Take your profits and run:
Lock in impressive gains on these two 2001 Taipan IPO picks— and get ready to reinvest your profits in this hidden gem!

by Siu-Yee Ng

Talk about slowdown. The IPO market has practically ground to a halt. But two of the IPOs Taipan introduced you to this year managed to get out the door with flying colors. Both have had impressive gains.

Tellium, Inc. (TELM:NASDAQ) was Taipan’s IPO pick in the 2001 forecast issue. After a long wait, Tellium finally debuted on May 17, 2001, at an offer price of US$15. And its IPO surprised everybody on Wall Street. As of June 6, 2001, Tellium was steadily trading at US$24—a Taipan IPO gain of 60%. Sell now to lock in your profits!

Riverstone Networks (RSTN:NASDAQ) is another technology company that has surprised all investors—that is, all except for Taipan readers. Riverstone debuted on February 16, 2001, pricing at US$12. Investors had another opportunity to buy when it dipped below the IPO price. And now it’s trading at US$22.50. That’s an IPO and aftermarket gain of 87%.

Since its IPO, Riverstone has reported strong fourth-quarter results. Just when you thought all Internet infrastructure companies were taking a bath, Riverstone reported a 175% increase in Q4 2001 revenues compared to the same period last year. To make the deal even sweeter, Riverstone posted a 326% year-over-year revenue gain.

Considering the volatility in this market, here’s what you should do now: take your profits and run! Sell above US$24 for 100% profit!

IPO D.O.A.?
It’s difficult to raise money in the public market now that IPOs have fallen out of favor. By June 1, 2001, only 31 IPOs had debuted, compared to a whopping 189 in the same period last year.

But that’s actually good news: only the strong deals are getting out the door. Of those 31 IPOs, 24 are trading above the offering price, and only seven are down. That’s not a bad percentage.

What exactly happened to the IPO market? It’s quite simple. Many companies quickly burned through the cash that the equity market was more than happy to supply. But after building their infrastructure, many companies realized they just didn’t have the customer base or financial resources to continue operations.

And, in the current market, the big culprits are the investment bankers.

Investment bankers have to figure out what sells. And then they sell until no one wants it anymore. That’s exactly what happened in 1999 and early 2000. They sold the stuffing out of Internet companies, until the bubble burst. Not only were some companies questionable to begin with, many were also competing for the same customers.

There was an oversupply problem. And in the aftermath, many companies are now folding up shop, while others are consolidating. This will eventually be the driving force behind a market recovery. The bad will die off and the good will consolidate, bringing supply and demand back into balance.

Search no more
This year’s IPOs have seen more modest and stable gains. But the gains have been steady. The IPO market is still a great place to look for the next Microsoft or IBM.

And here is one to keep an eye on: a yield-optimization software company that actually made a profit last year.

HPL Technologies is profiting from the driving demand for more and better electronic products that use semiconductor devices, also known as integrated circuits or “chips.”

You see, by identifying production failures early in a semiconductor product cycle, customers can improve the quality of their products, reduce production costs, and meet volume production requirements. Higher levels of revenues and profitability are the result.

Let me explain how all this works.

The efficiency of the semiconductor production process is commonly characterized in terms of “yield,” which is the percentage of properly functioning devices produced at each stage of the process. Each new semiconductor design is characterized by a unique “production yield learning curve.”

Initial yields are typically low. But with “yield learning”—the process of identifying defects and their causes and resolving the problems—yields will improve.

Since sales prices and profit margins are typically much higher in the early phases of a new semiconductor product cycle, a small acceleration of the production yield learning curve can have a meaningful effect on a semiconductor company’s revenue and profitability.

Although semiconductor companies understand the critical importance of yield analysis, and have spent considerable time and money on improving yields, most do not have the expertise to develop integrated and comprehensive yield-optimization software tools.

Handy helper
Worldwide spending on production equipment by semiconductor companies is expected to grow from US$34.6 billion in 1999 to US$72.8 billion in 2004, for a compound annual growth rate of 16%.

