Tut Systems struts in first day of trading

Shares hit 57.5, up 39.5 points from the company's $18 per share IPO, on heavy volume. The stock peaked at 63.5 in early trading. Following today's close, the company had a market capitalization of about $630 million.

Tut's strong market debut was supported by investor fervor over all things Internet. The company designs, develops, and markets communications products for high-speed Net access over traditional telephone wires.

"The bottom line is you have an Internet explosion going on here," said John Todd, analyst with Wedbush Morgan Securities.

Tut had earlier raised its pricing range to $16 to $18 a share, up from its initial range of $14 to $16 a share. The company had hoped to raise $45 million in capital with its IPO.

Analyst Kurt Scherf with Parks Associates said Federal Reserve chairman Alan Greenspan's comments on the Net stock craze helped pump up Tut's stock.

"Tut couldn't have timed it more beautifully," he said. "Some people expected Greenspan to say these technology-based companies were smoke and mirrors, and he didn't say that. Also, there's substance to Tut's technology. They have product on the shelf, it's not ethereal."

Tut previously received $39 million in investments from AT&T, Microsoft, and venture capital firms.

In the past year, Tut has seen its revenue rise to $10.6 million, up 71 percent over the previous year.

Most of the company's revenue comes from sales of its XL products, which extend networks based on Ethernet--the dominant means to connect PCs and server systems together in an office or building--across corporate and educational campuses using copper telephone lines.

But the sales price for the XL products have declined recently on increased competition, and the company expects the trend to continue, according to its filing with the Securities and Exchange Commission.

Tut's main competitors in corporate and educational networking include PairGain Technologies, Paradyne, Westell Technologies, and networking giant Cisco Systems.

Others with their war chests aimed at the home networking market include industry powerhouses Intel and 3Com.

Tut's net loss widened to nearly $14 million last year, compared with $9.4 million a year earlier. And at the close of last year, the company had a deficit of $44.4 million.

Looking for a product Home Run
Most of Tut's expenses last year were related to the development of its HomeRun technology, which enables Ethernet-based networks to work over existing telephone wires in the home. Additionally, the manufacturing and marketing of its Expresso products, which provide high-speed data access over existing local loop copper wires, also increased costs, the company said in its SEC filing.

But the eight-year-old, 100-employee-strong firm is banking on its so-called Expresso GS and Expresso products to drive revenue and reach profitability in the future.

The success of the Expresso MDU products, however, in part hinges on fast and widespread adoption of the company's HomeRun technology for the home networking market. This embedded technology would be used in integrated circuits and consumer devices.

Tut, in its SEC filing, said it plans to use $2.5 million of the proceeds from its public offering to buy another company's intellectual property, which it previously had to pay royalties to use. The name of the third party was not disclosed. Craig Stouffer, Tut's vice president of marketing, declined to comment yesterday, citing the quiet period before Tut goes public.

Underwriters for the offering include Lehman Brothers, Dain Rauscher Wessels, and Salomon Smith Barney. One portfolio manager who had seen the company's presentation to potential investors said his firm may participate in the offering, but only as a short-term holder of the stock.

"I'll look at it, but won't participate beyond a flip [of the stock]. We own 3Com and that's our pick for home networking," said the portfolio manager, who declined to be named. "There are more attractive opportunities of where to put our money."

He added, however, that Tut is playing its cards in the right industry.

"There's a lot of activity in the area of the networked home," he said. "There are two ways to look at this. There is the PC-based networked home or the network based on the TV or set-top box. Tut is delivering solutions along the PC lines and its certainly viable. The PC is further along at developing protocols than the consumer electronic guys."

Home networking is hot
Analysts say it's smart for Tut to bank on home networking for its future because they believe the market for connecting home PCs with consumer devices will explode in the next few years.

Demand will be driven by faster Internet access, cheap prices for PCs, and the increase in telecommuters who may need networked PCs, according to a recent study by the Yankee Group.

"You've seen tremendous appreciation in that market and Tut is benefiting from that," Wedbush Morgan's Todd said. "Tut's core technology is the basis for [phoneline technology], so they're viewed as a key participant in home networking because of that."

Analyst DavidPaul Doyle says Tut is the market leader in home phone line technology, but still faces stiff competition from other home networking companies, such as Epigram.

During the 1998 third quarter, the Home Phoneline Networking Alliance chose Tut's 1 mbps technology as the standard for networking PCs in the home using the phone line--and the company has reaped the benefits ever since.

Tut receives licensing fees from more than 20 vendors, including Intel, Compaq, and Diamond Multimedia using the 1 mbps technology for their products. But the company faces a tough standards battle with Epigram and possibly others over the 10 mbps standard, which will be the second version of the HomePNA specification, Doyle said.

Battle over megabits
"Right now, Tut Systems is really hot. They are the only tech supplier in the home market for current products today. But that won't last throughout the year unless they continue to create innovative technology," he said. "10 mbps is coming out by the third quarter, which means the 1 mbps standard will be left in the dust fairly quickly."

Doyle said Epigram, which has 3Com among its investors, is ahead of Tut in developing 10 mbps technology and that the HomePNA standards body will eventually choose Epigram's technology with some features from other vendors thrown in.

"Epigram's technology is more robust and backward compatible [to 1Mbps]. Tut really hasn't shown a demonstrable 10 mbps technology," he said.

Tut executives, however, disagree that their market leadership is short-lived.

Stouffer, Tut's vice president of marketing, said the company has developed 10 mbps technology, but has kept it under wraps. "We're not standing still. We're developing future generation products, but we've decided to keep our efforts quiet," he said.

Tut will submit its 10 mbps technology for the HomePNA later this quarter, he said. If Tut loses the standards battle for the 2.0 specification, the company will concentrate on building access concentrators, he said. And Tut will still reap the benefits of owning the technology in the 1.0 specification.

"They need to continue to be on the cutting edge of bandwidth and technology," Doyle said.