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The far-flung digital subscriber line (DSL) market has come under fire from investors recently as some of the better-known players have watched their share prices unceremoniously fall out of bed. Most notably, DSL wholesalers such as Covad Technologies (Nasdaq: COVD), NorthPoint Communications (Nasdaq: NPNT), and Rhythms NetConnections (Nasdaq: RTHM) have taken to trading lower lately as folks have started to question whether anyone can make money by selling high-speed DSL services to consumers and businesses.
One firm that is positioned to ride the DSL market wave to profitability, however, appears to be Virata Corp. (Nasdaq: VRTA), a company that is pretty far removed from the slip-sliding-away wholesalers in the DSL ecosystem. Instead of offering DSL service itself, Virata develops the communications processors and software modules that go into dedicated DSL hardware devices such as modems, gateways, and routers.
Today, Virata moved up on a deal to buy privately held symmetric DSL technology shop Excess Bandwidth for about $315 million in stock. On top of the acquisition, Virata also forecasted fiscal Q1 revenues between $25 million and $27 million, more than doubling last quarter's $12 million count, off a sequential tripling in its communications processor shipments. The higher sales guidance puts the company on a pace to perhaps have positive operating cash flow for the first time during the current quarter, with a shot at turning its first profit ahead of schedule.
The DSL sector may sound like the investing backwater of the communications chip sector, but that may be about to change as Virata's competitive positioning within the market strengthens. A typical ADSL (with the A standing for asymmetric) modem is a rather complicated device, incorporating analog front-end, transceiver, and data pump chips. Tying all of those various parts together and overseeing the entire modem sub-system is a communications processor, which is where Virata's expertise comes in. The main rival here is Motorola (NYSE: MOT). But Virata holds a key advantage over its much larger competitor as its design technologies incorporate both the processor and the proprietary software needed to make the whole ball of silicon work properly.
The hardware-software double dip is a major plus for Virata, as it allows the company to work alongside the modem manufacturer throughout the design process and chip in technical support when needed. The end result is an optimally designed product at a lower cost and the crucial opportunity for a faster time-to-market. Today's acquisition of Excess Bandwidth adds SDSL technologies to balance out Virata's existing ADSL presence and is aimed at making the customer's design process even smoother through an increased in-house base of knowledge. The company's three other acquisitions within the last two years were all geared with a similar, broadening-the-expertise purpose in mind.
In a burgeoning market such as broadband processors, building advantages through size and scope will be crucial for an upstart such as Virata. There's a lot at stake, and chip monsters such as Motorola, Texas Instruments (NYSE: TXN), and Intel (Nasdaq: INTC) are all roaming around the ecosystem. Still, any chip-inclined investor seeking out ways to profit in today's broadband build-out needs to know about the DSL market and Virata. Some good ways to start building a base of knowledge would be with some ground-level investigation on the company's website and an examination of its recent 10-K annual report.
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