What’s a Femtocell — $12 Billion Market by 2012?

Small-Cap Confidential pick from Tom Garrity

By Travis Johnson, Stock Gumshoe, October 21, 2009


Today we’ve got a bit of a teaser email from Timothy Lutts over at Cabot, for their Small-Cap Confidential newsletter. It’s got an interesting pitch with this “femtocell” business — he leads in by telling us how frustrated he is with dropped calls on AT&T near his home in Massachusetts thanks to the overtaxed network (which, in turn, is caused by the iPhone that he loves). As an iPhone user myself I can share some of the frustration, though I rarely have trouble down here in DC — but I do lose the signal in my house.

And a femtocell is apparently the solution. It’s a little cell transmitter thingy that apparently uses your broadband connection to connect to the phone network, instead of relying on a weak cellular signal in the bowels of your McMansion. I have no idea how or if it works, but they’re testing them in a few markets and Lutts tells us that he’s got a company that’s primed to do well in this market, even though the actual product isn’t yet a measurable market force.

Here’s how he teases it:

“My recommendation is an attempted home-run swing with an unknown little player in the femtocell market, a company whose revenues were just $4.9 million in the second quarter … mainly from non-femtocell electronics.

“The company, located here in Massachusetts, has been working with Alcatel-Lucent, Motorola, Hitachi, Nokia Siemens, Thompson Electronics and Pirelli … and most of all, Nortel. But Nortel filed for bankruptcy back in January, which not only slowed business down but also made the stock pretty cheap. Since then, Nortel’s relevant intellectual assets have been acquired by Ericsson (for $1.13 billion), and I have little doubt that Ericsson will be a big player in the femtocell market using this company’s technology.

“In the meantime, the company has been recently buying its stock back, a clear indication of how cheap management thinks it is. (It’s currently
trading around 7.) Another fan of the stock is Tom Garrity, editor of Cabot Small-Cap Confidential, who recommended the stock back in July, when
it was trading at 6.”

OK, so that’s a little slice of clue heaven — but there’s more, he excerpts part of Garrity’s recommendation letter to get us a wee bit more tantalized:

“The average operator’s core traffic, measured in terabytes, is up some 35 times in the past year. Data is flooding the network and carriers are struggling to stay afloat. [Company X] is here to teach them how to swim.

“[Company X’s] established relationships with the biggest players in the telecom industry have us imagining a day when its superior technology is
not only dominant, but ubiquitous. In other words, we think this company is setting a new industry standard. [Company X’s] wireless technologies
and its network management software are second to none. Investors have an opportunity here to get in at the beginning of a period of industry-transforming growth of a kind that’s not seen every day.”

So who is this little “home run swing?” Thinkolator sez it must be …

Airvana (AIRV)

As Lutts notes, it is headquartered not that far from his home turf in MA (they’re in Chelmsford, Cabot is in Salem), and this is a company that, although they work on a broad variety of technologies in the mobile broadband area, seems to be pretty focused on the potential of femtocell technology. If you’re curious about the technology and what it means, they give a nice pitch for it on their website here. And in order to draw more attention to the need for their products, they recently released a study that claims smartphones have eight times the network impact of regular cellphones — as probably most facebook-checking, app-downloading, web-surfing iPhone users would attest.

Airvana is profitable, but clearly priced for growth — they’re expected to close out the year with 27 cents in earnings this year, and analysts guess that they’ll earn about 40 cents a share next year, so the forward PE is right around 18 (the shares are still at almost exactly $7, and they were at $6 in July, as teased). Those numbers are from the analyst projections published by Yahoo Finance, Morningstar uses somewhat more optimistic ones and puts the forward PE ratio at about 14. The business is extremely seasonal, I assume because their customers do their buying at the end of the year — it appears that they lose money in every other quarter of the year and make it up with much higher sales in the fourth quarter, so over the last twelve months they’ve been, in total, unprofitable but apparently a big enough boost is expected this quarter to bring them to annual profitability.

So … I know that Airvana does work with all those partners that Lutts mentions in the teaser, that they are hoping to play a significant role in the femtocell market as well as in other mobile broadband technologies, and that they are on the edge of profitability and growing, though analysts have, over the last several months, brought estimates down for next year.

