Tut Systems prices IPO at $18 per share
CNET - January 28, 1999, 3:00 p.m. PT
Networking upstart Tut Systems today set its initial public offering
price at the high-end of its range amid strong investor demand.
Tut, which designs, develops, and markets communications products
for high-speed Internet access over telephone wires, priced its IPO at
$18 a share.
Tut had earlier raised its pricing range to $16 to $18 a share, up from
its initial range of $14 to $16 a share. The company will raise $45
million in capital with its IPO.
Tut, which previously received $39 million in investments from AT&T,
Microsoft, and venture capital firms, plans to start trading with 2.5
million shares tomorrow under the ticker "TUTS."
In the past year, Tut has seen its revenue rise to $10.6 million, up 71
percent over the previous year.
Most of the company's revenue comes from sales of its XL products,
which extend networks based on Ethernet--the dominant means to
connect PCs and server systems together in an office or
building--across corporate and educational campuses using copper
telephone lines.
But the sales price for the XL products have declined recently on
increased competition, and the company expects the trend to
continue, according to its filing with the Securities and Exchange
Commission.
Tut's main competitors in corporate and educational networking
include PairGain Technologies, Paradyne, Westell Technologies,
and networking giant Cisco Systems.
Others with their war chests aimed at the home networking
market include industry powerhouses Intel and 3Com.
Tut's net loss widened to nearly $14 million last year, compared
with $9.4 million a year earlier. And at the close of last year, the
company had a deficit of $44.4 million.
Looking for a product Home Run Most of Tut's expenses last year
were related to the development of its HomeRun technology, which
enables Ethernet-based networks to work over existing telephone
wires in the home. Additionally, the manufacturing and marketing of
its Expresso products, which provide high-speed data access over
existing local loop copper wires, also increased costs, the company
said in its SEC filing.
But the eight-year-old, 100-employee-strong firm is banking on its
so-called Expresso GS and Expresso products to drive revenue and
reach profitability in the future.
The success of the Expresso MDU products, however, in part hinges on
fast and widespread adoption of the company's HomeRun technology
for the home networking market. This embedded technology would be
used in integrated circuits and consumer devices.
Tut, in its SEC filing, said it plans to use $2.5 million of the proceeds
from its public offering to buy another company's intellectual property,
which it previously had to pay royalties to use. The name of the third
party was not disclosed. Craig Stouffer, Tut's vice president of
marketing, declined to comment yesterday, citing the quiet period
before Tut goes public.
Underwriters for the offering include Lehman Brothers, Dain Rauscher
Wessels, and Salomon Smith Barney. One portfolio manager who had
seen the company's presentation to potential investors said his firm
may participate in the offering, but only as a short-term holder of the
stock.
"I'll look at it, but won't participate beyond a flip [of the stock].
We own 3Com and that's our pick for home networking," said
the portfolio manager, who declined to be named. "There are
more attractive opportunities of where to put our money."
He added, however, that Tut is playing its cards in the right
industry.
"There's a lot of activity in the area of the networked home,"
he said. "There are two ways to look at this. There is the
PC-based networked home or the network based on the TV or
set-top box. Tut is delivering solutions along the PC lines and
its certainly viable. The PC is further along at developing
protocols than the consumer electronic guys."
Home networking is hot
Analysts say it's smart for Tut to bank on home networking for
its future because they believe the market for connecting
home PCs with consumer devices will explode in the next few
years.
Demand will be driven by faster Internet access, cheap prices
for PCs, and the increase in telecommuters who may need
networked PCs, according to a recent study by the Yankee
Group.
For example, the number of homes with multiple PCs is
expected to rise from 44 percent of U.S. households in 1998
to 54 percent in 2001. During that same time span,
households with cable or DSL Internet access will increase
from 450,000 to 4.5 million.
Analyst DavidPaul Doyle says Tut is the market leader in
home phone line technology, but faces stiff competition from
other home networking companies, such as Epigram.
During the 1998 third quarter, the Home Phoneline
Networking Alliance chose Tut's 1 mbps technology as the
standard for networking PCs in the home using the phone
line--and the company has reaped the benefits ever since.
Tut receives licensing fees from more than 20 vendors,
including Intel, Compaq, and Diamond Multimedia using the
1 mbps technology for their products. But the company faces
a tough standards battle with Epigram and possibly others over
the 10 mbps standard, which will be the second version of the
HomePNA specification, Doyle said.
Battle over megabits
"Right now, Tut Systems is really hot. They are the only tech
supplier in the home market for current products today. But
that won't last throughout the year unless they continue to
create innovative technology," he said. "10 mbps is coming
out by the third quarter, which means the 1 mbps standard will
be left in the dust fairly quickly."
Doyle said Epigram, which has 3Com among its investors, is
ahead of Tut in developing 10 mbps technology and that the
HomePNA standards body will eventually choose Epigram's
technology with some features from other vendors thrown in.
"Epigram's technology is more robust and backward
compatible [to 1Mbps]. Tut really hasn't shown a
demonstrable 10 mbps technology," he said.
Tut executives, however, disagree that their market leadership
is short-lived.
Stouffer, Tut's vice president of marketing, said the company
has developed 10 mbps technology, but has kept it under
wraps. "We're not standing still. We're developing future
generation products, but we've decided to keep our efforts
quiet," he said.
Tut will submit its 10 mbps technology for the HomePNA later
this quarter, he said. If Tut loses the standards battle for the
2.0 specification, the company will concentrate on building
access concentrators, he said. And Tut will still reap the
benefits of owning the technology in the 1.0 specification.
"They need to continue to be on the cutting edge of
bandwidth and technology," Doyle said.
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