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Taking Stock: Superconductors May Become More Important With 3G Wireless

Technology will cut down on the number of dropped calls.
Wireless phones are great, except when your call is dropped or when you can't hear what time you're supposed to meet someone because of the poor quality of the connection. You'd expect that user experience would improve as the next generation of a product is introduced. However, the introduction of third-generation (3G) wireless technology in its current form might actually make life worse for cell-phone users.

SuperFilter, the main product of Superconductor Technologies Inc. (SCON-Nasdaq), uses superconductor technology to solve the problems of dropped calls and interference. Superconductors are electric conductors that work without losing energy or dissipating heat, as opposed to a normal electric conductor such as copper, which has resistance that leads to power loss and heat generation.

The problem with superconductors is that they work only at very low temperatures. Until 1986, they only worked at temperatures below minus 250 degrees Celsius (minus 420 degrees Fahrenheit). The technology improved, and today it's possible to have superconductors operate at such balmy temperatures as minus 148 degrees Celsius (minus 235 degrees Fahrenheit).

Dropped calls and poor reception are related to the receiving part of a wireless base station. Dropped calls are due to the mobile call not being picked up by a new base station as the caller leaves the existing cell site. This could be because the cell sites are spaced too far apart, or because newer phones tend to have a lower transmission radius to save battery power. This could get even worse with 3G technology, which requires cell sites to be closer together, otherwise the data-transmission rates will be ridiculously slow.

Superconductor Technologies' product has more-efficient circuitry that increases the radius of each base station using SuperFilter or a similar superconductor technology. This could prove crucial because some countries, such as the United Kingdom, have a moratorium on new cell sites and antennae.

The problem of poor reception is most often the result of interference from other wireless users. The expected increase in the number of mobile-phone users and the addition of mobile data will likely exacerbate the problem. It turns out superconductor technology is very good for filtering, thus leaving only the intended signal and discarding the noise.

Superconductor Technologies, like so many other telecom equipment companies, has been hit by the downturn in spending by telecom carriers. Although the market for its products promises to be large, growth is dependent on increased numbers of wireless subscribers and a rollout of 3G. The company estimates that the market for retrofitting base stations is about $100 million, while the 3G market is even larger--about $400 million. Though it has about 70% of the current market, Superconductor Technologies won't have enough manufacturing capacity to capture 70% of these new markets.

Competition is limited to a couple of other superconductor companies, Conductus and Illinois Superconductor. Both are smaller than Superconductor Technologies but face similar problems. In addition, several large companies, including DuPont, IBM, and TRW, are showing interest as the market expands.

Superconductor Technologies reported third-quarter results in late September that reflected the current tech environment. Revenue fell 12.5% to $2.1 million from the same quarter a year ago. About half of sales stem from government contracts. Gross margins were slightly negative due to the low revenue base and a large, underused factory.

Superconductor Technologies isn't profitable or cash-flow positive, and the path to achieve this hinges on a recovery in the telecom equipment markets and the deployment of 3G. The company has about $20 million in cash on its balance sheet. If the downturn continues well into next year, Superconductor Technologies might be forced to raise more money.

I'm intrigued by this company, but it's a very risky bet in a fledgling industry.

William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at [email protected].

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