I don’t know if they’ll really be a great “home run swing” investment, but with decent growth forecast and a fairly reasonable forward PE for a small tech company in a growing sector (market cap about $400 million), I’ll confess that I’m thinking now about taking a closer look for my own account … and about maybe lining up to get one of those femtocell thingamajigs. The flip side, of course, is that in the telecom equipment sector things tend to get extremely competitive, and I have no idea as of yet how many femtocell players there are or if Airvana has any sustainable competitive advantage — if you’re a fan or foe of AIRV, feel free to let us know what you think with a comment below.

And we do not currently have any reviews on file for Cabot’s Small Cap Confidential newsletter, so click here if you’ve subscribed and would like to share your opinion — or you can see the reviews of other Cabot offerings here, they’ve got a couple letters that are pretty well-reviewed right now.

guest

12345

This site uses Akismet to reduce spam. Learn how your comment data is processed.

11 Comments
Inline Feedbacks
View all comments
Dennis
Guest
Dennis
October 21, 2009 4:15 pm

Don’t know much about this subject, but here’s an article that ran in April 2008 that names other companies engaged in this technology.

Nokia Siemens Seeking Tawainese FemtoCell Production

Nokia Siemens Networks is reported to be in talks with several Taiwan based manufacturers over plans for the joint production of femtocell base stations. The company is trying to drive the price down from the current average of US$250 per unit to around US$100, which would make it a lot easier for operators to start offering them as consumer products for Fixed-Mobile services in the home.

The Taiwan based DigiTimes, citing sources at Nokia Siemens Taiwan said that the company is already cooperating with a number of companies including Thomson, Airvana, Ubiquisys, Radioframe and Netgear.

Mike Wang, General Manager for Taiwan, Hong Kong, and Macau told the paper that they are now in talks with other network-equipment makers, including Gemtek Technology and Accton Technology.

At the begining of the year, Nokia Siemens Networks signed an agreement with Ubiquisys to cooperate in the marketing and sales of 3G femtocells to mobile operators. The company had prior marketing deals with RadioFrame Networks, Thomson and Airvana.

On the web: DigiTimes

Posted to the site on 23rd April 2008

Add a Topic
2494
Add a Topic
2494
Add a Topic
2494
Ron Ames
Guest
Ron Ames
October 21, 2009 4:18 pm

I get the daily notes from cabot as i used to be asubscriber to theiromnthly best pick. Read yesterdays letter and did the search. I came up with 3 possibilities 1-Airvana, 2-Starent Networks and 3- Acme Packet. I homed in on Airvana too but are keeping the other two as compitition.

Love your “thinkolater”

Ron A

Add a Topic
1640
Add a Topic
2469
Add a Topic
1263
Min
Guest
Min
October 21, 2009 5:55 pm

See below a recent article about Femtocell. I found this on dialaphone.co.uk which has been covering Femtocell techonology for awhile now.

Demand for 3G Femtocells Increasing but Market Supply Remains Low
Post by Kathryn Posted September 15th, 2009 by Kathryn in Research, Mobile Technology, Industry News

Femtocell TechnologyAt around this time last year we published an article about how femtocell technology was finally moving forward. Although there has been some progress in the development of this mobile technology since that time, most companies are still drawing out the process of femtocell trials rather than making this technology available to the public. This is in spite of the fact that there has been a significant increase in demand for the technology. Customers today not only want access to femtocell technology but also want it to be 3G femtocell technology which is only just beginning to be released. Experts are pegging 2010 as the year that this technology really takes off but we’ll have to just wait and see what the market reveals.

What is Femtocell Technology?

In brief, a femtocell is a small base station that can be installed in the home or office. Its main purpose is to improve call quality during indoor calls. It connects to your broadband network which reduces the drain that mobile broadband services place on carriers (and therefore increases the carrier’s network capacity so that you can get better call service). A major change to the technology that is taking place right now is an emphasis on 3G femtocell technology which boosts indoor call quality for 3G phones.

Demand for 3G Femtocell Technology

There is a high demand for femtocell technology in the market today. There is a specific demand for 3G femtocell technology. This demand comes from both individuals and businesses but is specifically driven by 3G phone customers who want to be able to utilized their advanced smartphones to full capacity in their homes and who are having trouble doing so because of limited coverage and capacity in their network areas. Juniper Research reports that this demand is driving the growth of femtocell deployment and predicts that there will be 15 million subscribers to the technology as early as 2012. These subscribers will be based primarily in North America, Western Europe and China.

