Category: IPO

Rocket Fuel takes off on debut

Scott Denne

Contact: Scott Denne Tejas Venkatesh

Adtech company Rocket Fuel created fireworks on the public markets today, first debuting at the high end of an already upwardly revised range and doubling shortly thereafter. The offering creates $1.8bn in market value, and highlights investors’ hunger for a combination of growth and technology differentiation.

Rocket Fuel generated $160m in revenue for the year ended June 30, up roughly 135% from the same period last year, valuing the company at a handsome 11.6x trailing sales. In its filings, the company emphasized its use of artificial intelligence and complete automation of ad buying. That makes it unique from other demand-side platforms, which work more like a Bloomberg terminal for ad buying, and that seems to appeal to investors seeking an adtech business that’s based on technology, rather than an arbitrage of buying ad inventory and reselling it at a higher price.

That growth and tech combination is resulting in the superior valuation compared to recent adtech IPOs like Tremor Video, Marin Software and Millennial Media, all of which trade at less than 6x trailing sales. For instance, Millennial, which is comparable to Rocket Fuel in revenue run rate, trades at just 3x trailing sales.

Rocket Fuel’s offering is good news for larger rival Turn, which is planning its own IPO. We believe the nine-year-old startup is generating roughly $250m in revenue and is likely to file its paperwork early next year.

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Mindful — and major — M&A by Mindjet

Brenon Daly

Contact: Brenon Daly

In its first major acquisition, Mindjet has handed over just less than one-third of its equity for Spigit, a social and innovation-focused front end to its collaboration platform. The deal comes as 20-year-old Mindjet continues its evolution from a Windows-based ‘brainstorming’ license software vendor to a multi-OS, subscription-based platform. That transformation – accelerated by the addition of Spigit – makes it a whole lot more likely that Mindjet will be in a position to join the ranks of public companies in a year or two.

According to our understanding, fast-growing Spigit will bump up Mindjet’s top line by about one-third. (Subscribers to The 451 M&A KnowledgeBase can click here to see our specific revenue estimates for Spigit.) Importantly, all of Spigit’s revenue is subscription, which fits with Mindjet’s efforts to transition to a fully SaaS business. Mindjet basically stopped selling perpetual licenses last year and is tracking to finish 2013 with subscriptions accounting for about 70% of total revenue.

Initially backed by Warburg Pincus, Spigit got re-capped earlier this year with PICO Holdings taking a majority stake of the company. Collectively, Spigit shareholders will own 30% of the combined company, and its 100 employees will account for almost the same ratio of the combined company’s 400 employees. Arma Partners advised Spigit on the sale.

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

Ringing Wall Street

Scott Denne

Contact:Tejas Venkatesh Scott Denne

Virtual phone systems vendor RingCentral revealed its prospectus earlier this week, likely setting up an IPO for next month for the 14-year-old company. The offering comes as RingCentral continues to evolve from a hosted answering machine service to a full virtual phone systems provider. RingCentral now enables voice, text and fax communication across multiple devices, including smartphones, tablets, PCs and desk phones.

The four-year-long transition is paying off. RingCentral generated $73m in revenue in the first six months of the year, up nearly 40% from the same period last year. Advances in broadband communications have resulted in rapid growth of the number of business lines hooked up with VoIP. According to the Federal Communications Commission’s latest local telephone competition report, VoIP business lines grew 106% between the end of 2009 and last summer. Further, there’s still a lot of room for growth, as only 10% of business lines are currently VoIP-enabled.

In addition to expanding its product portfolio, RingCentral is also looking to move upmarket. The company, which counts 300,000 customers, mostly caters to businesses that have less than 10 employees. As it continues to grow, RingCentral is looking to land larger customers. That strategy makes sense because small businesses are more likely to disappear, and are more expensive to support than bigger companies with an in-house IT team.

When RingCentral hits the market, we figure it will command a premium valuation compared with rivals due to its superior growth. Its primary competitor 8×8 currently trades at roughly 6x trailing sales. But that company, which is smaller than RingCentral, only grew 19% in the first six months of the year – just half of RingCentral’s rate over the same period. As a result, we believe 7-8x trailing sales would be a good starting point for RingCentral’s valuation. Slapping that range on RingCentral, which generated $136m in sales for the year ended June 2013, would value the company at about $1bn.

