 802.11 technology Allied Business Intelligence’s (ABI) new forecasts indicate that between 2002 and 2007 Wi-Fi chipset shipments are set to grow at a CAGR of 43%. Hence by 2007 shipments will reach 147.5 million chipsets, with revenues of $1.13 billion.


On another note, Atheros is pretty strong in the 802.11a category where it is currently competing with Broadcom quite effectively. it has managed to get some design wins at companies like Sony which are embedding Atheros in their flat panel televisions (at least in the Japanese market.) This non-PC market is pretty good place for Atheros because it has relatively low competition. Now it depends on how quickly this market takes off. Allen Nogee, analyst with In-Stat/MDR, a research firm, wrote to me in an email:

bq. The company’s 802.11g and combo chips are doing better. Atheros is one of only a few making a/b/g chipsets. 802.11a won’t keep them in business, but their other chips might. 802.11g & 802.11a/b/g chips aren’t being produced by the Taiwanese yet, in any large numbers, so this gives Atheros some time to keep their price up. Once more companies start making a/b/g chipsets, the price of chips will fall very quickly.

This is where the good news ends. The company is going to come under fierce pressure from Intel, GlobeSpanVirata, Texas Instruments and tons of Asian makers of Wi-Fi chips. As Scott Rafer of points out,

bq. GlobeSpanVirata bought IntersilÌs Wi-Fi chip business, which was Û and is Û the 802.11b market share leader yet still unprofitable. The 802.11b chip market is a bloodbath and the 802.11a market is unproven.

But the biggest worry has to be Intel, which is excellent at marketing, even though they are a bit behind in terms of technology. They currently have an 802.11b solution and have announced 802.11a/b, but still no 802.11a/b/g 802.11g is currently the fastest growing standard being sold, so Intel is definitely a bit behind here. Intel should have a 802.11a/b/g solution sometime mid-next year.

A Wall Street analyst I was chatting with concurs and adds: “Atheros would have been an ideal buy out candidate but as they say rising tide lifts all boats. Nobody is making money in Wi-Fi space and the unit growth despite what you might read has not been that huge to make money.” If you read the S-1 filing, you will notice that despite growing revenues the margins are not enough to translate into profits. “Unit growth is not translating into revenue and profit growth. it has become like PC market, where sales donÌt translate into profits.”

bq. Atheros reported a revenue of $49.7 million for the first nine months of the year and a net loss of $12.9 million. For the same period a year ago, the company had revenue of $16.5 million and a net loss of $16.2 million. Atheros’ chips are found in PCs from Hewlett-Packard, IBM, NEC, Sony and Toshiba as well as Wi-Fi gear manufacturers D-Link, IO Data, Linksys, Microsoft, NetGear, Philips and Proxim. (ZDNet)

So how will the IPO do? If the Wi-Fi madness continues, (VC community is certainly doing its bit) the company will do quite well in the first month or so, and then the stock is going to slide. And if the profits don’t materialize, then gravity is going to catch up with Atheros. (I might be fine tuning the story over next couple of days, so apologize for posting it early.)

* Atheros: You really want this?
* How to Money Fi, Wi-Fi
* Broadcom, Atheros in ugly Standards Spat

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