Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus, and does not contain all of the information you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our audited consolidated financial statements and related notes and the information set forth in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unless the context otherwise requires, the terms “Aquantia,” “the company,” “we,” “us,” and “our” in this prospectus refer to Aquantia Corp. and its subsidiaries.AQUANTIA CORP.
Overview
We are a leader in the design, development and marketing of advanced high-speed communications integrated circuits, or ICs, for Ethernet connectivity in the data center, enterprise infrastructure and access markets. Our Ethernet solutions provide a critical interface between the high-speed analog signals transported over wired infrastructure and the digital information used in computing and networking equipment. Our products are designed to cost-effectively deliver leading-edge data speeds for use in the latest generation of communications infrastructure to alleviate network bandwidth bottlenecks caused by the exponential growth of global Internet Protocol, or IP, traffic. Many of our semiconductor solutions have established benchmarks in the industry in terms of performance, power consumption and density. Our innovative solutions enable our customers to differentiate their product offerings, position themselves to gain market share and drive the ongoing equipment infrastructure upgrade cycles in the data center, enterprise infrastructure and access markets.
Ethernet is a ubiquitous and evolving standard of network connectivity that is characterized by its reliability and backward compatibility, which enables easy upgrades and continuity of operation through upgrade cycles. One Gigabit Ethernet, or 1GbE, has been deployed as a mainstream wired connectivity standard for over a decade. However, 1GbE is increasingly insufficient to meet the bandwidth requirements that can accommodate the exponential growth of global IP traffic. As a result, the 1GbE infrastructure is currently undergoing an upgrade cycle that is driven by the need to alleviate bandwidth bottlenecks on the wired side of networking equipment, including the data center (servers and switches), the enterprise infrastructure (wireless access points, or APs, and switches), and the access (client connectivity for personal computers, or PCs, and carrier access) markets. Based on projections by Crehan Research Inc., or Crehan Research, 650 Group LLC, or 650 Group, IDC and Dell’oro Group, Inc., or Dell’oro, we estimate that across these markets, over one billion Ethernet ports will ship in 2017 and that this number will grow to 1.2 billion ports in 2020, representing a substantial opportunity for upgrade of the Ethernet physical layer, or PHY. In addition, we believe another new opportunity for Ethernet is emerging in the automotive market, as a result of increased investment in the development of autonomous vehicles, or self-driving cars. Historically, the transition to the next Ethernet generation has been led by the introduction of IC solutions that reliably and cost-effectively meet the new Ethernet standard. We believe that the current upgrade cycle will follow the same course.
As the data rate of PHY devices continues to increase, the technical challenges of designing high-speed communications ICs require a significantly new architectural approach. In order to meet next-generation performance requirements with low power consumption and a small footprint, our differentiated architecture combines our two fundamental innovations: Mixed-Mode Signal Processing, or MMSP, which partitions signal processing across analog and digital domains, and Multi-Core Signal Processing, or MCSP, which incorporates multiple customized units to more efficiently process digital signals. We also implement patented techniques in Analog Front-End, or AFE, algorithms, power management and programmability in the design of our products. Our next-generation Ethernet solutions have been developed by one of the most innovative design teams in the semiconductor industry, with deep expertise across multiple disciplines that range from analog and mixed-mode design to digital signal processing and communication theory. We have leveraged the expertise of our design team to achieve technological breakthroughs and bring what we believe to be best-in-class semiconductor solutions to market, anticipating the future technological needs of our customers and helping them shape their product roadmaps. Our best-in-class semiconductor solutions provide the functionalities that meet customers’ requirements, as well as the relevant Institute of Electrical and Electronics Engineers, or IEEE, standard. For example, in 2012 we created a novel technology that we call AQrate, which has since been adopted by the IEEE as the baseline for the IEEE 802.3bz standard that was ratified in September 2016 as the industry specifications for 2.5GBASE-T and 5GBASE-T products made by different manufacturers to be compatible with each other. This technology is currently being deployed in the enterprise infrastructure and access markets.
We are a fabless semiconductor company. We have shipped more than 10 million ports to customers across three semiconductor process generations, and are currently in mass production in 28nm process node. 28nm and other silicon process geometries, such as 40nm and 90nm, refer to the size of the process node in nanometers for a particular semiconductor manufacturing process. Our target markets include ASICs and ASSPs for Data Processing and Communications across the following applications: Enterprise LAN and Wireless LAN Infrastructure; Server, 1/2/4+ CPU socket; Storage Network Infrastructure and DAS/FAS Storage; PC, desktop-based; Service Provider Routers and Switches. We estimate that our total addressable market opportunity across these target markets is $11.5 billion in 2017.
