Israel's Celeno Finds Growth in the East

The U.S. has long been the prime export market for Israel's high technology industry. Although—along with Europe—it still accounts for the bulk of Israeli tech sales, the global economic crisis has forced a growing number of Israeli companies to seek new opportunities in Asia and emerging markets.

That's what Celeno Communications did to survive. Based in Raanana, northeast of Tel Aviv, the privately held startup makes a chip that allows digital TV signals to be redistributed within the home via Wi-Fi wireless networking. When Celeno ran into foot-dragging from recession-strapped Western telecom companies, Chief Executive Officer and Co-Founder Gilad Rozen decided to target potential Chinese clients.

Rozen's bet paid off: Last month, Celeno scored a major deal with Shanghai-based Shanghai Telecom and Wuhan (China)-based FiberHome Telecommunication Technologies (600498:CH) that could be worth up to $50 million over the next few years. "China will become our largest market in 2011, accounting for 40 percent of our revenues," Rozen says. That compares with less than 10 percent this year.

Celeno typifies an eastward shift in Israel's tech exports, driven by sluggish demand in advanced economies and an increasingly global perspective among entrepreneurs. According to figures from the Israel Export and International Cooperation Institute, sales of nonmilitary goods to China and India more than doubled in the past year, to $884 million and $1 billion, respectively. China is now Israel's fifth-largest export market, up from 11th place a year earlier, while India has jumped from No. 5 to No. 2.

Heading east wasn't Celeno's first instinct. The company launched commercial sales in 2009 and initially targeted U.S. and European telecom service providers for trials. The company's chip, which costs about $10 and is installed in digital set-top boxes, relays IPTV (Internet Protocol Television) signals delivered into the home via broadband Internet connections to other digital devices, such as TVs, laptops, or Apple (AAPL) iPads.

IPTV subscriptions to soar in China

Celeno signed up a handful of carriers to test its technology in the field, including Stockholm-based Stockholms Stadsnät and Horizon Telecom (HRZCA) of Chillicothe, Ohio. All told, Celeno says its revenues will amount to "several million" dollars this year and "double-digit" millions in 2011. The U.S. and Europe currently account for about 80 percent of sales.

The problem for Celeno has been that even though Western clients loved the technology, the downturn slowed their plans to roll out new services. CEO Rozen and his executive team mounted an intensive campaign to score deals in Asia, flying to the East frequently to meet with potential buyers in the world's fastest-growing region. According to consultancy Multimedia Research Group of San Jose, the number of IPTV subscribers worldwide will soar, from 28 million at the end of 2009, to 102 million in 2014—with one-third of them in China.

Celeno's big breakthrough came in July's Shanghai Telecom deal. The Chinese company, a unit of Beijing-based China Telecom (CHA), has ambitious plans to roll out "triple-play" services offering voice, data, and digital TV in the Shanghai region. The telco is working with systems integrator FiberHome Telecommunication Technologies, which will incorporate the Celeno chip into a set-top box.

"We selected Celeno for its superior performance," says Shihai Zhang, general manager at FiberHome, noting that the chip is particularly good at rejecting wireless interference. The companies expect Celeno's technology to be installed in 2 million to 3 million homes over the next few years, with an average of two to three chips per home.

military signal-processing technology

"This is a big vote of confidence for Celeno's technology and it will have tremendous significance in China," says Kurt Scherf, principal analyst for Parks Associates, a Dallas-based technology research firm. So far, Scherf notes, communications chipmakers such as Qualcomm (QCOM) and Broadcom (BRCM) haven't had much success penetrating the IPTV market. Celeno's main competitor is another startup, Ruckus Wireless of Sunnyvale, Calif.

Celeno believes it has a superior solution that addresses the limitations of existing wireless schemes. It is adapted from military signal-processing technology meant to improve radar communication in hostile environments, which Rozen helped develop during his 10-year stint in an elite Israeli army intelligence unit. Rozen says the Celeno chip operates "in the same way radar tracks an airplane," accurately positioning the location of the set-top box or boxes and penetrating obstacles such as doors and walls.

The company has raised $32 million in three rounds of financing since it was founded in 2005. Investors include Cisco Systems (CSCO), venture firms Pitango Venture Capital and Greylock Partners, Linksys founder Victor Tsao, and former JDS Uniphase (JDSU) CEO and Chairman Jozef Strauss. Celeno is looking to raise additional money later this year to finance its expansion. It expects to break even by the end of 2011, buoyed largely by its new Chinese connections.

Rozen aims to build a standalone company and hopes someday to take Celeno public, although he won't rule out being acquired. There, too, Israel's eastward shift could come into play. While hundreds of Israel tech startups have been taken over in the past two decades by American and European companies, ventures such as Celeno are increasingly likely to elicit interest from potential buyers in Asia.

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