IPO of the Week: Betting on Broadband
By Kelly Black, IPO Columnist
DSL enabler Turnstone Systems is the latest IPO that should hit the market
running.
Take a beverage straw and try sucking a tennis ball through it. For those individuals
whose sluggish Internet connections make surfing the Web one
enormous World Wide Wait, you already know the feeling. If you're not aboard the broadband wagon, don't
walk, run to your nearest local carrier and sign up.
Think big pipes. And speak of the devil, there's a broadband-related offering steamrolling its way onto Wall Street that I'm
really crazy about. Turnstone Systems (Nasdaq:TSTN - news) is set to debut Tuesday, offering 3 million shares at $23 to $25
each. Expect to see pricing rise to $26 by the time this goes to press.
Coke or Pepsi
Simply put, Turnstone helps the phone companies that are helping you get on the broadband bandwagon. How? It makes
software that automates and facilitates remote-control installation and operation of digital subscriber lines, one of two main
types of onramps to the information superhighway.
Lost already? Let's back up.
Broadband comes in two flavors: cable modems or digital subscriber lines. Cable modems work through the cable-TV lines
going into your house; DSL works on your phone lines. Describing exactly how these technologies work could easily fill
another column altogether. Fortunately, the folks at Dell - who are smart people but don't have a hidden agenda on the topic -
have already written a good explanation.
Despite a propaganda war between proponents of both technologies, cable and DSL are roughly comparable. The bottom line is
that the vast majority of Web enthusiasts have a need for speed, and broadband flat-out flies. Once you join the revolution,
you'll never go back to Web crawling.
And that explains why investors are so eager to place their chips on high-speed Internet access and broadband-related players.
Without a doubt, it's an investment in the future, and a smart one at that.
Turnstone's Turnkey Solutions
Turnstone targets half the players in this burgeoning market, the phone companies that can turn your ordinary phone line into a
super speedway for Internet access.
To understand Turnstone Systems' business, I'll need to give you a quick primer on how DSL is deployed. First, your house
typically needs to be within a three-mile radius of your phone company's central office, and a line test is needed to see whether
your copper wires can handle the bandwidth. Once you're qualified, a technician will install a splitter in your phone box that
enables you to talk on the phone while simultaneously connected to the Internet. Throw in a modem, some extra hardware, and
some technical jargon that I won't bore you with, and presto - you're on the Internet Autobahn.
But from the phone company's perspective, the installation process is pretty labor intensive. Industry insiders called it 'truck
roll' - whenever a technician needs to hop into her pick-up truck to install, configure, or troubleshoot your line, it costs the
phone company greenbacks. Turnstone's making money hand over fist by keeping those repair trucks in the parking lot.
Turnstone's software helps companies automate and facilitate operation and maintenance of their DSL lines by remote control.
Copper CrossConnect CX100 is its flagship product, which phone companies install at the central office. That makes DSL
deployment and maintenance cheaper, faster, and more efficient.
The company has inked alliances with the likes of Lucent (NYSE:LU - news) and Copper Mountain (Nasdaq:CMTN - news),
and boasts customers from Rhythms NetConnections (Nasdaq:RTHM - news) to Covad Communications (Nasdaq:COVD -
news).
Turnstone's financial health also has plenty of giddy-up. Last year, the company collected a respectable $27.2 million, losing
$183,000, up from no revenue and losses of $4.7 million a year-ago same period. So far, its CX100 units are flying out the
door to just a handful of clients. With an aggressive marketing push, revenue growth could really get interesting.
Final Thought
You have to like the chutzpa that the upstart has recently shown by bumping its price range from $15 to $17 per share, to the
$23 to $25 range. That boosts the company's prospective take from about $42 million to $72 million. Investors always prefer
to see a newcomer grab the money off the table, rather than fill the underwriter's coffers.
Turnstone should have a brimming war chest and likely won't have to greedily come sneaking back to investors for a prompt
follow-on offering like a Homestore.com (Nasdaq:HOMS - news) or Critical Path (Nasdaq:CPTH - news).
Aside from the obvious signs of investor demand, this company enjoys explosive growth in a spicy sector. If it continues to
execute in Internet time and takes full advantage of its first mover status, Turnstone will be going places. Goldman leads the
underwriting team with its smashing track record, so Turnstone is virtually guaranteed to mint a dazzling return. Although if I
had my choice, I would like to have seen the company nab 'TURN' as its ticker symbol. But I'm just nitpicking.
Investors looking to pan for broadband gold on Wall Street would do well to keep an eye on this offering. The best opportunity
to buy should fall between the first week following the IPO and the end of the 25-day quiet period. On the off chance that the
impending Fed rate hike causes Turnstone to stumble out of the gate, a buying opportunity could arise sooner.
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