We estimate that our serviceable addressable market opportunity across our application-specific standard product, or ASSP, and application-specific integrated circuit, or ASIC, applications is approximately 100 million ports in 2020, based on projections by Crehan Research, 650 Group, IDC and Dell’oro, which we estimate would be equivalent to $800 million. Our end customers include Aruba (acquired by Hewlett-Packard Enterprise in 2015), Brocade, Cisco, Dell, Hewlett-Packard Enterprise, Huawei, IBM, Intel, Juniper, Oracle and Ruckus (acquired by Brocade in 2016). For the years ended December 31, 2014, 2015 and 2016 and the six months ended June 30, 2017, sales to Intel accounted for approximately 68%, 78%, 68% and 65% of our revenue, respectively. For the years ended December 31, 2014, 2015 and 2016, our revenue was $24.5 million, $80.8 million and $86.7 million, respectively, our net loss attributable to common stockholders was $27.8 million, $10.0 million and $0.4 million, respectively, and our non-GAAP net income (loss) was $(26.8) million, $1.3 million and $1.1 million, respectively. For the six months ended June 30, 2016 and 2017, our revenue was $41.4 million and $48.8 million, respectively, our net loss attributable to common stockholders was $0.7 million and $3.4 million, respectively, and our non-GAAP net loss was $0.3 million and $1.1 million, respectively. See the section titled “—Summary Consolidated Financial Data—Non-GAAP Financial Measures” below for additional information regarding non-GAAP financial measures and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.
Industry Opportunities
The migration of data to the cloud and the proliferation of mobile devices are continuously driving the need for faster wired connections in data center, enterprise infrastructure and access environments. The legacy infrastructure currently installed in these environments is primed for the next upgrade cycle. The data transported over wired connections can be transmitted either optically or electrically, and the transport protocol is typically based on the widely deployed Ethernet standard. Optical solutions are generally able to carry high-bandwidth traffic over long distances, but can be cost-prohibitive in short-distance applications that are typical of the data center, enterprise infrastructure and access environments. Electrical copper-based interconnects are generally less expensive than optical solutions due to their implementation in silicon. The most commonly deployed interconnect solution is based on twisted-pair copper cabling, commonly called Ethernet cable, or BASE-T. The 100-meter reach of BASE-T, its ease of deployment and its large installed base have made it the preferred medium in many information technology, or IT, environments. According to Crehan Research, approximately 80% of all connections currently are between switches and servers (the two main components of data center architecture), and 80% of those connections are electrical, resulting in electrical interconnect solutions accounting for more than 60% of data center connections. In 2016, the majority of all links in data center and enterprise environments were based on GbE, and 90% of all GbE links were based on twisted-pair copper cabling.
The increasing demand for faster connectivity in corporate data centers has led network engineers to consider upgrading from GbE to 10GbE, with the 10GBASE-T standard experiencing the fastest growth among existing 10GbE PHY options, due to its reach, lower cost and backward compatibility with earlier generations of Ethernet. Crehan Research projects that shipments of 10GBASE-T in data centers will reach 29 million ports in 2020, representing approximately 23% of all ports shipping to data centers that year and a compound annual growth rate, or CAGR, of 27% from 2017 through 2020.
Another class of data center, the “cloud data center” or “hyperscale data center” for the largest cloud data centers, is witnessing a major transformation. In this class of data center, due to impact of social media and video applications, data requests by remote clients typically generate multiple queries and are often retrieved from multiple sources in different servers. The resulting data traffic pattern is called East-West, as data flows back and forth between adjacent servers within the data center before exiting the data center, as opposed to a North-South traffic pattern, characteristic of corporate data centers, in which a remote client retrieves data from a single server in the data center. The impact of this new trend and topology is a dramatic increase in bandwidth requirements between servers and switches towards speeds as high as 100Gbps for very short connections. Crehan Research projects that, out of a total of approximately 130 million ports shipping to data centers in 2020, shipment of 100Gigabit Ethernet, or 100GbE, together with 25GbE and 50GbE, will reach 47 million ports, representing approximately 37% of all ports added to data centers that year and a CAGR of 87% from 2017 through 2020.
