Quantenna Communications is probably the only company in the world that right now is able to build WiFi chips that use genuine beamforming across 4 antennas, despite that capability and beyond being in the standard for 802.11ac, the next generation of WiFi. Which is why it is a hot property and why ST Micro has just signed up to ‘borrow’ its technology in a non-exclusive license that will see 4 x 4 antenna arrays as well as other MIMO configurations like 3×3 and 2×2, built into the ST Micro product range.
This is a significant win for Quantenna, and will help ST Micro, one of the world’s largest set top SoC vendors keep up with rivals like Broadcom, which already put both WiFi and set top function into many of its SoCs.
But to some extent this is Quantenna using up its ‘get out of jail free’ card in the game of WiFi monopoly. It would have rather won all of the deals that ST Micro can now go after on its own, rather than take pure licensing revenue. To some extent there has been a market change that has eclipsed what Quantenna set out to do in 2006 when it was founded. Homes gateways with set top function are replacing pure set top devices, and while, for the most part WiFi can be a separate chip in the same device, the shift to lower and lower silicon geometries invites these components to be combined, if for nothing else other than power savings. The trend is also likely to hit Quantenna rival Celeno as well.
Quantenna has attracted a number of investment rounds since 2006, many of them well documented and some not so well. In 2008 Quantenna never mentioned a further cash injection and in 2011 it never said how much Telefonica put into the pot, so to some extent there is some guesswork in the table below.
But it has taken on over $162 million and VC investors like to believe that their successful investments go up in value at 30% per annum. They have a number of standard instruments with names like ‘price protection’ which ensure that this happens. Price Protection means that if VCs are asked to invest in a company at a later stage and cannot justify it based on something greater than its earlier value, then it puts equity in at a lower value. In order to protect the earlier money, it does a notional calculation of how many shares it COULD have bought with the first round, at the new price, and if that’s more, it forces the company to issue extra shares to itself, diluting management and other shareholders.
Given the valuation that Quantenna must now be required to achieve, it is likely to have already happened there, and its management must be fairly desperate to exit the company before they are diluted out of existence. The company has money right now, but we cannot accept that it has reduced its cash burn significantly, and model it as going down not up. If our assumptions are right Quantenna was faced with finding more money by the middle of next year, or risk having to cut back on development. And then this deal came along, possibly driven by one of the investors.
Doing a deal like this with ST Micro, one of the largest silicon vendors in the world, means that Quantenna is giving a helping hand to a potential rival. ST is the number one semiconductor maker in Europe, diversified across a range of microcontrollers, set tops, flash memory, and automotive chips. It had revenues of $8.5 billion last year.
At the CES in January the two companies combined to produce a wireless set top reference design, to reduce time to market for customers. The match between the beamforming and MIMO capabilities of Quantenna and the video delivery requirements of either a home gateway, set top or multiroom DVR, is a very good one and they put the ST STiH207 SoC with Quantenna’s QHS710 4×4 MIMO chipset.
What the company is trying to do is kill that burn rate stone dead and do an IPR deal that will almost certainly mean no expenses out, except for a few engineers being shipped over to the ST labs, but which will be based on revenues that come out of the designs. Our guess is that ST Micro will have had to pay some money up front for this deal, and that additional revenues will start well into 2014, as products come off the conveyor belt from ST Micro partners.
If Quantenna cannot turn a profit by the end of 2014, it will have to ask for more money and its initial investors will eat up most of the equity. Its last round of funding was clearly precarious, involving as it did a state run Russian bank with a mission to invest in Nano Technology. Somehow Quantenna has to shift sideways into research into some aspect of nanotech, to fulfill its side of the bargain, something that would involve further cash burn. Other investors included Bright Capital, a Russian-US bridge investor as well as previous investors Sequoia, DAG Ventures, Grazia, Sigma Partners, Southern Cross and Venrock Associates.
The only other company that has anything like this capability to create longer and stronger WiFi signals, less prone to errors, for carrying video, is Israel’s Celeno, which has been behind WiFi video signals on devices at China Telecom, Deutsche Telekom, Liberty Global and Bouygues Telecom. Celeno has built its OptimizAIR around the 802.11n standard and says that it has been successful at 75 operators. For its part Quantenna has only won a single tier one in Europe at Swisscom.
That Celeno success has largely been taken out of Quantenna’s hide and has left it in a quandary over how to claw back market share against a company that it believes it has superior technology to, but which came to market a full two years before it did. Celeno has been the only chip that has won in a head to head with the Quantenna chip at an operator. Even this 11n technology enables the simultaneous distribution of up to eight 1080p HD resolution video streams.
But Quantenna was one of the first to move when the new 802.11ac standard came out, and had a 4 x 4 MIMO version out before the standard was complete, telling us it would go through retail channels and that it had little or no place in operator’s TV plans. Which makes it doubly strange that ST Micro is picking the Quantenna Beamforming MIMO technology on 11ac, in an area which mostly goes through pay TV operators.
Clearly 802.11ac has taken off with devices coming out of the major WiFi makers like Broadcom, although once again, none of them reaching 4 antennas, which gives both better throughput and deeper home penetration. So Broadcom remains a potential target customer for the IPR that Quantenna holds in this area.
And we can see it ending up there. In our spreadsheet calculations if the investors are still carry a 30% compound growth rate through on their investments, then the very lowest valuation has to be over $300 million and on the way to $375 million later this year. Given there is not a strong IPO market, the company will either have to be sold and likely at a far lower value than that (we do not know current revenues, but would think that they might impute a value closer to $150 million).
So either ST tries out this product line and it takes off and in order to prevent it paying out lots of royalties and the technology being hawked around to its rivals, it buys Quantenna , or it sells very few, due to the grip Celeno has on this market and stops making them and gives up.
Right now ST is not a recognized maker of WiFi chips and may well use this IPR deal to begin making WiFi chips in much larger volumes, and go up against Qualcomm Atheros, Broadcom and Marvell. But we would not bank on it doing that successfully.