IPO Report: Barracuda Networks (CUDA)

Barracuda Networks (CUDA) provides cloud-connected solutions that helps its customers address security threats, improve network performance and protect and store their data.

12 other IPOs scheduled for this week.  The full IPO calendar can be found at IPOpremium.

CUDA scheduled a $81 million IPO on the NYSE with a market capitalization of $974 million at a price range of $19.50, for Wednesday, November 6, 2013.

The S-1 with price ranges was filed October 23, 2013.  The Manager, Joint Managers are Morgan Stanley, J.P. Morgan and BofA Merrill Lynch.  The Co-Managers are William Blair, Lazard Capital Markets, Pacific Crest Securities

Overview

Since inception in 2003, CUDA has sold its solutions to more than 150,000 customers located in more than 100 countries.

CUDA increases top line revenue on the order of 20% annually and maintains a high 77% gross margin.  Revenue for the fiscal year ending February 29, 2014 could be in the $240 million range.

While CUDA has significant competition, it is targeting two multi-billion markets, see below.

Valuation

CUDA is priced at 4.3 times annualized sales and around 50 times annualized EBITDA. 

CUDA is running a loss based on GAAP accounting, but that is not unusual for a subscription-based, recurring revenue company with a high renewal rate — 93% for fiscal 2013, ended Feburary ’13.  Subscriptions account for about 69% of revenue.

CUDA has an accumulated deficit of -$284 million.

Conclusion

Neutral CUDA on the IPO, because although

• CUDA is an established, growing IT company targeting enterprise solutions in multi-billion markets, and and is focused on security applications.
• CUDA has a 77% gross margin and a high renewal rate.

Once institutions really started looking at the numbers they becamee less enthusiastic.

Business

CUDA provides cloud-connected solutions that helps its customers address security threats, improve network performance and protect and store their data.

Since inception in 2003, CUDA has sold its solutions to more than 150,000 customers located in more than 100 countries.

CUDA’s solutions are delivered as cloud-connected appliances and virtual appliances, as well as cloud-only solutions.  CUDA’s cloud services which enable continuous software updates, offsite redundancy and distributed capacity, and are provided on a subscription basis.

Subscription revenue for fiscal 2011, 2012 and 2013 and for the six months ended August 31, 2013 represented 63%, 73%, 70% and 69% of total revenue, respectively.

Subscriptions are billed in advance of the purchased subscription period. Renewal rates from subscriptions, on a dollars basis, have been 89%, 90% and 93% in fiscal 2011, 2012 and 2013, respectively.

Distribution

CUDA fulfill sales of solutions through a global partner network of over 5,000 distributors and value added resellers. Customers typically receive solutions and can deploy and begin to realize value within 24 hours.

Markets

CUDA operates in a number of established, multi-billion dollar segments across the security and storage markets that CUDA estimates were approximately $30 billion in 2012, based on market data from established third-party market research firms.

Securty market
CUDA defines its security market as the web access management, secure email gateway, secure web gateway, intrusion prevention systems equipment, secure socket layer VPN equipment, VPN/firewall equipment and application delivery controllers segments.

According to Gartner, estimated spending on these security segments was $14.4 billion worldwide in 2012.

Storage market

CUDA defines its storage market as the archival disk-based storage, archiving software, purpose-built backup appliances and data protection software and hardware segments.

According to IDC, estimated spending on these storage segments was $15.9 billion worldwide in 2012. Included in these markets are some high-growth segments, such as the purpose-built backup appliance segment, which, according to IDC, is projected to grow from $3.2 billion in 2012 to $5.9 billion in 2016, representing a compound annual growth rate, or CAGR, of 16.7%.

According to Gartner, the next generation firewall appliance sub-segment within the VPN/firewall segment was $4.5 billion worldwide in 2011 and is forecasted to grow to $8.7 billion by 2016, a 14.1% CAGR.

The market for the above security and storage segments for companies with 100 to 4,999 employees was $8.7 billion in 2012, according to a study CUDA commissioned from Compass Intelligence. Compass Intelligence further estimates there were 1.01 million companies worldwide with 100 to 4,999 employees in 2012, and an additional 1.43 million companies worldwide with 50 to 99 employees worldwide.

Intellectual property

CUDA had 43 issued patents and 63 patent applications pending in the United States, as of August 31, 2013.

Competition

Main competitors in these markets fall into two categories:

Independent network security, storage and application delivery vendors such as Blue Coat Systems, Inc., Check Point Software Technologies, Ltd., CommVault Systems, Inc., EMC Corporation, F5 Networks, Inc., Fortinet, Inc., Imperva, Inc., Juniper Networks, Inc., Palo Alto Networks, Inc. and Symantec Corporation that offer competing solutions.

Diversified IT suppliers such as Cisco Systems, Inc., Dell Inc., Hewlett-Packard Company, the McAfee division of Intel and International Business Machines that have acquired large security specialist vendors in recent years, that have software- or hardware-based storage solutions or that have the technical and financial resources to bring competitive solutions to the market.

Dividend policy

In October 2012, in connection with the recapitalization, CUDA declared $130 million of cash dividends, which is why CUDA has a negative book value, post-IPO.  That seems like a poor decision for a company that needs cash to grow, and whose free cash flow is declining as a percent of revenue.

5% stockholders

Entities Affiliated with Francisco Partners  26.5%

Entities Affiliated with Sequoia Capital       17.4%

Use of proceeds

CUDA expects to net $71.1 million from its IPO.

Proceeds are allocated for capital expenditures and general corporate purposes, including working capital, sales and marketing activities, product development and general and administrative matters.