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Based in San Jose, California, GCT Semiconductor (GCTS) scheduled a $60 million IPO with a market capitalization of $312 million at a price range mid-point of $8, for Thursday, March 1, 2012.

GCT Semiconductor is one of six IPOs scheduled for this week (see our IPO calendar). Notice that Yelp is scheduled for Friday.

Summary

GCT Semiconductor supplies system-on-a-chip solutions for the 4G mobile market. Cisco (NASDAQ:CSCO) projects the market to grow 26 times between 2010 and 2015. Market research firm IDG projects an annual compound growth rate of 98% between 2011 and 2011.

Another company with a similar business plan to GCT Semiconductor's is Sequans Communications (NYSE:SQNS). Sequans IPO'd on April 4, 2011 at $10 per share. The first day, shares sank 17% and on May 31, 2011 Sequans topped out at $19.17. The company recently traded at $3.13, off 84% from its high.

Observations

GCT Semiconductor's revenue was up 73% for the December 2011 six months compared with the December 2010 six months. Gross margins are in the 36% range, not very high for a technology company. For the six months ended December 2011, operating earnings increased to 3% from a loss of 6% for the December 2010 six months.

Flat Quarterly Revenue

Revenue has been essentially flat the past five quarters. And December quarter revenue was down 1% to $22.2 million from $22.5 million for the September quarter. Profits were respectively 2% and 1% of sales.

While GCT Semiconductor is in a rapidly expanding market, it is not showing significant profits and sequential quarterly revenue has flattened around $22 million.

Conclusion

It is possible that GCT Semiconductor will pop on the IPO. We're not saying GCT Semiconductor will suffer the same fate as Sequans. However, GCT Semiconductor has not yet proven that it can profitably participate in the 4G market's growth, so it seems prudent to wait on the sidelines regarding the GCT Semiconductor IPO.

Business

GCT Semiconductor believes it is a leading fabless designer and supplier of advanced 4G mobile semiconductor solutions.

GCT Semiconductor products are system-on-a-chip (SoC) solutions that integrate radio frequency ((NYSE:RF)), baseband modem and digital signal processing (DSP) functions onto a single die for the 4G Long-Term Evolution (LTE) and Worldwide Interoperability for Microwave Access (WiMAX) markets.

Big Market Growth

The mobile communications industry is in the early stages of a multi-year upgrade cycle driven by changes in the way customers access the Internet using a wide variety of mobile devices.

The introduction of 4G technology has dramatically improved the technical performance and usability of the mobile network, allowing for a rich media experience on mobile devices.

According to Cisco Systems, Inc. (CSCO), mobile data traffic is expected to grow 26-fold between 2010 and 2015. (Source: Cisco Visual Networking Global Mobile Data Transfer Forecast, 2010-2015.)

The improved user experience, along with new and more user-friendly device applications, is driving the next wave of mobile device sales. IDC estimates that shipments of 4G-enabled mobile phones will increase from approximately 13.1 million units in 2011 to approximately 202.2 million units in 2015, representing a compound annual growth rate (CAGR) of 98%.

The two dominant technologies in the 4G standard are LTE and WiMAX. LTE networks are currently being deployed by major 3G cellular operators to take advantage of the benefits of increased capacity and throughput offered by 4G technologies.

Other Income

Other income was $3.2 million for the six months ended December 31, 2011, a change of $8.0 million, or 168%, compared to other expenses of $4.8 million for the six months ended December 31, 2010.

The other income for the six months ended December 31, 2011 was primarily due to a $2.2 million gain from the decrease in the fair value of the preferred stock warrants and foreign currency gains of $1.0 million on foreign currency denominated transactions and account balances for the six months ended December 31, 2011.

By comparison, GCT Semiconductor recognized a $3.2 million loss from the increase in the fair value of the preferred stock warrants and foreign currency losses of $1.5 million on foreign currency denominated transactions and account balances for the six months ended December 31, 2010 .

Customers

GCT Semiconductor sells its products to both OEM/ODM customers either directly or indirectly through distributors. Direct sales to OEM/ODM customers are conducted on a purchase order basis. OEMs typically incorporate GCT Semiconductor's products into their mobile devices and then sell these devices to operators.

Customer Concentration

Direct Sales

GCT Semiconductor sells directly to LG(OTC:LGCIF), which accounted for 48% and 14% of total revenue for the year ended June 30, 2011 and the six months ended December 31, 2011, respectively. LG Corp. is the second-largest South Korean conglomerate company following Samsung (OTC:SSNLF).

These sales were made in support of launches of 4G networks from several major wireless operators, including AT&T (NYSE:T), Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD). GCT Semiconductor sells its products to LG on a purchase order basis, and LG does not have any long-term commitment or agreement with GCT Semiconductor to purchase products.

