Category: IPO

Contact: Scott Denne

Arista Networks, a next-generation networking vendor, aims to go public with a last-generation IPO – one from a company that boasts growth and profits. A decade of developing Ethernet switches based on innovative software and merchant silicon, rather than custom chips, has led to a 71% CAGR for the past four years.

The company wrapped up 2013 with $361m in revenue, up 87% from the $193m it posted a year earlier as its largest customers, mostly cloud datacenters, Internet providers and financial services firms, bought more of its gear. Arista’s 10 largest customers accounted for 43% of sales in 2013, up from 32% in 2011. Its largest customer, Microsoft, accounted for $80m of its sales last year, up from $14m in 2011.

Unlike most other newly minted enterprise IPOs, Arista’s growth hasn’t come at the expense of profits. Instead, it’s printing cash. Aside from a slight uptick in the resources it earmarks for R&D, all of Arista’s costs have risen in tandem with, rather than ahead of, revenue and it finished 2013 with $42m in profit, up 99% from a year earlier.

Having posted four straight profitable years removes some of the guesswork of estimating Arista’s future cash flows, and we expect that Wall Street will put a premium on that – and its stellar growth, of course. As disclosed in its S-1, shares of the company have traded hands this year at prices that value Arista at $3-3.5bn. As a public company, we’d expect it to trade far higher than that.

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Contact: Scott Denne

Investors haven’t balked recently at bidding up an enterprise tech IPO with massive growth and no profits in sight. Box, however, will test the appetite for that kind of stock more than most. The file-sharing provider has put up impressive growth numbers, doubling its revenue last year to $124m. The prior year it fell just short of tripling revenue. That growth has come at a cost. In the year ending January 31, Box had a net loss of $169m driven by $171m spent on sales and marketing.

Plowing revenue back into sales and marketing is fashionable lately, but few are doing it to the extent that Box does. At the time of their IPOs, SaaS companies Workday and ServiceNow, for example, were spending less than half of their revenue on sales and marketing while putting up similar growth rates. Box is trending toward becoming profitable – its costs grew at a slower rate than its revenue and every dollar it spent last year brought it $0.44 in revenue, up from $0.30 in 2011. However, improving margins have done little to stem the flow of cash out of the business; its negative free cash flow rose to $124m last year, up from $101m a year earlier. At those rates, it will take at least three or four years for Box to get near being profitable or cash-flow positive.

We would expect Box to be valued in the same neighborhood as Workday and ServiceNow’s IPOs, which each priced at 22x trailing revenue. That would put Box’s debut valuation at about $3bn, a step above the roughly $2bn valuation on its last venture round. Given Wall Street’s bullish reception of other enterprise SaaS vendors, Box should trade up from there.

We’ll have a longer report on Box’s IPO filing in our next 451 Market Insight.

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Contact: Scott Denne

Call-center software maker Five9 made its IPO filing public Monday, with financials that fit the pattern of other SaaS companies: strong revenue growth, steep losses. Five9 posted $84m in 2013 revenue, up 32% from 2012.

There was a cost to that growth. The firm ended the year with $17m in cash, after raising $45m in debt and equity financing in 2013. Its sales and marketing expenses jumped 67%, double the rate that its revenue grew, and pushed operational expenses up to the highest level in the three years disclosed in its prospectus. Five9 recorded a $28m net loss last year, up from $17m in 2012 and $7m in 2011.

None of that makes Five9 an outlier, however. Many other SaaS vendors, including RingCentral, ServiceNow and Workday, spend a larger portion of their revenue on sales and marketing. None are trending toward profitability.

Losses haven’t hurt valuations for those companies, and they likely won’t impede Five9. Because of its pure cloud portfolio, we expect Five9’s enterprise valuation to be a few ticks higher than competitors Interactive Intelligence (4.8x trailing revenue) and inContact (3.5x), both of which still sell legacy on-premises software in addition to cloud offerings.

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Contact: Scott Denne

Online food delivery services company Seamless North America had the size and the growth for a solid public offering of its own, and by acquiring (and taking the name and CEO of) its closest competitor, GrubHub, the company improved both of those attributes. The new GrubHub wasted no time pushing itself out to public markets. It filed for a public offering just four months after closing the merger and made its filing public last week.

Seamless itself posted $111m in 2013 revenue, up 35% from a year earlier and coming off a year of 36% revenue growth. Wall Street would likely have rewarded that high, consistent growth rate. Instead, Seamless added to that, handing over about 43% of its stock in August to pick up GrubHub, which, independent of Seamless, grew revenue 62% to $59m last year.

