Beceem's IPO Plans: Positive for Clearwire

Beceem has filed its S-1, paving the way for its IPO in the coming months.
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On Friday after the close of market, Beceem filed its S-1, paving the way for its IPO in the coming months. The investors are mostly venture capitalists and some management participation, with Intel (INTC) - Get Report being the strategic investor at 20.3% (page 102 of the prospectus). In brief, Beceem is the leading play on WiMax chips, with WiMax being a broadband wireless technology deployed in over 530 networks world-wide to date.

Why is the Beceem IPO significant, and for whom? The Beceem S-1 filing comes almost to the day three years after the only other WiMax-related IPO,

Clearwire

(CLWR)

. Clearwire is the dominant WiMax carrier in the U.S., with service launched in 28 markets to date, such as Chicago, Seattle, Philadelphia, Atlanta, Dallas, Houston and Las Vegas. These 28 markets cover over 33 million homes, which will more than triple to over 100 million homes by December 2010, including cities such as New York, San Francisco, Los Angles and Miami. These launches have all been disclosed in Clearwire press releases.

Here is the correlation: Every single subscriber device ("modem" for short) which Clearwire has been selling to date is based on a Beceem chip. This could be simple USB modem or a sophisticated WiMax-to-WiFi battery-driven and pocketable converter such as the Sierra Wireless Overdrive. Of course, there are some Clearwire users who don't buy a modem from Clearwire because their laptops already come with a built-in WiMax modem, and those are made by Intel.

What is the correlation "from the other side" - Beceem's revenue going into the Clearwire network? First of all, Beceem sells to equipment makers such as Motorola (MOT) and a variety of mostly Asian OEMs/ODMs, who in turn sell to Clearwire. Here is the critical sentence in the Beceem S-1 filing, from page 38: "As of December 31, 2009, over 50% of our total revenue was derived from end customers based in the United States."

Well, "over 50%" is how much precisely? Somewhere between 51% and 100%. And what part of this goes to Clearwire versus other WiMax operators in the US? I don't think anyone would disagree about the notion that Clearwire constitutes probably 99% of all WiMax investment in the US at this point. My estimate is that approximately 75% of Beceem's revenue is for deployment in the Clearwire network, splitting the difference between 51% and 100%.

So how is Beceem doing, revenue-wise? 2009 revenue more than tripled over 2008, going from $13.9 million to $43.7 million. This suggests that Clearwire is being very confident in its ability to drive very aggressive subscriber growth in 2010, as these devices produced in 2009 are going into the hands of new subscribers signing up in 2010.

Yes, I know there are numerous caveats here: Clearwire buying modems doesn't mean it will automatically gain that number of subscribers. There is inventory build. There will be other suppliers sooner rather than later. The mix with Intel-based WiMax chips in laptops is unknown. And so forth. But despite all of these caveats, these extremely high growth numbers for Beceem should be a positive sign that something right is going on at Clearwire. The confidence that Intel and the other shareholders have in filing this S-1 suggests that the pipeline for revenue growth in 2010 looks very good.

Here is an example of how the Beceem chip, operating on the Clearwire network, improves the experience for all the new Apple iPad users: Instead of ordering your iPad with an embedded HSPA modem operating on the

AT&T

(T) - Get Report

network, just get the WiFi version of the iPad and connect it via WiFi to the Sierra Wireless Overdrive 3G/4G mobile hotspot device, powered by Beceem. This means that your iPad download and upload speeds will most likely more than double, while cutting latency (the initial lag after pressing a button, clicking a link, etc) by 70% or more. This should be a very compelling argument for any iPad, laptop or smartphone user.

In fact, this Sierra Wireless Overdrive device, operating on the Clearwire network, simultaneously connects up to five devices, sharing the $60 per month subscription. So you could argue that while delivering performance dramatically superior to AT&T, the cost per Beceem-driven Clearwire device could be counted as $12 per month ($60/5), or substantially lower than a $30 per month per device subscription from AT&T.

Ask yourself the simple questions: Would you like the wireless data network to perform better? Would you like higher speeds? Would you like lower latency? Would you like to get 250 gig per month of usage instead of 5 gig per month? Did you like the transition from dial-up to broadband some 10 to 15 years ago? If you answer yes to any of these questions, you will understand the significance of the Clearwire network and the Beceem WiMax chips powering most of the Clearwire users.

At the time of publication, the author was long CLWR, AAPL, SWIR and INTC.

Anton Wahlman was a sell-side equity research analyst covering the communications technology industries from 1996 to 2008: UBS 1996-2002, Needham & Company 2002-2006, and ThinkEquity 2006-2008.