Other primary customers, to which GCT Semiconductor sells directly or indirectly through distributors, included Infomark Co. Ltd., Inkel Corporation Ltd., Interbro Inc., Kyocera (NYSE:KYO), LG Innotek Co. Ltd., Modacom Co. Ltd., Quanta Computer, Inc., Seowon Intech Co. Ltd. and YTL, during the fiscal year ended June 30, 2011.

Indirect Sales

Indirect sales through distributors are generally made under non-exclusive agreements. The main purpose for sales through distributors is to take advantage of their expertise in end-customer fulfillment logistics.

Sales through GCT Semiconductor's largest distributor, Daejin Semiconductor Co., Ltd. (Daejin), accounted for approximately 19% and 16% of total revenue for the year ended June 30, 2011 and six months ended December 31, 2011.

In addition, during the six months ended December 31, 2011, GCT Semiconductor's sales to two distributors, China Electronic Appliance Shenzhen Co. Ltd. (CEAC) and Apache Communication, Inc. (Apache), accounted for 19% and 24%, respectively, of total revenue for this period.

Long Sales Cycle

The sales cycle in the cellular semiconductor market can be lengthy. Once GCT Semiconductor's product has been provided to end customers for evaluation, it generally takes 12 or more months to achieve successful commercialization. To drive early market adoption of GCT Semiconductor solutions in the market, the company uses a dual-pronged approach, focusing on both operators and OEM/ODM customers.

GCT Semiconductor has established key relationships with wireless operators, including AT&T (T), MetroPCS Wireless, Inc. (PCS), Verizon (VZ), Vodafone (VOD), and Yota for LTE and Clearwire (CLWR), KT Corp. (NYSE:KT), SK Telecom Co. Ltd., Sprint (NYSE:S), UQ Communications, Inc., Yota and YTL for WiMAX.

GCT Semiconductor also works closely with selected OEM/ODM customers to help them design GCT Semiconductor products into their devices. These efforts include providing these customers with access to up-to-date product information, future product roadmaps and reference designs, enabling them to develop and market competitive devices for wireless operators

MANUFACTURING

GCT Semiconductor is a fabless semiconductor design company and relies on third-party foundries, assembly contractors and test contractors to manufacture products. This outsourcing approach allows GCT Semiconductor to focus resources on the design, development, sales and marketing of our products.

Foundry vendors

GCT Semiconductor's foundry vendors are UMC Group ((NYSE:USA)) (NYSE:UMC) and Samsung Semiconductor System LSI Division. GCT Semiconductor also uses third-party vendors to assemble, package and test products. GCT Semiconductor primarily uses the services of ASE Test Limited (ASE) and STATS ChipPAC Ltd. for assembly, and ASE, Giga Solution Tech Co., Ltd., Hana Micron Co., Ltd., and United Test and Assembly Center Ltd. for testing.

Intellectual Property

As of December 31, 2011, GCT Semiconductor had 44 issued patents and three pending patent applications in the United States, 46 issued patents and three pending patent applications in Korea, eight patents issued in China, nine patents issued in Japan, nine patents issued in Taiwan and four patents issued in India. The issued patents in the United States expire in the years beginning in 2018 through 2030.

GCT Semiconductor's 44 issued patents in the United States relate primarily to methods for designing and implementing GCT Semiconductor's core technologies, including RF CMOS, single-chip integration, OFDMA, MIMO and dual modem implementation, which help GCT Semiconductor address the LTE and WiMAX standards and offer highly integrated, low power and cost-effective solutions.

Competition

In the LTE market, GCT Semiconductor competes and expects to compete with semiconductor companies such as Broadcom (NASDAQ:BRCM), Intel (NASDAQ:INTC), Marvell Technology (NASDAQ:MRVL), Qualcomm (NASDAQ:QCOM), Samsung Electronics Co., Ltd., ST-Ericsson N.V. (NASDAQ:ERIC) and potentially other companies focused on developing LTE SoCs.

In the WiMAX market, GCT Semiconductor competes and expects to compete with semiconductor companies such as Broadcom, which acquired Beceem Communications Inc., Intel , MediaTek Inc., Samsung Electronics, Sequans and potentially other companies that offer WiMAX SoCs.

Use Of Proceeds

GCT Semiconductor expects to net $51 million from its IPO with proceeds allocated as follows:

  • $8.6 million to repay debt

  • Balance for working capital.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: GCT Semiconductor (GCT Semiconductor)IPO is scheduled to price Wednesday evening to trade Thursday.

Source: IPO Preview: GCT Semiconductor