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2 May 2019

Could Quantenna be dragged from comfort zone to Raptor enclosure?

Quantenna proved why ON Semiconductor just paid $1.1 billion to buy the business in its first financial report since the surprise acquisition was announced around six weeks ago. Revenue spiked 27.8% to $57.7 million for Q1 2019 – a feat for which Quantenna’s 11ac Wave 3 10G strategy was given a standing ovation.

But it was the breakdown by region which stood out like a sore thumb, as Quantenna added over $12 million worth of business across Asia Pacific in the year period, now accounting for 92% of its total quarterly revenue, up from 90% a year earlier.

Quantenna lists three mystery OEM customers as contributing 10% or more of revenue during the first quarter, whereby the biggest – coined customer A – grew from 18% to 26% of Quantenna’s total revenues in a year. Anonymous customers B and C contributed 16% and 10% respectively in Q1 2018 but with no year on year growth confirmed for the latest quarter.

Despite being a US company and being in the process of being bought by a US company, Quantenna expects the majority of business to continue to be delivered outside the US. It’s worth remembering the major Asia Pacific OEMs Quantenna ships chipsets to end up selling various WiFi APs, gateways, set tops and repeaters to North American and Western European service providers – notably Comcast, Cox Communications and Telefonica – so we expect an escalation in this trend.

An additional $12.6 million in revenue for the quarter helped deflate net loss by 66% to $1.1 million, while gross profit jumped 30% to $29.5 million – an enviable gross margin of 51.2%. Higher unit volumes of 11ac product shipments spearheaded an increase in WiFi solutions sales.

WiFi 6 (802.11ax) product sales were cited as another healthy growth area, with Quantenna’s 802.11ac 8×8 QSR-10G chipset being one of the first to market in September 2015. However, Quantenna warned that competitors are coming in hot and fast. “In February 2017, Qualcomm announced a new 8×8 product based on the draft WiFi 6 standard that may compete with our product. In addition, in August 2017, Broadcom announced new 4×4 WiFi connectivity solutions based on the draft WiFi 6 standard, and in January 2018, Intel announced new chipsets based on the draft WiFi 6 standard for mainstream 2×2 and 4×4 home routers and gateways. We expect our competitors will also introduce new products based on new standards and other next generation technologies in the future.”

The WiFi silicon specialist also provided an update on the takeover, although this comprised the bare minimum details given how the management team decided against hosting an investor conference call – so we should prepare for future communications from Quantenna to be increasingly vague. Going by a statement from Quantenna this week, it appears new parent On Semi plans to merge Quantenna with an existing subsidiary called Raptor Operations Sub, which peculiarly has virtually no online presence. The name Raptor Operations doesn’t appear anywhere outside this week’s financial filing, so we have asked Quantenna to shine some light on Raptor, including which specific fields Raptor operates in and what the roadmap looks like, so we aim to provide an update soon.

Quantenna also issued a warning to investors about the impending merger. “There is potential uncertainty about the direction of our product offerings and the support and service of our products after the merger is consummated. For example, the announcement or pendency of the merger could have an adverse effect on our revenue and business if our customers delay, defer or cancel purchases or design win opportunities pending completion of the merger.” One example being a potential termination fee of $32.2 million.

So, while we are waiting on more detail regarding the shadowy Raptor Operations, it’s more than likely the ON Semiconductor subsidiary sits somewhere in the wireless space, while we understand ON Semi’s largest sector is automotive. The wireless, industrial and consumer segments are all growing quickly, and we have also come to associate Quantenna’s new parent company as offering more miscellaneous services including various IoT-focused designs ranging from wearables to pig-implantable temperature sensors and low-power Bluetooth SoCs. Hence why we suggested Quantenna’s WiFi expertise could be transferred to unfamiliar territory.