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

How will Violin play on Wall Street?

Brenon Daly

Contact: Brenon Daly Tim Stammers

In what would be the first IPO from the storage sector in two years, Violin Memory’s prospectus is out for all the world to see. (We indicated last week that the S1 was on its way.) What people are mostly seeing in the paperwork, however, is red ink – and lots of it.

As we wrote in our full report on the all-flash array (AFA) vendor, its filing and what it has to look forward to as a public company, Violin’s offering won’t appeal to everyone on Wall Street: It’s a relatively immature company, spending money at an unsustainable rate in a market that today represents only a tiny fraction of overall storage spending but is getting more competitive every day.

If we wanted to translate that into some actual numbers, we might offer this summary from the prospectus: Each quarter, Violin has been losing anywhere from $20m to as much as $35m to bring in $20-25m in revenue. (Altogether, Violin has run up an accumulated deficit of more than $250m since incorporating in 2005.)

The main reason for the deep losses at Violin is the fact that its product is expensive to make. (Gross margins run only in the low-40% range.) Once those costs are subtracted, there’s very little left over for operating costs. Yet that hasn’t slowed Violin’s spending on R&D or sales/marketing. For the past year, quarterly operational spending at Violin has run three times higher than its gross income.

While certainly staining the P&L sheet a blood red, Violin’s lavish spending has nonetheless helped establish it as the leader in the nascent AFA market. Storage professionals at major enterprises have tapped Violin as the most exciting privately held storage vendor, according to recent interviews by TheInfoPro, a service of 451 Research. Further, Violin has succeeded in converting that into sales momentum, with recent growth rates of about 70%. For more on Violin and the offering, see our full report.

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Violin set to play on the big stage, with IPO imminent

Brenon Daly

-by Brenon Daly

After a fitful past few quarters, Violin Memory is ready to play on the big stage. The all-flash array provider is set to reveal its IPO paperwork later this week, according to sources. Our understanding is that the offering itself will take place in about a month, with Violin likely to be valued at just under $1bn at debut. Assuming it does go public, Violin would be the first significant enterprise storage IPO in two years.

The initial valuation is a bit lower than the $1.5bn we penciled out for Violin last October when we first reported that the company was set for an IPO. Two factors are weighing on that – one inside the company and one outside. In terms of macro-level influences, there’s been a recent trend toward conservative pricing for IPOs, at least at debut, as uncertainty and volatility has increased on Wall Street.

Still, fast-growing companies have traded substantially higher in the aftermarket, and we would expect Violin to follow suit. The reason? Violin’s torrid growth rate. According to our understanding, Violin is tracking to increase sales about 80% in the current fiscal year, ending next January. We gather that Violin put up roughly $75m in sales in the previous fiscal year, and is projecting about $135m for its current fiscal year.

The heady growth hasn’t come without a stumble or two. Several sources have indicated that the company’s sales in the second half of last year came in much lighter than expected, in part because Hewlett-Packard stopped reselling Violin. But at least some of the lumpiness that Violin had been experiencing has been smoothed by new sales arrangements and new products.

For instance, my colleague Tim Stammers recently wrote an in-depth look at Violin’s partnership with Toshiba, which is also an investor in Violin, to start selling PCIe flash cards . Although the expansion into what’s likely to be a commodity market doesn’t alleviate all of the concerns around the inherent lumpiness of Violin’s big-ticket arrays, it does at least add a new revenue stream.

And in terms of its core product, Violin does have the advantage that it has created a fair amount of buzz with the audience that matters. A recent survey by TheInfoPro, a service of 451 Research, interviewed more than 260 storage professionals at major enterprises and asked them to name which vendor they found ‘exciting.’ Violin came in as the top-ranked privately held storage company, with twice the mentions of other high-flying startups such as Nimble Storage and Pure Storage.