Because semiconductor companies invest hundreds of billions of dollars in the production process, a high level of efficiency is essential if they are to maximize return on invested capital.

And according to Dataquest’s May 2001 report, worldwide semiconductor revenue is expected to grow at an average rate of 15% annually from 1999 through 2004, from US$171 billion in 1999 to US$347 billion in 2004.

Given the substantial costs of developing and maintaining internal yield-optimization technologies, and the accelerating trend toward industry specialization, you can see why HPL’s yield-optimization software solutions will become increasingly important.

Their software integrates data sets from the design, fabrication and test stages of the semiconductor production process. Semiconductor companies can then synthesize that data into a unified format, conduct analyses to suggest yield enhancements, and view and manipulate the information through a user-friendly interface.

In effect, the semiconductor production process can be modified to avoid or minimize the factors that limit yield, and production resources can be focused on corrective action.

Where? Armenia?
It’s pretty common for U.S. companies to set up facilities abroad, where labor and production costs are cheap. And HPL has chosen Armenia, a country with a highly skilled workforce.

Under the Soviet Union’s central planning system, Armenia built up a developed industrial sector, supplying machine building equipment, defense electronics and optics, textiles, and other manufactured goods to sister republics in exchange for raw materials and energy resources.

After voting for independence in 1991, the country has faced political and economic problems.

But even in the midst of instability, the Armenian government has still been able to lay the foundation for a market economy by liberalizing prices and implementing an aggressive privatization program.

Now, this is still a country with serious problems, such as mass unemployment, low purchasing power and living standards, and a huge foreign trade deficit. But HPL has been able to harness Armenia’s skilled labor to produce its software. I don’t expect any drastic changes in Armenia—at least in the near term. But the political risk factor is something to keep an eye on.

Sales are up
HPL licenses its software products and sells related services through its direct sales force, its exclusive distributor, Canon, and semiconductor equipment OEMs that bundle HPL’s software with their hardware.

Direct sales accounted for approximately 54% of its revenues in the year ended March 31, 2001, and indirect sales accounted for the remaining 46%.

Due to the nature of its sales cycle, a relatively small number of customers have accounted for a large portion of HPL’s revenues in each of the past three fiscal years.

HPL had four customers that individually accounted for at least 10% of its revenues in fiscal years 1999 and 2001, and three such customers in the year ended March 31, 2000. In the aggregate, these customers accounted for 77%, 44% and 74% of its revenues in fiscal years 1999, 2000 and 2001, respectively.

I hate to see a company depending on such a small number of customers. So HPL will need to broaden its customer base.

In the past three years, HPL has licensed software products or provided consulting services to more than 30 semiconductor companies, either directly or through a distributor. Customers include Agilent Technologies, Credence Systems, Teradyne, and Advanced Micro Devices.

Generating profits
How many new issues can actually say they are profitable? But HPL’s fiscal year 2001 was profitable. With HPL’s continued expansion, it’s hard to predict whether the company will be able to sustain a profit.

But in view of increasing international sales, it’s smart for HPL to continue its expansion.

Sales to customers located outside the United States accounted for approximately 5%, 13% and 48% of its revenues in fiscal years 1999, 2000 and 2001, respectively. And international sales are expected to grow.

Total revenues increased a whopping 262% to US$13.4 million in fiscal year 2001, up from US$3.7 million for the prior year. Of this increase, approximately 81% was owing to a rise in software license revenues—primarily from sales of its YIELDirector products, which were first introduced for sale in the second half of the year.

Not all of the terms of HPL Technologies’ IPO have been set. But it plans to raise US$86.3 million dollars under the proposed ticker symbol HPLA. This is a small offering that may generate steady gains in the aftermarket. The lead underwriter is UBS Warburg LLC.

ACTION ALERT

HPL Technologies
2033 Gateway Place
San Jose, CA 95110
Phone: 408-437-1466
fax: 408-501-9210