Pairing up didn’t hurt profits. Despite a $24m loss in 2012 from the original GrubHub, the combined company (Seamless alone through August 8, 2013, and combined results afterward) made a profit in each of the past three years and every quarter during the past two years, including $3.6m in combined net income on $84m in revenue during the two recent quarters, which mixes results between the two businesses.

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Contact: Scott Denne

Over the three years on record in its IPO prospectus, application delivery controller vendor A10 Networks has grown its total revenue, but not without setbacks. The company has weathered – and continues to weather – multiple patent lawsuits, with one resulting in a $75m settlement with Brocade that included current and future patent licensing from A10 to Brocade until 2025.

Meanwhile, its own operations are showing signs of slowing. A10’s top line grew a respectable 18% to $141m in 2013, but its year-over-year growth rate on a quarterly basis was inconsistent, ranging from 7-27%.

Further, its costs have risen lately, indicating that the growth may not have met management’s expectations. A10’s operating costs (minus litigation expenses) grew to 84% of revenue in 2013, up from 73% in 2012 and 60% in 2011 and 2010. Last year A10 recorded a $27m loss, making 2013 the first year in the past four (the full period reported in its S-1) that it was unprofitable independent of its legal bills.

A10’s networking peers trade at 3-5x trailing revenue. Taking into account A10’s slightly higher – but lumpy – growth and the prospect of pending litigation, we expect it to trade on the low end of that range, with an enterprise valuation of 3-4x for a debut valuation of about $500m.

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Contact: Scott Denne

Aerohive Networks, a maker of Wi-Fi equipment and software, has made its IPO filing public, setting it up to be the fastest-growing publicly traded Wi-Fi vendor. The company posted $89.6m in trailing revenue and while it has yet to declare its full 2013 performance, we estimate Aerohive’s revenue was roughly $100m for the year, giving it 50% year-over-year growth.

Its revenue is tilting toward SaaS sales, rather than equipment revenue alone, as it grows sales of its network management software. SaaS makes up less than 10% of Aerohive’s overall revenue; however, sales of its software are causing a spike in its deferred revenue, indicating that future revenue will be less lumpy than a typical networking equipment provider – something that should play well on Wall Street.

Aerohive’s growth comes as enterprises are moving wireless networking projects to the top of the queue. In surveys of enterprise IT buyers by TheInfoPro, a service of 451 Research, 25% of respondents said a wireless rollout or expansion was their top networking project during the second half of 2013 and first half of this year.

The best comparables for Aerohive are two of the publicly traded Wi-Fi vendors, Ruckus Wireless and Aruba Networks. Both are bigger companies with slower growth (Ruckus posted 17% year over year in its most recent quarter, while Aruba posted 11%) and enterprise valuations of 3x trailing revenue for Aruba and 3.6x for Ruckus. Aerohive’s superior growth rate and increasing SaaS revenue should give it a significant valuation boost, and we expect the company to be valued at 6-8x trailing revenue, or about $700m, when it comes to market.

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Contact: Scott Denne

Ad-exchange operator Rubicon Project has filed its IPO, lining itself up to be the latest new ad-tech offering in the public markets. Even though that market has been volatile and, sometimes, unforgiving, we see an IPO as the most likely near-term exit for the company’s investors. Prices for all the recent ad-tech entrants are trending downward, with half down more than 20% from their debuts. Unlike those vendors, Rubicon is on the opposite side of the advertising business. It runs an exchange where publishers place ad inventory for real-time bidding by ad agencies and networks like Criteo and Rocket Fuel.

Rubicon also captures a larger share of ad spending through its ad exchange than any of its recently public peers; although, because it is an ad exchange, it keeps a smaller portion of that spending: about 15%, compared with about a 40% benchmark for buy-side ad businesses. Rocket Fuel and Criteo trade at roughly 9x and 3x trailing revenue, respectively. Given that Rubicon Project’s posted growth rates are half of what those companies boast, we’d expect it to begin trading somewhere between 5-7x its trailing revenue of $75m, giving it a market cap between $375m and $525m.

Although ad-tech offerings have been volatile – Rocket Fuel, for example, has seen its shares plummet 20% two times since its September IPO, followed by a move back into positive territory, and Criteo has seen similar patterns – the dearth of buyers makes an IPO the best potential for liquidity for Rubicon’s investors and employees. (We understand Rubicon was talking to investors last year about a secondary offering.) Owning an ad exchange is of little value to anyone except the largest Web publishers (Google, Yahoo, Twitter, etc.), and those companies have all built or bought one of their own.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.