Femtocell technology

Femtocells in the Market Today

We keep hearing rumors about femtocell trials and technology but there are very few femtocells that are actively selling in the market yet today. Those carriers that do offer this solution stand out as leaders in this emerging area of mobile technology. Examples of these few carriers include:

• Vodafone. This UK carrier launched a 3G femtocell solution in July of this year called Access Gateway. The launch comes after only six months of testing. Their solution requires an existing broadband connection and allows for up to 4 3G calls to be placed at once through the connection. The phones that are allowed to use the solution must be registered with Vodafone in advance. The price is a £160 one time payment or a smaller monthly fee.
• Sprint. In the United States, the company that has been most successful in deploying femtocell technology to date has been Sprint which rolled out a nationwide option called Airave in fall 2008.
• Verizon. Also in the United States, this company created a femtocell model mirroring that of Sprint’s and released it later in 2008. The problem with both Verizon and Sprint is that the technology is primarily used in areas that are already known for poor call coverage quality and therefore aren’t consistent solutions for everyone in the network. In fact, it is notable that neither company overtly advertises this solution and tends instead to only offer it to customers who are threatening to switch carriers because of poor coverage.

Trials and Plans for 3G Femtocells

The solutions that are offered by Sprint and Verizon in the US are 2G femtocell solutions. Only Vodafone has successfully launched a 3G femtocell device intended for residential customers. But there are plans in the works from several companies:

• AT&T. Many people love their iPhones but hate the fact that they get terrible indoor call quality on their devices. AT&T has been promising a 3G femtocell solution to be released sometime in 2009. However, as of the writing of this article, there is still no set date for when this will be released.
• Samsung. This company is working on making a new 3G-compatible femtocell device that would be compatible with several carriers. Rumors indicate it should be available in early 2010.
• Ubiquisys. In terms of femtocell vendors, the company to watch right now seems to be Ubiquisys. They’ve recently received $11 million in new funding to assist in deploying 3G femtocell solutions both residentially and commercially. The CEO of the company believes that rapid deployments of the technology will be possible due to current market demands.

What’s Taking So Long?

One question that people who are familiar with femtocells keep asking is “why is this all taking so long?” The carriers that are testing out femtocell technology seem to be engaged in lengthy trials that don’t result in any clear cut answers as to when the technology will be deployed nationally / globally. There are a few reasons for this:

• A hesitant market. Although all research indicates that customers will buy femtocells, many carriers are concerned that this new technology will flop. They are taking their time putting out the devices because they want to reduce their risk of profit losses.
• Unsure about pricing. This is a new market so carriers aren’t quite sure how to price the new devices. In Europe vendors are quoting a suggested price of euro 150 for stand-alone femtocell devices but this excludes added features like interference management which can boost the price to euro 275. Multi-functional devices are even pricier. Carriers aren’t sure quite how to introduce these pricey devices to their customers.
• Changing technology. The shift that has taken place from 2G to 3G requires changes in the technology that has been created in femtocell development to date.
• Waiting for applications. Telstra in Australia reports that its customers already get good indoor coverage so there’s no need to deploy femtocell technology yet but agrees that it would “get in the game” once additional applications for the technology became clear to them.
• Troubleshooting legal issues. Finally, this technology is new enough that there remain some legal issues to be worked out. How do we prevent other people from jumping on to the customer’s device? What options do we have for making sure emergency calls can go through the device in case of a power outage? How do we comply with spectrum requirements in deploying these devices? These are all questions that carriers have to answer as they start to release femtocells to the market which explains some of the delay in the process.

The Future of Femtocell Technology

Research by Juniper suggests that the future of femtocell technology is going to proceed in a rather interesting manner. It is believed that femtocells will first take off in the market as standalone devices. Sales of these devices will begin in 2010 and will rapidly increase throughout 2011 and 2012. However, it is believed that there will then be increased attention to incorporating femtocell technology into multi-functional devices. For example, the technology might be incorporated into your home’s wireless router. Juniper predicts that by 2014 it is these integrated multi-purpose femtocell units that will really be receiving attention in the market. 5 years from now we should all be familiar with how femtocells work in the home.

Add a Topic
108
Add a Topic
2664
Add a Topic
2664
Robert Gifford
Guest
October 21, 2009 6:05 pm