Category: IPO

With its IPO, Cyber-Ark floats on high water

Brenon Daly

Contact: Brenon Daly

It seems the record-setting Alibaba offering didn’t suck up all the IPO money on Wall Street after all. Although investors handed out a staggering $25bn to the Chinese e-commerce vendor last week, they stepped right back into the market to buy newly minted shares of Cyber-Ark on Thursday. And boy, did they buy.

Cyber-Ark, an Israel-based identity and access management (IAM) provider, sold 5.4 million shares at an above-range price of $16 each. Once free to trade, shares doubled. (In early afternoon trading under the ticker ‘CYBR’ the stock was changing hands at $32.20, having never dipped below $30 on its debut.) Cyber-Ark’s IPO stands as the first tech offering (aside from Alibaba) in some three months.

The strong demand for Cyber-Ark pushed it to a rather princely valuation. With roughly 30 million shares outstanding, the company’s market cap is nosing toward the magical $1bn mark. That stands out because Cyber-Ark, while profitable, will put up less than $100m in sales in 2014. Further, those sales are coming from old-fashioned license and support, rather than the more highly valued subscription delivery model. The company has been increasing revenue in the 30-40% range in recent quarters. (See our full report on Cyber-Ark’s filing.)

Cyber-Ark is particularly richly valued when compared with other IAM providers, in both the IPO and M&A markets. It trades at more than twice the current multiple of Imprivata, which went public three months ago and is currently under water. (Imprivata focuses entirely on the healthcare market, while Cyber-Ark counts more than 1,500 customers across a range of industries.) Meanwhile, earlier this month, direct rival BeyondTrust got flipped to another PE portfolio in a deal that we estimate went off at about 3x trailing sales.

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At the Wall Street box office, Alibaba is a blockbuster

Brenon Daly

Contact: Brenon Daly

In Hollywood, a blockbuster debut that is expected to help support the release of other films around the same time is known as a ‘tentpole.’ And while that phenomenon may have also played out in the IPO business in the past, no one is expecting the Alibaba debut later this week to help prop up other offerings. Quite the opposite, in fact.

To understand why, think of Alibaba as Godzilla (the monster, not the movie). The Chinese e-commerce giant is looking to come to market – backed by no fewer than 20 investment banks – and create almost a Facebook-size valuation overnight. The sheer size of Alibaba’s record-setting offering of some 320 million shares at (currently) $68 each basically pushes other IPO candidates outside the awning of any Alibaba tentpole.

With Alibaba and its underwriters looking to place billions of dollars of equity, buyers are unlikely to step right back in to buy smaller-ticket tech IPOs. That means solid offerings that are in process, such as Cyber-Ark and HubSpot, may initially open a bit soft at the box office that is Wall Street.

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Its IPO stuck, Box is no longer the upstart startup

Brenon Daly

Contact: Brenon Daly

This year’s Burning Man and BoxWorks have more in common than just a spot on the calendar. The two festivals have grown far beyond the original events, both in terms of scope and attendees. In fact, both the bacchanal in the desert and the Box user conference, in their own ways, have grown so much from their anti-establishment roots that they’ve now become part of the establishment. The onetime fringe events have gone mainstream.

While the Burners debate whether the festival ‘sold out’ its founding principles, the Boxers have posed a similarly existential question: What are we now?

Throughout its three-day conference for developers and customers, which wrapped Thursday, Box took great pains to show how much it has grown up in its nine years in business. For the first time ever, BoxWorks was held at an actual convention center (the same location Oracle will use later this month for its user conference and salesforce.com will use next month). And more than ever before, Box populated its panels and presentations at the event with big company representatives, consciously underscoring just how far it has come since its fabled ‘pivot’ away from the consumer business.

But the clearest indication of the change at Box came from the very top of the company. CEO Aaron Levie, who normally freewheels through speeches, sounded much more measured. The 20-something-year-old CEO dialed down his snark and couched some remarks in language that read like it came from an SEC filing. (Maybe filing an S-1 does that to a chief executive?)

