Virage hopes to make splash with system-on-a-chip

With many of the economic and technical hurdles being conquered, firms in the so-called system-on-a-chip market are looking to cash in.

For years, the semiconductor industry has predicted that one day, all of the work of a complex electronic device will be handled by a single piece of silicon.

Now, with many of the economic and technical hurdles being conquered, firms in the so-called system-on-a-chip market are looking to cash in.

Among those is Fremont, Calif.-based Virage Logic, which this week filed to sell up to $40 million worth of shares in an initial public offering. Virage designs embedded memory circuits that can be incorporated into a large, highly integrated chip.

Like numerous semiconductor start-ups, Virage is a chipmaker that doesn't actually make chips. Instead, the company is an intellectual property firm that licenses its technology to larger manufacturers for royalties. Rambus, the memory designer, is one of the better-known intellectual property firms.

Although Virage only makes one element of an integrated chip, this may not be an impediment to potential success, analysts say. To save time and money, system-on-a-chip designs will largely be conglomerates of technology from different designers.

Some companies, for instance, specialize in ways to connect different subsystems. Virage's technology will serve as an intrachip data repository. National Semiconductor and Toshiba are two of the company's customers.

"To make a system-on-a-chip, you get a CPU core from one company, you go to other companies for memory (and other functions), and you put it all together," said analyst Tom Halfhill of Cahners MicroDesign Resources.

The public markets, not that hot on tech stocks lately, have chomped eagerly at several chip offerings in recent weeks. The cyclical semiconductor industry is in the midst of what analysts project will be a multiyear upturn after three harsh years.

Despite a recent pullback, shares of the chip and chipmaking equipment makers that make up the Philadelphia Semiconductor Index are up nearly 50 percent for the year.

For an example of how hot the chip market is, analysts say, investors need only consider the response to the public offering of ON Semiconductor--the semiconductor components unit jettisoned by Motorola that makes relatively cheap, low-margin chips. Investors sent shares of ON Semiconductor up 37 percent in their first trading day last Friday. The stock, which went public at $16 a share, closed at $22.50 today.

The need for more integrated chips has grown as the number of new devices has exploded, Halfhill said. Companies such as LSI Logic specialize in piecing together different functions on a custom chip.

"You tell them what you want and they do it," Halfhill said.

System-on-a-chip didn't make as much sense when most of the machines being built were PCs that required the same standard components, Halfhill said. But as devices become more varied and smaller, the value of integrating becomes more compelling.

Adam Kablanian, former head of LSI Logic's embedded memory design unit, co-founded Virage in January 1996, along with Alexander Shubat. The two worked together at Waferscale Integration; several other top executives have experience at Waferscale or LSI.

According to documents filed with the Securities and Exchange Commission, Virage earned $246,000 on revenues of $9.59 million for the year ended September 30, 1999. In the two quarters since then, the company has had a net loss of $556,000 on revenues of $8.8 million.

The company did not say in the preliminary filing how many shares it will sell or in what price range.

Virage's largest customers include ATI Technologies, MMC Networks, National Semiconductor and Toshiba, each of which accounted for between 10 percent and 18 percent of sales in the last fiscal year. IBM also has become a leading customer, accounting for 10 percent of sales in the past two quarters.

Virage's competitors include the memory design groups within chipmakers and intellectual property firms, such as Artisan Components, Avant and Synopsys. Virage also could face competition from standalone memory chip companies, such as Cypress Semiconductor and Micron Technology, if those companies move into the embedded market.