IPO Watch: Entropic Communications

Ann C. Logue | Nov 20, 2007 6:30am EST | Comment

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Entropic Communications
www.entropic.com
(Nasdaq: ENTR)
Scheduled for Dec. 3
$765.9 million post-money valuation

In this day and age, we have so many machines—televisions, computers, telephones—to keep us entertained, but there is an increased desire for devices that have content compatibility, which isn’t easy. That’s where Entropic Communications comes in.

The company designs semiconductors to handle multimedia home networks. It’s a fabless semiconductor company, which means that another company handles the manufacture and distribution of the chips. This reduces Entropic’s capital requirements. Because semiconductor equipment isn’t cheap, the outsourced manufacturing more than makes up for the loss of operating control that goes along with it. In April of 2007, Entropic acquired RF Magic, which had a complementary portfolio of home networking products.

Entropic’s semiconductors are purchased by electronics manufacturers to put in televisions, digital video recorders, modems and other devices that pull video from coaxial cable. In 2006, Entropic and RF Magic combined drew 31% of their $67.7 million in revenue from Actiontec Electronics, Inc., 23% from Motorola, Inc. (NYSE: MOT) and 11% from CalAmp Corp. (Nasdaq: CAMP). This customer concentration forms one risk, but that’s less worrisome than the risk of cable companies and customers standardizing around a competing home networking technology, such as Ethernet, xDSL, or WiMax.

Neither Entropic (founded in 2001) nor RF Magic (founded in 2000) is profitable, which is no surprise given the early-stage nature of the underlying technologies. The combined companies raised more then $124 million from five different venture capital firms. None of these are selling shares on the IPO and they’ll control 36% of the company after the IPO, which values their stakes at $275.7 million. Some shareholders, including some managers and small venture firms, are selling all or part of their holdings in the IPO. Most of the proceeds will go to general corporate purposes, keeping the company going until its products catch on and it stops losing money.

This is a risky deal. The company is losing money, and it’s unclear if its technology will be the standard for home networking. (For that matter, it’s not even clear if coaxial cable will remain standard, given the customer service record of the average cable operator.) However, the venture capital firms are waiting to cash out, which is a strong indicator of good results ahead.

Current and recent IPOs:

CreditCards.com (www.creditcards.com; Nasdaq: CCRD; this week; $409.4 million post-money valuation): Shopping around for the best credit card deal out there? CreditCards.com is the place to go. The company makes its money from credit card companies and related marketing firms, which pay a fee for each qualified application received through the site. It’s a low overhead business, with most of the expenses going to sales and marketing. In 2006, the company made $18.6 million in net income on $42.9 million in revenue. Of course, both supply and demand for credit is drying up, so 2007 and 2008 might not be so great.

American Public Education (www.apus.edu; Nasdaq: APEI; Nov. 8; $597.6 million market cap): Despite what you might think from the name, American Public Education is not a K-12 school, nor is it publicly supported. Instead, it operates American Public University and American Military University, private, online institutions that specialize in programs for U.S. military personnel, who have complicated schedules and who travel frequently to remote places. In the first six months of 2007, the company had 7,400 students, took in $30.2 million in tuition revenues and generated net income of $3.6 million. The challenge is turnover; the colleges have open enrollment and almost 30% of those who start drop out.

Upcoming IPOs:

NameMedia (www.namemedia.com; Nasdaq: NAME; pricing not yet scheduled; expected to raise $172 million): NameMedia has just filed its IPO, so it probably won’t be priced until after New Year’s. But it’s an interesting deal. The company is an Internet domain-name registrar, brokering existing URLs and handling the purchase of new ones. It operates BuyDomains.com and Afternic.com and has distribution agreements with such other registrars as GoDaddy.com and Register.com. Although domain names are less important than they once were, given improvements in search technology, they still matter, and that’s why NameMedia is on track to rake in over $40 million in revenue this year.

CampusU (www.campusuinc.com; Nasdaq: CMPS; Dec. 3; $77.3 million post-money valuation): This e-commerce company started with a website selling technology and software to college students under the www.campustech.com URL. It’s also branching out into other sites with content that might interest students, generating ad revenues. The problem is that CampusU has constantly lost money, and it’s unlikely that college students have content needs that aren’t already being met.