The Anglo File: Parthus Soars on GPS Deal, but Success Is Far From Assured
By Nick Watson
Senior European Correspondent
9/4/00 8:20 AM ET
thestreet.com
LONDON -- It's not hard to spot mobile-phone users these days. But the ability to do so accurately and from a distance is soon expected to be a very lucrative business.
This belief in the value of mobile-phone location technologies sent shares in Ireland's Parthus Technologies (PRTH:Nasdaq ADR - news) soaring 75% since announcing on Wednesday that it had signed an agreement with ARM Holdings (ARMHY:Nasdaq ADR - news) to license its mobile-location technology.
While there is undoubtedly merit to the optimism surrounding the technology in general and the deal itself, there are doubts whether this agreement justifies such a surge in the shares.
There are essentially two parts to the agreement between Parthus, a developer of semiconductor intellectual property for the mobile-Internet market, and ARM, one of the largest designers of microprocessors used to power mobile phones. The first part involves ARM incorporating Parthus' Global Positioning System -- or GPS -- technology into one of ARM's microprocessor cores, licensees of which include Qualcomm (QCOM:Nasdaq - news), STMicroelectronics (STM:NYSE ADR - news) and Texas Instruments (TXN:NYSE - news), among some 40 others.
The second part of the agreement involves ARM acting as a licensing agent for Parthus, giving it access to ARM's impressive customer base, which includes such luminaries as Nokia (NOK:NYSE ADR - news), Ericsson (ERICY:NYSE ADR - news) and Nortel (NT:NYSE - news).
Although Parthus would not divulge details of the deal, a standard Parthus agreement typically includes a $600,000-plus licensing fee with a per-chip royalty of 3% to 6%.
Basically, this agreement has it all -- a promising technology for the mobile-Internet market developed by a company using the licensing business model that has served companies such as MIPS Technologies (MIPS:Nasdaq - news) and Rambus (RMBS:Nasdaq - news) so well, being sold to companies that have become synonymous with the wireless industry. And coming at a time when the U.K.'s Techmark 100 index rallied 11.6% over three days, it's perhaps understandable that Parthus shares surged 47% over the same period to close Friday at 342.5 pence. The shares closed Monday up 66 pence, or 19.3%, at 408.5, bringing the four-day rise to 75%.
Yet a closer look at the deal suggests more caution, given that it has helped lift the company to a multiple of 83 times 2000 sales. And Parthus isn't expected to break even until 2003.
Not Exactly Exclusive
There are some devilish details that argue against the market exuberance shown last week. This deal will have no material impact on the company's finances for some time. Eric Chen, analyst at Chase H&Q, reckons that any significant impact on revenue won't be felt until the first or second quarter of next year. Product shipments are expected to start in the summer of 2001, so there will be no royalties until after then. Chen has a buy rating on the company. (Chase has had an investment banking relationship with Parthus.)
Second, a year ago ARM signed a similar agreement with Parthus' competitor Cambridge Positioning Systems to incorporate its proprietary location technology into some of ARM's microprocessors. A spokesman for ARM said, "ARM supports all its partners equally and is technology-agnostic," meaning the Parthus deal is a nonexclusive arrangement. It should also be noted, though, that ARM is a major shareholder in Parthus, having invested $2 million in the company in May.
Irrational exuberance in the stock price notwithstanding, there is much to be said for the future of mobile location technologies, especially of the sort Parthus is developing.
Find Me the Money
According to Faulk Muller Veerse of the research and investment firm Durlacher, "the ability to locate the position of a mobile device is key to providing geographically specific information that stimulates mobile commerce."
Industry forecasts for the value of location services, such as buying a movie ticket or finding the nearest Italian restaurant, are pegged at around $16.5 billion by 2005. Ericsson is predicting that three-quarters of tasks carried out over the mobile phone will utilize location technology.
Kevin Fielding, chief operating officer of Parthus, says the value of GPS technology is enhanced by the fact that there are few companies left working in this area. "Most, such as Texas Instruments and Motorola (MOT:NYSE - news), got out of this about six years ago," he says. That presumably explains why Qualcomm was willing to pay $1 billion to acquire GPS developer Snaptrack in March of this year.
Regulation is also doing its part to push the technology. The U.S. Federal Communications Commission is forcing all mobile operators by 2001 to offer emergency services that allow a caller's location to be determined within a radius of 125 meters. The European Union wants something similar by 2002.
The GPS technology that Parthus is developing also has many advantages over other location technologies. GPS is a system that consists of 24 satellites circling the earth, which can pinpoint the position of a receiver such as that in a mobile phone to within 5 meters. This is especially important when locating, say, a lost child in a street. As such, it is the preferred technology of the FCC.
Because GPS does not rely on the triangulation of base stations, like other location technologies, it is effective in remote areas with few base stations. There is also the privacy issue. GPS allows a mobile-phone user to simply switch off the location technology, while other technologies depend on network operators knowing where the user is and then passing on that information to other parties.
Nevertheless, proponents of Cambridge's positioning technology would argue that GPS does not yet work inside buildings and is also relatively expensive to implement since it requires upgrades to every handset. On the other hand, they argue, Cambridge's system needs only changes to the base stations.
These arguments are likely to continue for some time before it's clear which technology, if any, becomes dominant. Yet their very existence contrasts with the certainty with which investors have piled into the shares of Parthus recently in the belief that they have located a surefire winner. |