As an example of this new business-like attitude, consider the shift in Box’s relationship with onetime nemesis Microsoft. At previous BoxWorks, Levie thrived by bashing Microsoft, positioning the company as a lumbering dinosaur that had been outflanked by the nimble startup, Box. And yet, one of the key features for Box that Levie played up during his keynote was the fact that Box now partially integrates into Office 365. (For the record: It’s in beta, and comes more than three years after Microsoft launched Office 365 and Levie blogged that Box ‘would love’ to connect with the offering.)

With Box likely to put up about $200m in sales this year, it’s clearly no longer a startup. But what was made equally clear at BoxWorks this year is that the company is no longer an upstart, either. It’s turning into another enterprise software vendor, whether it likes it or not.

In our opinion, it is that realization that makes it more likely that Box will be sold or, at the least, be a more willing seller. In the consolidated, mature market of enterprise software – where a company like Microsoft puts up more revenue each day than Box does in a year – scale is an advantage. Despite all of its marketing spending and a more grownup user conference, Box still doesn’t have scale, and can likely only obtain that by getting acquired. So which company is likely to pick up Box? Hewlett-Packard is our top pick, followed by Cisco.

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HubSpot markets a potential IPO

Scott Denne

Contact: Scott Denne Matt Mullen

HubSpot takes the covers off its financial performance by filing its S-1. Like many recent SaaS IPOs, the documents show strong growth but steep losses. The company points to the nearly untapped market for its software ? and our surveys indicate that this is indeed the case, but HubSpot and its competitors will have to continue to spend heavily to build that opportunity.

HubSpot generated $93.8m in revenue for the most recent 12-month period ? an impressive 46% increase compared with a year earlier, but growth is declining from the 50% the company posted in 2013 and the 81% in 2012. During that same period, it had a $35.7m net loss, a figure that only grew 34% year over year. While losses as a percentage of revenue continue to tick down, HubSpot is many years away from putting up annual profits (not that we expect a lack of profits to impact the offering).

A recent survey by ChangeWave Research, a service of 451 Research, revealed that only 24% of companies had either deployed or planned to immediately deploy any form of digital marketing technology. Among companies with 10-1,000 employees (HubSpot’s sweet spot), nearly two-thirds said they had no near-term plans to begin using digital marketing technology, highlighting that while there is certainly a sizable chunk of the market that has yet to be tapped, the job of persuading the majority of potential customers that such investments are worthwhile is an ongoing challenge.

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TubeMogul’s IPO getting fuzzy reception

Scott Denne

Contact: Scott Denne

TubeMogul has had a tough time finding reception on Wall Street. The company, which sells software and services to enable brands to advertise in online videos, cut the expected range of its IPO to $7-8 per share from $11-13, and its existing investors have informally committed to buy more than half of the $47m offering.

Some of the difficulty stems from the performance on its closest peers – Tremor Video and YuMe. Those video ad networks went public last summer and have seen their value drop 57% and 34%, respectively. TubeMogul is transitioning itself to a provider of software (41% of revenue last quarter), not just services (58%, down from 76% a year ago), giving it higher gross margins and potentially a higher valuation – at the midpoint of its range it would have a pro forma enterprise value of about 2.3x trailing revenue, double what YuMe and Tremor command.

Despite the potential for TV ad dollars – which currently account for about half of all ad spending – to move online, the transition is in its early days and while TubeMogul has managed to capture a chunk of the first phase (desktop video accounted for 95% of its revenue in each of the past two years), Wall Street may be wondering if it will be able to post the same growth (more than 2x YoY last quarter) selling ads into mobile devices, connected TVs and other emerging forms of video consumption.

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Big money for little companies

Brenon Daly

Contact: Brenon Daly

With Wall Street continuing to look like forbidding territory to most IPO candidates, where are money-burning companies going to restock their treasury? Increasingly, hedge funds and mutual fund giants are providing, collectively, the hundreds of millions of dollars in financing that might have otherwise come through IPOs.