In the enterprise infrastructure, 1GbE over twisted-pair copper cabling, or 1000BASE-T, has been adopted as the preferred connectivity between PCs, wireless local-area networks, or WLANs, APs and Ethernet switches. This adoption has been facilitated by the ease of deployment of Ethernet cables in ceilings and walls, and the relatively low cost of 1000BASE-T-based networking equipment. Ethernet cables have been widely deployed in this segment of the market, representing more than 90% of the worldwide base of cables installed between 2003 and 2014. With the advent of 802.11ac and 802.11ax, the latest IEEE standards for WiFi pushing throughput up to 5Gbps, the wired 1GbE connectivity between WLAN APs and switches has become insufficient and the need for a Multi-Gigabit/s, or Multi-Gig, Ethernet wired connectivity solution has emerged, in both the enterprise and small and medium sized business, or SMB, environments. 650 Group projects that shipments of 2.5GBASE-T and 5GBASE-T in the enterprise infrastructure market will reach 57 million ports in 2020, representing a CAGR of 112% from 2017 through 2020. 650 Group also estimates that in 2020, 385 million ports in enterprise and small- and medium-sized businesses still will be 1GbE, representing a significant opportunity for growth for Multi-Gig.
In the access market, which consists of PC connectivity (or client connectivity) and carrier termination devices and gateway boxes used at home and in offices (or carrier access) the need to adopt the Multi-Gig solution has emerged. Despite the trends towards lighter and thinner machines such as notebooks and laptops, IDC projects that PCs will continue to be equipped with Ethernet ports for the foreseeable future, estimating that 194 million PCs, or approximately 80% of the total market, will ship with an Ethernet port by 2020, driven by enterprise buyers and gamers. Based on current adoption trends, we estimate that 10 million ports of Multi-Gig Ethernet, in the form of 2.5GBASE-T, 5GBASE-T and 10GBASE-T, will ship in 2020 as PC users transition to Multi-Gig. Inside PCs, the Ethernet PHY device is typically integrated with a Media Access Control device, also referred to as the controller. We believe that integrated solutions combining both the PHY and the controller are likely to become the preferred choice of PC original equipment manufacturers. Our targeted carrier access market focuses on the last 100 meters between the carrier or service provider termination device, which is typically located in the basement of an apartment complex or the entry-door cabinet in an individual home, and the residential gateway box which is typically owned or leased by the consumer. As carriers and service providers deploy “last-mile” high bandwidth technologies, such as Passive Optical Network, or PON, Digital Subscriber Line, or DSL, and cable modem, the need has arisen to provide high-bandwidth, low-cost, easy-to-deploy solutions to connect termination devices and gateway boxes. The bandwidth requirement is now exceeding 1 Gbps in an increasing number of deployments, on distances that are typically within 100 meters between termination device and gateway box. In addition, we anticipate that the availability of Multi-Gig Ethernet on PCs, Network-Attach Storage, or NAS, as well as 802.11ac/ax WiFi extenders and wireless routers, will drive the need for gateways to migrate from 1GbE to Multi-Gig Ethernet on the local-area network, or LAN, side as well. Dell’oro projects that 74 million gateways will ship in 2020, representing a total of 370 million ports as gateways typically ship with five Ethernet ports per box. We estimate that seven million ports of Multi-Gig Ethernet will ship on the wide-area network, or WAN, and LAN sides of these gateways in 2020.
The automotive market is undergoing a transformation with the development of self-driving cars. Developing a fully autonomous vehicle requires innovation in the areas of image processing, fast and multi-dimensional decision-making processes, and deep learning, similar to some of the most advanced facial recognition algorithms or complex model simulations being handled by super computers in hyperscale data centers today. As a result, systems that are being contemplated by the car industry to deliver such capabilities will likely need high-speed signaling connecting together end points such as cameras and other sensors, processing units, and an array of switches for rich connectivity and redundancy. Ethernet is one of the most promising technologies to deliver the high-speed connectivity required for making the self-driving car a reality. The car environment has its own very stringent set of requirements such as low weight, low power consumption, limited electro-magnetic emissions and susceptibility, ability to support higher spread of environmental temperature, and low cost. In terms of connectivity, this matrix of requirements is well served by high-speed Multi-Gig Ethernet over copper cabling. The potential market opportunity is considerable. Raymond James estimates that the silicon content in autonomous vehicles will represent a $30 billion total addressable market by 2030. We are currently shipping products into this market but do not expect significant volume production to occur until 2019.
