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Quantenna in good shape but shares industry pain from trade wars

Quantenna has ridden the WiFi boom as the world’s principal dedicated chip vendor in the field and yet remains undervalued after reporting its latest financial results for calendar 2018 with annual revenues up 25% at $220.5 million. It ended the year even more strongly with Q4 revenue up 52% over the last three months of 2017 at $62.6 million, which was also 5% up on Q3. Operating profit doubled to $20 million, or 9% of revenue, compared to $10 million in 2017 or 6% of revenue. This was on the non-GAAP accounting method more in line with international reporting practice than the rather prescriptive US GAAP, which has rules such as having to report expenses in the same period as the revenues associated with them, even if the billing was earlier.

 

These results are better than those of Quantenna’s immediate competitors, where Broadcom, Qualcomm and Marvell spring to mind, although since they are much bigger and not dedicated just to WiFi, this is really comparing apples with oranges. Nonetheless, Broadcom did best of these last year with 2018 revenues up 12% at $5.45 billion, while Marvell was up 4.7% at $2.41 billion and Qualcomm up 2.4% at $22.7 billion.

As often when financial results come out, the share price was affected more by Quantenna’s predictions of the future than the report of the immediate past which had already been largely discounted, so that slipped by 4.2% on the revenue guidance for the quarter we are currently in, Q1 2019. That guidance was lower than expected with Quantenna citing the impact on its supply chains of global trading conditions and especially the ongoing standoff between the US and China.

This is despite the fact that Quantenna stock looks cheap by almost all standard assessment methods. On the price to earnings growth (PEG) ratio widely used to assess tech stocks, Quantenna measures 0.47, which indicates its value should be higher than it is. A PEG ratio of 1 is supposed to equate to parity with a lower figure indicating under-valuation and a higher one over-valuation.

For this reason, financial analysts rate Quantenna stock at 1.8 on the desirability scale where 1.0 suggests a Strong Buy, 2.0 still a Buy, 3.0 a Hold, 4.0 a Sell and 5.0 a Stong Sell. Furthermore, when we dive down into the technology and recent customer wins, such assessments look close to the money or even mildly pessimistic.

Like other WiFi technology firms, whether in silicon or software, Quantenna is competing on performance, resilience and coverage with the aim of delivering consistent QoS across the whole premise, whether a home, enterprise office or public space. Its success has been founded largely on being ahead of the game so that deploying impending standards in its products ahead of ratification has been crucial. This of course is combined with a guarantee that products, primarily access points, home gateways, routers and repeaters, will be fully compatible with those standards when ratified.

This shows up with the latest standard now called WiFi 6, a name still causing some confusion. This is because the WiFi Alliance decided to simplify WiFi standard naming from the original designations set by the IEEE. As a result, the latest version, originally called 802.11ax, coming out this year, has been renamed WiFi 6. Then 802.11ac, released in 2014, is now WiFi 5 and 802.11n, which came out in 2009, is WiFi 4. The earlier versions now extinct have also been folded into the new naming structure for convenience even though they will hardly ever be referred to. So, WiFi 1 would have been 802.11b, released in 1999, while 802.11a, released in the same year, becomes WiFi 2 and 802.11g, released in 2003, becomes WiFi 3.

At the same time, the WiFi Alliance announced it would like software vendors to replace the old IEEE titles with these numbers in their documentation and references so that users can tell easily what version their WiFi network is.

The WiFi Alliance announced a few weeks ago in January 2019 that it plans to certify WiFi 6 in Q3 this year, which would set the stage for broad adoption of the standard. Meanwhile, Quantenna is busy marketing its pre-standards version in keeping with its established strategy, nailing Telefonica as its biggest scalp so far. This would never have happened last time round when WiFi 5, or 802.11ac as it then was, gained certification in 2014, when Quantenna was still small and virtually unknown beyond keener WiFi watchers.

WiFi 6 builds on WiFi 5, which enabled headline bit rates of 1.3 Gbps and up to around 400 Mbps in the real world, over four different spatial streams in the 5GHz band using MIMO. WiFi 6 also runs over four MIMO streams and again in 5 GHz, but with a major advance in spectral efficiency through incorporation of OFDM (orthogonal frequency division multiplex). Some companies such as Huawei have claimed this boosts theoretical maximum bandwidth 10 times, but in practice it is more like five at this stage, with 11 Gbps being about the maximum demonstrated so far. This translates into real world data rates of around 2 Gbps.

OFDM has already been deployed in wide area wireless networks, including the DVB-T2 second generation digital terrestrial and also 4G/LTE, to boost data rates. Like some other transmission technologies, it is based on theoretical work done years ago, dating back to a seminal paper published by Bell Labs in 1966, but has had to wait for the electronic components to catch up, along with associated software development. This relies on two related developments, firstly splitting each data symbol across multiple low bit rate carriers which can then be packed closely together with overlaps, greatly increasing both throughput and also resilience to inter-symbol interference.

This in turn feeds off the second development, the orthogonality, which renders each symbol totally immune from interference from any of the others. This exploits the waveform of the radio signals which can be represented by oscillating sine waves with peaks and troughs. If the multiple low bit rate carriers are separated by spaces corresponding to multiples of the wave period, then with the appropriate modulation and demodulation techniques their sum total is zero since the peaks cancel out the troughs from neighboring carriers. Effectively then they are all at right angles, or “orthogonal”. Only the actual signal carrying each symbol then has a non-zero value that can be determined through mathematical integration.

This elegant and simple method has already yielded huge benefits for wireless communication and is about to for WiFi. Quantenna is in the vanguard bringing OFDM to market with two versions of WiFi 6, one called 5G ax and the other 10G ax, sticking to the old IEEE abbreviations to add confusion. The 10 G ax uses dual band to aggregate two 5G channels and this is the first time Quantenna has offered two product families ahead of the standard being certified.

We can single out two other products that could be called USPs (Unique Selling Points) for Quantenna. One is the Spartan family launched in September 2017, so called we assume because it allows consumers to be “spartan” as they upgrade their WiFi capacity as cheaply as possible. This has proved successful by extending the life of legacy home gateways with a significant performance lift, either by boosting existing APs (Access Points) or adding wireless extenders and mesh nodes to increase coverage. Initially this allowed device customers such as AirTies, Zyxel, Mitrastar, Askey, Icotera and HiWiFi, to build single-band and dual-band products based on Quantenna’s QV840 and QV860 chipsets.

Then mesh is the other key plank in the firm’s strategy, but that is hardly unique as it has been recognized as fundamental to WiFi performance and coverage. Mesh makes wireless networks operate more like wired ones with peered radio nodes working like traditional APs connected to a wired port. It extends the range by aggregating nodes that boost the signal as well as cooperatively transmitting data between points, with forwarding decisions based on knowledge of the network topology and also transient conditions.

Quantenna has been collaborating with various vendors of mesh technology, with Plume Design the most recently announced partner at IBC 2018, around the latest WiFi 6 chipsets. This adds Plume’s Adaptive WiFi technology, run from the cloud, adapting to internet usage in the home and allocating bandwidth dynamically within the mesh.

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