This, of course, isn’t an entirely new phenomenon. But we can’t recall a time that has seen more late-stage funding than the just-completed second quarter. Okta, Atlassian, New Relic, Pure Storage and others all drew in financing during the past three months from investment firms that have historically only purchased shares in public companies. In many ways, it’s a wonder that it took the recent chill in the IPO market to spur this ‘crossover’ activity to new levels. (We’ll have a full look at the recent IPO market – as well as the other exit, M&A – in our report on Q2 activity available later today on 451 Research.)

From the money managers’ perspective, these investments in private companies offer a bit of portfolio diversification, as well as the opportunity to outpace the returns of the broader equity market, which has registered a mid-single-digit percentage gain so far in 2014. And on the other side of the investment, the late-stage companies stand to receive tens of millions of dollars from a single investor without all the SEC rigmarole and other public company exposure.

Further, with billions of dollars to put to work, the mutual funds and hedge fund giants haven’t shown themselves to be as ‘price sensitive’ as other traditional late-stage funders. (The discrepancy between valuations of illiquid private shares and freely traded public stock stands out even more now, as new issues are being discounted heavily in order to make it public at all. For instance, Five9 stock has never even reached the minimum price the company and its underwriters thought it should be worth, and currently trades at just 3.5 times this year’s revenue. Meanwhile, MobileIron shares have dropped almost uninterruptedly since the company’s IPO, falling back to only slightly above their offer price. MobileIron is currently valued at only about half the level that a direct rival received when it sold earlier this year.)

Like life, markets are cyclical and IPOs will undoubtedly come back into favor on Wall Street at some point. But in the meantime, many late-stage companies are calling on the big-money investors to keep the lights on. We would include Box in that category. The high-profile company, which has been on file publicly since March, has found its path to the public market a rather rocky one. Having already raised more than $400m in backing, we could well imagine the money-burning collaboration software vendor crossing off an IPO (at least for now) and going back to a crossover investor for cash later this summer.

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Sync and share startups get Boxed in

Scott Denne

Contact: Scott Denne Alan Pelz-Sharpe

Dozens of enterprise file sync and share (EFSS) startups were looking toward the Box IPO to set a high bar for valuations in this crowded space. Instead, Box delayed going public and, by filing an S1, exposed the extensive costs involved in building out a viable EFSS business.

There have been few EFSS exits – a worrisome development for many startups as sync and file sharing are rapidly becoming a commodity. Unlike other commoditized tech sectors, there hasn’t been a single marquee exit from EFSS. Contrast that with markets like mobile device management, which has more than 60 vendors but already has a $1.5bn exit (AirWatch) and at least $600m in market cap coming (MobileIron), as well as several $100m-plus acquisitions.

Had Box gone public at the expected time and multibillion-dollar valuation, the IPO would have likely triggered a fast-tracking of M&A activity and maybe even a number of smaller offerings in its wake. Although Box itself will likely find its way to a strategic acquirer or an eventual IPO and billion-dollar exit, many of the 30-40 startups in this space will face pressure to stem losses and find profits or potential buyers.

We’ll have a report in tomorrow’s 451 Market Insight detailing our outlook for the EFSS sector.

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MobileIron forges on toward IPO

Scott Denne

Contact: Scott Denne

Mobile device management (MDM) vendor MobileIron unveiled its S-1 this week, posting strong revenue growth as it inches toward becoming a profitable business. Our surveys indicate that there’s more to come: MobileIron is on the cusp of pulling ahead in a market where spending shows few signs of slowing.

The company finished 2013 with $105.6m in revenue, up from $40.8m in 2012. And it isn’t having a hard time managing that growth. MobileIron’s operational costs are growing at a slower rate than revenue and while it is still far from profitable, its losses shrank to $32.5m last year from $46.5m in 2012. Although its revenue growth is decelerating as it scales, it’s still growing fast: in the most recent quarter, revenue doubled year over year to $28m.

Surveys by TheInfoPro, a service of 451 Research, indicate that there’s plenty of blue sky left for the MDM market and MobileIron. In a survey of IT pros last year, 46% expected to spend more on MDM in 2014 than in 2013, up from 41% a year earlier. In those surveys, MobileIron was the second-most-implemented MDM provider (Good Technology was the first, with AirWatch in third and BlackBerry a distant fourth), and was in more planned deployments and trials than any other vendor.

