GCT Semiconductor Inc. (GCTS), which planned to complete the first initial offering from a U.S. chipmaker since 2010, is proving just how hard it is for a chip startup to go public.
The maker of communications processors for phones postponed its initial public offering last week after investors refused to pay GCT’s asking price, a person with knowledge of the situation said. GCT will probably try again after its fiscal year ends in June, when it has two more quarters of results, said the person, who asked not to be named because the details are private.
The postponement highlights the challenges that startup chipmakers face as they try to go public and may determine whether Cortina Systems Inc., Peregrine Semiconductor Corp. and Audience Inc., which have all filed their prospectuses, proceed with their own offerings. While GCT is vying with Qualcomm Inc. (QCOM), Broadcom Corp. (BRCM) and Intel Corp. (INTC) in the mobile-phone chip market, it generates 1 percent of the sales and has 0.3 percent of the cash of the smallest of the three.
“It will be a real challenge because they’re so much smaller than the other guys,” said Jim McGregor, a semiconductor analyst at In-Stat in Scottsdale, Arizona. “And let’s face it, chips aren’t sexy. It’s the devices or it’s the Internet companies and applications that are.”
Venture financing of U.S. semiconductor companies has been declining because of the prohibitive expenses of getting a startup off the ground. Chipmakers spend millions developing and testing their designs before they can know whether an idea is viable. Meanwhile, the cost of starting software and Internet companies has gone down, thanks to cheap Web-based programs and services.
Chips Versus Software
Last year, VCs invested $1.18 billion in semiconductors, little changed from 2010 and less than one-fifth of the total invested in software companies. Total investment by venture capital firms jumped 22 percent to $28.4 billion.
Semiconductors, made from silicon wafers, provide the brains for electronics ranging from computers to mobile phones, washing machines to nuclear missiles. GCT is banking on the surging popularity of smartphones and demand for increased processing power to make up for its smaller scale. Some 13.1 million 4G phones were sold last year, and that number is set to rise to 202.2 million in 2015, according to research by IDC cited by GCT.
San Jose, California-based GCT was among the first companies to produce chips based on long term evolution, or LTE, the wireless standard at the heart of new networks being deployed by Verizon Communications Inc. (VZ) and AT&T Inc. Its top customers include South Korea’s LG Electronics Inc., the world’s third-largest maker of mobile phones.
GCT filed to raise as much as $67.5 million in its IPO, offering 7.5 million shares for $7 to $9 each. Alex Sum, a vice president at GCT, didn’t respond to requests for comment.
Since Aeroflex (ARX) Holdings Corp.’s IPO in 2010, the only U.S. chipmaker to go public was Freescale Semiconductor (FSL), a company with more than $4 billion in annual revenue and a history as a public company.
Aeroflex, a designer of radio frequency and microwave integrated circuits, has dropped 44 percent in the last 12 months and is down 20 percent since its IPO in 2010. Chipmaker Inphi Corp. (IPHI), which went public a week before Aeroflex, is down 38 percent in the past year. Of the seven chip companies that have made it to the public markets over the last five years, only Inphi and Entropic Communications Inc. are trading above their offering price.
Separately, three semiconductor companies have been acquired since late 2010 while on file to go public. PMC-Sierra Inc. (PMCS) bought Wintegra Inc., Broadcom bought Beceem Communications Inc., and Skyworks Solutions Inc. acquired SiGe Semiconductor Inc.
GCT’s revenue in the three months ended December rose 14 percent from a year earlier to $22.3 million, and the company’s net loss narrowed to $2.25 million from $2.79 million. Research and development costs increased 24 percent to $4.19 million. Qualcomm, with $22 billion in cash, had $14.96 billion of revenue in fiscal 2011. It spends about 16 percent of its sales on R&D.
GCT acknowledged some of the risks it faces in IPO prospectus.
“Many of our competitors have longer operating histories and customer relationships, significant legacy products and technology, greater resources and brand recognition, more industry influence and a larger customer base,” according to the filing.
While the company has been quick to turn out products for the latest standard, its chips don’t work with older network technology, meaning that handset makers would have to install multiple sets of processors.
That may restrict the use of GCT’s technology to the U.S., Europe, Korea and Japan, where consumers will buy more expensive handsets made up of multiple radio semiconductors, according to Will Strauss, an analyst at Forward Concepts Co. in Tempe, Arizona.
“That could hurt them in the huge China market,” Strauss said.
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