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

Welsh Carson cleans up cap table for IPO-bound Alert Logic

Brenon Daly

Contact: Brenon Daly

In its first major move into IT security, buyout firm Welsh, Carson, Anderson & Stowe has acquired a majority stake in SaaS security vendor Alert Logic. The deal substantially cleans up the capital table at 11-year-old Alert Logic, which has drawn backing from six firms since its series A in 2005, including at least two shops that are designated as early-stage investors. As is typical for these late-stage growth investments by private equity (PE) firms, we would expect the next major capital event for Alert Logic to be an IPO.

Closer at hand, having a single, deep-pocketed owner should help Alert Logic take on its next opportunity for growth: international expansion. Currently only about 230, or 10%, of Alert Logic’s total customers are outside its home US market. The Houston-based company doesn’t have any direct sales outside the US.

International expansion for cloud-based companies like Alert Logic can be expensive because not only do they have to hire sales and marketing staff, they may also have to open in-country datacenters, depending on data residency laws. With $20bn in total capital, Welsh Carson can write those checks. (While Welsh Carson doesn’t currently hold any information security vendors in its portfolio, we would note that the PE firm is well-versed in the service-provider market, where Alert Logic does the majority of its business. The PE shop has put money into both Savvis and Peak 10.)

Alert Logic’s streamlined ownership also should help smooth the way for an IPO, although an offering may not come until 2015. The company finished 2012 with GAAP revenue of $30m and will likely bump that to nearly $45m in 2013. Assuming that growth rate roughly holds, Alert Logic could do $60-65m in sales in 2014. (Keep in mind, too, that Alert Logic is a subscription business, so revenue lags bookings.)

The two most-recent SaaS security providers to debut (Proofpoint and Qualys) both went public when their quarterly sales hit approximately $25m. (Proofpoint went public in April 2012, while Qualys followed suit last September. The two companies have market caps of $1bn and $600m, respectively.) However, we would note that although Alert Logic is smaller, it is growing twice as fast as Qualys and about half again as fast Proofpoint. Alert Logic has been clipping along at a 40-45% growth rate, compared with 20% at Qualys and 30% at Proofpoint.

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

Zillow takes a big bite of the Big Apple, acquires StreetEasy

Brenon Daly

Contact: Brenon Daly

Looking to expand its offering in one of the most competitive real estate markets in the US, Zillow pays $50m in cash for New York City-focused StreetEasy. The deal, which should close this month or next, will be part of the company’s Marketplace portfolio, which generates about two-thirds of total revenue at Zillow. (The remaining revenue comes from display advertising and mortgage offerings, two businesses where Zillow has also used tuck-in acquisitions.)

Founded in 2006, StreetEasy provides both rental and for-sale listings in the New York City area. The company draws nearly 1.2 million unique visitors each month. (For comparison, Zillow attracted more than 61 million users in July, up from 37 million in July 2012.) StreetEasy is the largest of Zillow’s seven acquisitions, which have all come in the past two and a half years, according to The 451 M&A KnowledgeBase.

Fitting for a company that is growing at about 60%, Zillow recently told Wall Street that it will be increasingly reinvesting in its business. In the second quarter, Zillow lowered its EBITDA projection for the rest of the year, while bumping up its revenue forecast. (It now sees about $185m in sales for 2013, compared to a market capitalization of $3bn.)

Although Zillow holds roughly $170m in cash and short-term investments, the company also announced plans to sell 2.5 million new Class A shares. (Additionally, private equity firm Technology Crossover Ventures and company insiders have registered to sell another 2.5 million shares.) At current market prices, the secondary would add some $215m to Zillow’s treasury. Zillow priced its IPO at $20 per share in mid-2011, sold additional shares last September at about $40 each, and now trades at more than $80 each.

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

A solid offering from Cvent

Contact: Tejas Venkatesh

At first glance, event management software may seem like a niche business idea. But Wall Street gave Cvent a stellar reception on its first day as a public company today. The event management startup leaped onto the public markets, raising $118m. The company first priced its shares above range at $21 per share and traded up more than 60% from there. By midmorning, the stock changed hands at $34 per share, valuing the company at $1.3bn.