 

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A tale of two IPO markets

Brenon Daly

Contact: Brenon Daly

It’s not quite the clichéd ‘best of times, worst of times’ in the tech IPO market right now, but there’s a clear split in fortunes for companies coming to market. Whimsical consumer technology firms are back in favor, while the more serious enterprise-focused tech vendors are struggling to find buyers for their equity. That was shown in sharp relief in the divergent receptions of two tech companies – one from each of the broad sectors – that debuted Friday morning.

Representing enterprise tech vendors, we have Five9. On paper, the call-center software provider would appear to have a bullish profile for Wall Street: a pure SaaS delivery model, solid growth (30%+ in 2013) and a big opportunity in front of it (the company sizes its existing market at some $22bn). And how did that go over with investors? Well, Five9 had to take a sharp discount to even get public. It had planned to sell its shares at $9-11, but instead priced at just $7 and closed Friday at $7.52.

While Five9 was discounting its offering, the IPO from its consumer counterpart, GrubHub, was headed very much in the opposite direction. The online takeout ordering service sold more shares than originally planned at a higher price than originally planned. After pricing its offering at an above-range $26 per share, it closed at $34 on the NYSE.

The discrepancy in valuation between the enterprise and consumer companies is even more startling. Wall Street says Five9, which has roughly 48 million (undiluted) shares outstanding, is worth about $360m. That works out to about 4.3x 2013 revenue of $84m. On the other hand, GrubHub is valued at some $2.7bn, or nearly 20x 2013 revenue.

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What’s behind door number two? An IPO

Brenon Daly

Contact: Brenon Daly

For tech startups considering the two possible exits so far this year, an IPO is clearly door number two. Sure, there’s plenty of money to be made in taking a company public. And the valuations that Wall Street is handing out for recent debutants – notably the double-digit multiple for Varonis Systems and a solid 6x trailing sales for A10 Networks – are far from paltry. But there hasn’t been anything that comes close to a ‘WhatsApp’ in the IPO market so far this year.

Granted, the $19bn sale of the five-year-old mobile messaging startup is something of an anomalous event, so we will go ahead and set aside that transaction. But even leaving out the largest-ever sale of a VC-backed vendor, there were still three other sales of VC-funded firms in the first quarter that went off at more than $1bn. When we look at the other exit, we would note that not a single tech firm that went public in the first three months of 2014 created more than $1bn of market value.

Further, as we skim down the list in The 451 M&A KnowledgeBase of VC-backed startups that have opted for a trade sale so far this year, it’s hard not to see that IPOs – despite all of the talk about how the JOBS Act has made it easy to go public and a ‘record’ Q1 – have fallen out of favor.

Consider Mandiant, a 10-year-old information security provider running at more than $100m in bookings. Last summer, the company indicated to us that it was looking to raise one round of late-stage capital and then go public in 2015. Instead, it sold to FireEye for just under $1bn, mostly in the acquirer’s own freshly printed stock. Elsewhere, AirWatch garnered some 15x bookings in its $1.5bn sale to VMware, a valuation that rival MobileIron is unlikely to trade at – not initially, anyway – when it comes public later this year.

And even down in the mid-cap market, Coverity gave up on its long-held plan to go public, selling instead to one of its customers, Synopsys. From our perspective, Coverity certainly looked like a reasonable candidate to be a public company: it had little pressure to sell (having taken in just one round of funding and sitting on about $25m) and was growing at a 20-30% clip while nearing $100m in sales. Instead, it sold for $375m, valuing itself at 4.7x trailing sales. That’s about a turn higher than the broader tech M&A multiple, but lower than what Wall Street typically hands out for companies sharing Coverity’s profile.

But the IPO, which has always enjoyed a sort of premium standing among most VCs and executives, appears on the cusp of reclaiming its top-ranked position. At least two enterprise tech vendors are currently on file for what will almost certainly be hot offerings. Both Arista Networks and Box will undoubtedly be ‘billion-dollar babies’ when they come to market in early summer. You can read more about both the recent M&A market, which is clipping along at a record level currently, as well as the outlook for IPOs in our Q1 M&A report published earlier this week.

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