Commentary: Ixia's post-IPO quiet period expires this week, and the firm's underwriters will predictably issue a host of buy ratings. So what's new? Ixia actually deserves the underwriters' praise.
Quiet period expirations are a joke for the most part. Twenty-five days after an IPO, underwriters, who are paid to say nice things, tout strong fundamentals and hand out buy ratings. Pets.com looked good as did a host of young companies, which flopped even though some are still listed as buys. Typically, the underwriters' research reports read like a script for an infomercial.
Ixia is different. When underwriters Merrill Lynch, Donaldson, Lufkin & Jenrette, and Dain Rauscher Wessels talk up Ixia, you should believe them.
The company, which makes analysis systems for fibre optic and broadband gear, has real revenue, profits and a strong market to target. With telecommunications carriers building out networks and buying next-generation networking gear, one of the biggest issues is evaluating what products can actually deliver as advertised. Enter Ixia's systems.
Ixia's market niche has been quite profitable. For the third quarter, Ixia reported earnings excluding charges of $6.4m, or 12 cents a share, on sales of $21.3m. The earnings flew under the radar since analysts and management couldn't talk about the company's prospects.
Revenue for the first nine months of 2000 was $49.5m, up 223 percent compared with a year ago. Earnings excluding charges were $15.5m, up 276 percent from a year ago.
You can't argue with those financials, but Ixia has always been good with money. After an initial $1.5m in seed financing, Ixia has supported its growth with cash generated from operations, according to Renaissance Capital.
The customer list is also pretty impressive. Ixia said in regulatory filings that it has sold its systems to more than 170 customers. The largest customers include Cisco, Lucent, Nortel, AT&T, Worldcom's UUNet and Broadcom.
These networking giants are using Ixia's systems because evaluating new gear is increasingly difficult since the telecommunications equipment space has splintered. Hot startups such as Corvis are setting the pace and joining established giants such as Cisco. Simply put, testing network performance is a lot harder than it used to be.
There are risks as cited in Ixia's regulatory filings. The biggest cloud is capital spending by telecommunications carriers. If spending slows, Ixia's revenue growth may also slow. However, it's not like capital spending is going to zero. As new technologies develop -- something that's ongoing -- companies will need to measure network performance.
In addition, many of Ixia's customers also have internal performance analysis tools. But companies can't develop every analysis tool in house. One of Ixia's largest customers -- Cisco -- has been testing network performance with its in-house systems, but still buys Ixia's systems. Cisco accounts for more than 30 percent of Ixia's sales.
And there's also competition from the likes of Agilent Technologies, Netcom Systems and Adtech. Competitors such as Agilent have huge financial resources to compete with Ixia. Ixia will also have to diversify its product line -- optical systems account for 60 percent of sales.
The risks are an issue, but Ixia's financial performance shows the company can deliver. Ixia's underwriters will be able to push the stock and actually use real financials to bolster their case.
A few notable tech bellwethers report earnings this week. Here's a look:
- Sycamore Networks reports fiscal first quarter earnings 14 November. Sycamore had been among the networking stars, but concerns about telecommunications capital spending will be an issue on the conference call. First Call consensus: $0.01.
- Applied Materials reports its fourth quarter results 15 November Applied, the world's largest chip equipment manufacturer, always gives good insight to the chip sector. First Call consensus: $0.76.
- VA Linux reports its first quarter results 16 November. The quarter's outcome is already known since the company issued a profit warning. VA Linux blamed a slowdown in dot-com spending for its woes. On the conference call, you should listen to see if VA Linux is seeing a one-time blip or a big slowdown ahead.
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