VSA Capital Market Movers – Ethernity Networks


VSA Morning Technology Comment, 02/12/20

Ethernity Networks (LON:ENET)

Ethernity Networks Ltd (LON:ENET) has today announced positive progress on trading as it approaches the end of its financial year (December 31st 2020). For 2020, we forecast revenue of US$2.0m (up 50% on 2019) and EBITDA loss of US$3.1m. For 2021 we estimate revenue rising by 300% to US$6.0m and a reduced EBITDA loss of US$0.8m. The Company reports today that revenues are on track to meet our 2020 estimate for 50% growth to US$2.0m and that it already has, “increasing visibility over 2021 forecast revenue with approximately 60% forecast revenue currently anticipated from existing ENET licensing contracts, subject to customer confirmations of order volumes”.

Ethernity is an Israel based technology company that provides communications network firmware and software that is runs on Field Programmable Gate Array (FPGA) semiconductors. The company’s technology accelerates data networks and security. The Company’s Ethernet (ENET) technology is used at the heart of digital communication networks and is required to manage and process huge volumes of data traffic. Users are government, military, corporate and telecommunications companies – Ethernity is working on 5G opportunities with Mobile Network Operators.

The Company reports today that a North American tier-1 telecommunication OEM, initially contracted in October 2018 for delivery of 10G PON (Passive Optical Network) OLT (Optical Line Termination), has now consumed the prepaid licenses under that contract. Further additional licenses will be billed and paid quarterly. The customer also upgraded its contract signed in April 2020 to support double capacity of 400Gbps and, Ethernity note, this includes further revenue to the Company.

A customer who signed a contract in May 2017 to enable 1Gbps over fixed wireless residential service as an alternative to fibre, post field trials is incorporating Ethernity’s FPGA SoC as the main switch and traffic manager device, to be located at each antenna. Following successful field trials in 2020, the customer has forecast that they will require ~US$500,000 ENET FPGA SoCs based on their planned deployment rollout for 2021, the vast majority of these, reports Ethernity, are to be supplied in H2 2021, and a further requirement of up to ~US$1m in SoCs in 2022. This will all help to support our 2021 estimates for revenue of US$6.0m

For 5G, Ethernity’s SmartNIC technology frees up the servers in data centres and those of mobile network providers, from network traffic processing. This saves on capital cost of server processors (CPUs) and accelerates data. 5G network infrastructure is being rolled out fastest in Asia followed by the U.S. and other areas. The Company is testing and developing its product both with OEMs and end-users including national telecoms operators. Initial testing phases are reporting as progressing well with larger scale field trials prior to eventual commercial deployments.
A Southeast Asian national telecom operator, referenced at Interims, has integrated its open source-based 5G User Plane Functionality (UPF) software onto Ethernity’s ACE-NIC100 FPGA SmartNIC and tested it against other tier-1 competitors. The operator is now progressing to commercial field trials. In China, a partner was selected to develop customised UPF software for a private 5G network to a Chinese mobile service operator as part of the OpenUPF initiative, which will now be targeted primarily toward industrial and private 5G deployment.
In India, further to the licensing contract signed in September 2020 with an OEM, the parties have agreed that the hardware manufactured by the Indian vendor incorporating the Ethernity technology can be sold by Ethernity outside of the Indian market. This is anticipated to result in additional revenues for the Company, as Ethernity will be able to market the complete product solution into new geographic markets through other channels.
Ethernity continues to invest in R&D for 5G and noted today that it is receiving significant interest in its ACE-NIC100 for 5G Distributed Unit (DU) with embedded Virtual Router function, which product offering was announced on 22 October 2020. This interest is from major server vendors and system integrators who anticipate incorporating the FPGA router data plan embedded in the ACE-NIC, into their offering.
In all, this is really good progress. We are forecasting for year-end June 2020, 2021 and 2022 respectively, revenue of US$2.0m, US$6.0m and US$9.0m. PBT – we forecast for 2020 a PBT loss of US$4.2m, this reducing in 2021 on rising sales         to a loss of US$2.0m and, as 5G deployments accelerate revenues, a reduced loss of US$0.6m in 2022. However, if Ethernity can progress revenue as we forecast for 2021 and achieve confirmed design wins in 5G supported by the success in applications such as North American tier-1 telecommunications OEM 400Gbs network opportunity covered today,  its valuation could be substantially higher than it is now.
The current depressed valuation does not reflect the IP, market interest already achieved, and limited number of players in the space, leaving the company a potential takeover target. Our peer group analysis supporting a DCF valuation indicates a target price of 53p/sh implying 225% upside. Buy.


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Phil Smith, Equity Analyst, Technology | T: +44 (0)20 3617 5187 | E: [email protected]

VSA Capital Research | T: +44 (0)20 3005 5000 | E: [email protected]

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