Cvent has put up impressive topline growth, while running solidly in the black. The startup has grown its revenue from $26m in 2008 to $84m in 2012, representing a CAGR of 35%. Cvent claims to be continuously cash-flow positive for the past eight years and estimates its total addressable market to be roughly $7bn.

In the 12 months ending March 31, the company generated $90m in sales. That means the market is valuing Cvent at 14.5x trailing sales. For comparison, we could look to Concur Technologies. The travel and expense management software vendor, which operates in a fairly compartmentalized part of the market like Cvent, currently garners a valuation of 11x trailing sales. Cvent’s premium valuation could be attributed to its higher growth clip compared with Concur, which grew 26% last year.

Cvent trades on the Nasdaq under the ticker symbol CVT. Morgan Stanley and Goldman Sachs were lead bookrunners for the IPO.

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Groupon gets lost in translation

Brenon Daly

Contact: Brenon Daly

Sometimes, business models lose a little something in translation. For all of the talk about globalization, commercial homogeneity and so on, we often get reminders that what works in one country may not necessarily flourish in another. That’s particularly true around commerce, as was evident once again in the Q2 results that Groupon announced Wednesday.

First, a bit of history: About a year and a half after its launch in late 2008, Groupon went on an international shopping spree. The heavily funded company picked up about 10 ‘clones’ in locations around the globe, ranging from its massive $126m consolidation of Berlin’s CityDeal, which it paid for with pre-IPO shares, to the tiny tuck-in of Israeli online coupon service Grouper. Other acquisitions got the Chicago company into markets such as Russia, the Philippines, South Africa and beyond.

But so far, Groupon isn’t getting the kind of returns it had hoped for when it started throwing money around the globe. Revenue from business outside of Groupon’s home North American market has actually shrunk so far this year. And it’s not just a slight downtick, but a full 20% decline in sales. Further, international sales are barely breaking even, as investments in ‘rest of world’ (primarily Asia) operations nearly siphon off all of the operating income produced in its EMEA division.

The dramatic slide in international sales contrasts sharply with the 44% growth Groupon posted for revenue in North America. (Add to that the fact that North America business at Groupon is almost half again as large as business outside of its home market.) That disparity stands as a reminder that while the world may be ‘flat’ (as Thomas Friedman and his cohorts have termed it), the business done on it tends to be lumpy.

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Where might FireEye be casting its eye for M&A?

Brenon Daly

Contact: Brenon Daly

When business is booming, who has time to shop? We were wondering that as we skimmed the prospectus for FireEye, an ‘advanced threat protection’ vendor that has doubled revenue so far this year. As we noted in our full report on the company’s planned IPO, FireEye has only really had its product out for three years, but is likely to put up about $150m in sales in 2013.

That’s astonishing growth, a testament to the company’s calculated effort to expand as quickly as possible. In the prospectus, FireEye notes that 375 employees – a full 40% of its entire payroll – work in sales. (That goes some distance toward explaining how FireEye has spent more just on sales and marketing than it has brought in as revenue so far this year.)

With all of the focus on – and enviable results from – organic growth, it’s no wonder inorganic growth has yet to figure into FireEye’s business. In that way, it’s basically following the practice of other high-flying companies that have come public – the companies that will serve as ‘comps’ for FireEye.

Neither Workday nor Splunk nor Tableau has been active in M&A, despite having the windfall of an IPO and richly valued equity to use in deals. Only ServiceNow has done a deal, and that was just a $13m purchase announced last month, a full year after it went public. (For those with a longer view, we would note that salesforce.com didn’t ink its first acquisition until almost two years after its IPO in mid-2004.)

Nonetheless, my colleague Wendy Nather has penciled out a few possible targets should FireEye want to go shopping. (And the company may need to use M&A, if just for customer perception. As she notes, threat intelligence and sandboxing at the network layer are not going to be considered a complete solution for handling malware attacks in the future.) We have a few thoughts around possible markets (think endpoints) and even a few specifics that may figure into FireEye’s future M&A plans in our full report.

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