Alien Technology Seeks $88M in Upcoming IPO

Alien Technology Seeks $88M in Upcoming IPO
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The RFID vendor faces some hurdles along the way to profitability in a maturing industry.Alien Technology, a manufacturer of RFID tags, readers and hardware, is looking to raise in the neighborhood of $88.1 million with an IPO scheduled for July 27, according to Nasdaqs July 24 Web site listing.

Alien Technology, based in Morgan Hill, Calif., initially filed for an IPO (initial public offering) with the Securities and Exchange Commission on April 13.

The company expects to release 9 million shares at about $11 each during its initial offering later the week of July 24.

In its S1 prospectus, filed with the SEC in April, Alien said it anticipates using about $19 million of the cash raised from the sale to fund equipment purchases and tenant improvements for its manufacturing facility in Fargo, N.D.

The remaining $69 million will be used for "general corporate expenses," including the expansion of Aliens sales and marketing and R&D efforts. The company also plans to use some of the cash for working capital, capital expenditures and "potential acquisitions of, or investments in, complementary businesses, products and technologies."

In its prospectus, Alien officials said the company has no current agreements or commitments with respect to any acquisitions or investments. Officials are not available to comment.

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"Our management will have broad discretion to allocate the net proceeds from this offering," the prospectus said. "Pending such uses, we plan to invest the net proceeds of this offering in highly liquid, investment-grade securities."

Alien is not without some cash of its own—but its operating in the red. For its 2005 fiscal year ending Oct. 1, the company generated about $19.8 million in revenue—$12.7 million from products and $7.1 in services. For the first half of this fiscal year, which ended April 1, Alien generated $10 million in earnings: $5.4 million from products and $4.6 million in services (excluding an acquisition).

Losses for the 2005 fiscal year were logged at $53 million, and $34.2 million for the first half of 2006—far outweighing earnings.

Alien said in its prospectus that it has not reported "positive margins" on the sale of its RFID (radio-frequency identification) products since the company began selling them in 2002. And it doesnt expect to have positive sales on its newer products, which incorporate EPCglobals Gen 2 standard, until a couple of key initiatives are underway.

The first is a conversion from outsourcing the manufacturing of Gen 2 tags to using Alien Technologys proprietary Fluidic Self-Assembly tag manufacturing process. That shift is expected to be completed by the end of this fiscal year, "but could take longer."

At the same time, Alien needs to complete its transition from using third-party-designed ICs (integrated circuits) to using its own IC design, manufactured in-house. The initial steps are in place—Aliens IC has been certified by EPCglobal Conformance Testing and is EPCglobal UHF Gen 2-certified—and the transition is scheduled to be done the first half of 2007, "but could take longer," the company said.

Does Alien Technologys IPO reveal too much about the state of the RFID industry? Click here to read more.

Finally, sales volumes for Aliens FSA-manufactured Gen 2 tags, even with its own ICs incorporated, will have to reach "significantly higher volumes" for the company to actually make some money.

Alien, like most RFID technology manufacturers targeting the supply chains in retail, consumer goods, manufacturing and defense (to name a few verticals), is banking on the proliferation of UHF (ultrahigh frequency) Gen 2 tags and readers—and a major uptick in the RFID market.

ABI Research, headquartered in Oyster Bay, N.Y., predicts that RFID spending will increase to $6.3 billion by 2011, and that UHF RFID tag shipments will increase to $20 billion in the same time frame. But thats dependent on several factors, not the least of which is the cost of tags themselves.

RFID passive tags (which are activated by radio frequency waves from a reader and are most frequently used in supply chains) are pegged now at about 18 cents each for pallet and case tags, according to consulting firm IDTechEx, in Cambridge, England. The industry goal is 5 cents per tag, and well below, to spur wide adoption.

Strategic developments

Alien expects to reduce the cost of its manufacturing so that it can, in turn, sell tags profitably at 5 cents per tag or less. But, like all manufacturers, its seeking that magic bullet that will bring the costs of production down to a profitable level.

"We believe we can achieve this cost reduction by reducing the size and cost of our RFID IC in successive designs, by improving the design of, and materials used in, our tag antennas, and by continuing to refine the development of FSA," Alien said in its prospectus.

At the same time, the company also plans to continue to upgrade the performance of its RFID components, and to reach out to different vertical markets.

Next Page: Alien faces risks.

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