The Day Ahead: ITeX may brighten dreary IPO week

Integrated Telecoms Express could be on the fast track to Moneysville
Written by Larry Dignan, Contributor

In a dreary week for initial public offerings, broadband chip maker ITeX could be one of the bright spots. ITeX, known as Integrated Telecom Express, has what it takes to be a Wall Street hit.

The company, which is offering 5.6 million shares for trading Friday, priced at $18, the middle of its $17 to $19 price range. Lehman Brothers is the lead underwriter.

ITeX has a few things going for it. For starters it makes digital subscriber line chips and software. The company has also landed 55 design wins as of 30 June.

Specifically, ITeX makes products that are designed to enhance the performance of asymmetric digital subscriber line (ADSL) equipment. The gear is used both at the central office facilities and the customer premises. With companies such as the newly combined Verizon and NorthPoint, EarthLink and SBC Communications driving demand, there should be a big market for ITeX gear.

Aside from the hot broadband market, the company is bound to look good relative to its peers. Among the companies going public this week, most of them are trading below their IPO price. Shares of PeoplePC fell 11 percent on the first day of trading and 23 percent on the second. It's safe to say the market isn't welcoming junk.

ITeX looks a bit more promising even though it sees losses for the foreseeable future. For the six months ending 30 June, the company lost $11.5m on sales of $14.4m. For perspective, ITeX reported sales of $3m for 1999. That sales growth should garner some attention.

Following the IPO, ITeX estimates it will have about $129m in cash.

As for customers, ITeX counts Alcatel Bell and Nokia as clients. For the six months ended 30 June, sales to Xpeed and Alcatel Bell accounted for 29 percent and 10 percent of sales, respectively.

The biggest risk for ITeX is competition. Alcatel Microelectronics, Analog Devices, Centillium Communications, Conexant Systems, Lucent and Texas Instruments are notable foes.

One of those struggling IPOs this week was Lexar Media, which makes digital photography accessories. Lexar priced at $8, well below its price range and hasn't budged since.

Given that small splash, our first question to chief executive John Reimer was "why go now?".

"We could have waited, but we've put a lot of work into this IPO," said Reimer. "We're happy to get it done so we can focus on the business."

Reimer admitted to having mixed feelings about Lexar's IPO reception, but noted that the company's court battle with Sandisk gave Lexar shares a "30 percent correction" before they even hit the market.

Sandisk is suing Lexar for patent infringement. In response, Lexar is reworking its product to avoid the flap no matter what happens. Reimer said the logic behind reworking its products is simple -- make the Sandisk suit, which kicks off 23 October, moot.

It's unclear how the Sandisk-Lexar suit will be resolved, but it's a big cloud. Reimer said Sandisk attempted to buy Lexar a few times already to gain access to its technology.

As for the company's big growth markets, Lexar sees digital photography, music and content downloads as key markets. "We believe over time our shares will reflect our value," said Reimer.

And while we're on the IPO topic, Divine Interventures, a barely incubated Internet incubator, reported a whopper of a second quarter loss. Divine lost $75.4m on revenue of $12m.

Net incubators are facing tough times amid a weak IPO market. CMGI contends it's an operating company and Internet Capital Group isn't talking the visionary game. Divine shares are below their IPO price of $9.

As we noted before Divine is nearly impossible to value. Divine's stable of Internet companies are young -- too young to get Wall Street excited about upcoming IPOs.

On a conference call, Divine ran through a list of what could be promising IPO candidates -- in a year or so depending on market conditions. As for Divine's talkative chief executive Andrew J Filipowski, he sounded almost mellow. "We'll see opportunity in cycles," said Filipowski. "We think we're near the bottom now for digital economy companies."

Officials did note that Divine is seeing a lot of opportunity in the dot-com downturn. Divine said it would be investing in early stage, late stage and even public companies that have seen their valuations crumble. "There is a silver lining to this," said Filipowski.

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