Challenges to the Adoption of 10GbE and Multi-Gig Ethernet over Copper Cabling
Nevertheless, addressing these technical challenges with conventional silicon architectures generally yields ICs that are inefficient and consume more power. We believe the design of complex signal processing solutions requires a novel architectural approach.
Our Solution
We have developed a differentiated architecture that leverages our deep technical design expertise to create integrated high-performance connectivity solutions that address the significant opportunities present in the data center, enterprise infrastructure and access markets. Our Ethernet PHY solutions provide a critical interface between the high-speed analog signals transported over wired infrastructure and the digital information used in computing and networking equipment. Our architecture combines our two fundamental innovations, MMSP and MCSP, as well as several other patented techniques in AFE design, algorithms, power management and programmability.
We initially used these core innovations in the development of 10GBASE-T PHY devices, and subsequently in custom ASICs for Intel that integrate our PHY devices with various elements of Intel’s proprietary technologies. These custom ASICs are driving the transition to 10GbE networking from legacy 1GbE technology in corporate data center server applications.
More recently, we employed our fundamental PHY expertise to develop AQrate, our technology designed to improve transmission speeds from 1GbE to 5GbE over existing copper cabling infrastructure in the enterprise infrastructure and access market. Our Multi-Gig AQrate-based products are being deployed in WLAN APs and Enterprise/SMB switches.
Subsequently, we developed a Multi-Gig Ethernet controller and integrated it with our AQrate as well as our 10GBASE-T PHYs to deliver a size, power and cost-optimized solution for client connectivity in PCs for the access market. Our AQrate PHYs are also being integrated inside service provider gateways for deployment in the home to provide Multi-Gig speeds on the WAN side and in some cases also on the LAN side of the equipment.
We also developed a breakthrough 100GbE interconnect solution we call QuantumStream, leveraging on our core expertise and proprietary architecture. Our QuantumStream technology is capable of transporting data at a speed of 100Gbps over a single lane of copper cabling and is aimed at inter and intra rack connectivity of up to three meters, complementing longer reach optical connectivity solutions in hyperscale data centers and cloud computing environments. According to estimates by Crehan Research, this represents the majority of direct server and storage Ethernet network connections in hyperscale data centers.
We are currently developing solutions for Multi-Gig Ethernet over copper to serve the potential automotive market opportunity. We are also collaborating with several CPU/GPU chip manufacturers that specialize in artificial intelligence and complex processing for autonomous driving applications. We are currently shipping products into this market but do not expect significant volume production to occur until 2019.
Benefits We Provide to Our Customers
We believe our solutions provide our customers the following benefits:
deliver low power consumption. For instance, our first generation PHY product was delivered at lower power in 90nm process node compared to similar products delivered by our competitors in 65nm process node. Additionally, since analog does not shrink through process scaling, and our architecture benefits from an intrinsically smaller design, we expect a sustainable and growing advantage as the design migrates to finer process geometries. We were the first to deliver a 28nm product to the market, and we endeavor to maintain our leadership position.
Our Competitive Strengths
varied products, including Ethernet PHYs, high-speed serializer/deserializer, Ethernet switching, cellular networking, memory, microprocessors, programmable logic arrays, PLDs, and experience from across industry leaders, including AMD, Beceem, Broadcom, Centillium, Intel, LSI Logic, National Semiconductor, Philips and Samsung. We intend to continue to aggressively recruit and seek to retain talented engineering and design personnel.
Our Strategy
Key elements of our strategy include:
Risks Associated with Our Business
Our business is subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated with our business include, among others:
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012. We intend to take advantage of certain exemptions under the JOBS Act from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or until we are no longer an “emerging growth company,” whichever is earlier.
We have irrevocably elected not to avail ourselves of the provision of the JOBS Act that permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
Corporate Information
We were incorporated in Delaware on January 27, 2004. Our principal executive offices are located at 105 E. Tasman Drive, San Jose, California 95134 and our telephone number is (408) 228-8300. Our corporate website address is www.aquantia.com. Information contained on or accessible through our website is not a part of this prospectus, should not be relied on in determining whether to make an investment decision, and the inclusion of our website address in this prospectus is an inactive textual reference only.