IPO Report: Mavenir Systems (MVNR)

Mavenir Systems (MVNR) provides software-based telecommunications networking solutions that enable mobile service providers to deliver internet protocol (IP)-based voice, video, rich communications and enhanced messaging services to their subscribers globally.

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

MVNR scheduled a $77 million IPO on the NYSE with a market capitalization of $412 million, at price range midpoint of $16 for Wednesday, November 6, 2013.

The S-1 was filed October 24, 2013.  The Manager, Joint Managers are Morgan Stanley, BofA Merrill Lynch and Deutsche Bank.  The Co-Manager is Needham & Company.

Overview

For the six months ended June 30 ’13 MVNR’s revenue increased only 20% compared to the year earlier period, to $48 million from $40 million.  That’s quite a slowdown for year-over-year increase for 2012 and 2011 of 48% and 525% respectively.

And revenue was essentially flat comparing the September ’13 quarter with the June ’13 quarter.  Gross margin as declined from 62% for the six months ended June ’12 to 48% for the six months ended June ’13 to 49% for the three months ended September ’13.

Valuation

MVNR has an accumulated deficit of -$103 million.

Conclusion

• The rate of increase in top line revenue is decreasing, gross magin is decreasing, and operating loss % of revenue is still at a relatively high -14%.
• MVNR sells products, not subscriptions, so the only recurring revenue is maintence, which accounts for only 23% of total revenue.
• EBITDA is and always has been negative, although for the six months ended June '13 EBITDA was only -$.5 million negative.
• Even though IPO market currently appears ebullient, there still may be some rationality left, so the rating on MVNR is neutral, at the price range mid-point of $16.

Business

MVNR provides software-based telecommunications networking solutions that enable mobile service providers to deliver internet protocol (IP)-based voice, video, rich communications and enhanced messaging services to their subscribers globally.

MVNR solutions deliver Rich Communication Services (RCS), which enable enhanced mobile communications, such as group text messaging, multi-party voice or video calling and live video streaming as well as the exchange of files or images, over existing 2G and 3G networks as well as next generation 4G Long Term Evolution (LTE) networks.

MVNR’s solutions also deliver voice services over LTE technology and wireless (Wi-Fi) networks, known respectively as Voice over LTE (VoLTE) and Voice over Wi-Fi (VoWi-Fi). MVNR enables mobile service providers to offer services that generate increased revenue and improve subscriber satisfaction and retention, while allowing them to improve time-to-market of new services and reduce network costs.

MVNR’s mOne^® Convergence Platform has enabled MetroPCS (now part of T-Mobile), a leading mobile service provider, to introduce the industry’s first live network deployment of VoLTE and the industry’s first live deployment of next-generation RCS 5.

Market

In a September 2013 report, Gartner estimated that worldwide annual spending on 4G LTE mobile infrastructure would grow from $5.9 billion in 2012 to $33.9 billion by 2017, representing a compound annual growth rate (CAGR) of 42%. (Source: Gartner, Forecast: Carrier Network Infrastructure, Worldwide, 2010–2017 3Q13 Update, September 2013.)

The capabilities of smartphones and tablets have caused consumers to shift their communication preferences from traditional voice service to a combination of voice, video and messaging services, which are offered by rich communication services.

Additionally, many consumers are using their mobile devices to browse the internet, run software applications, access cloud-based services and consume, create and share rich multimedia and user-generated content.

These trends have placed substantial capacity constraints on the existing networks of mobile service providers. According to the February 2013 Cisco Visual Networking Index report, the average smartphone and tablet generate 50 and 120 times more data traffic, respectively, than the average basic-feature cell phone.

As a result, mobile data traffic is projected to continue to increase exponentially, driven by the rapid adoption of smartphones and tablets and the demand for enhanced and high-bandwidth mobile services such as video.

In order to alleviate the resulting spectrum and network capacity challenges, mobile service providers are making significant investments to transition their networks to the 4G LTE standard for voice and data transmission over mobile networks, as that standard enables higher data speeds and allows more efficient use of the frequency spectrum.

Customers

MVNR’s end customers include AT&T, MetroPCS (now part of T-Mobile), T-Mobile USA, Vodafone, Tele2, Deutsche Telekom AK and Telstra. Its customers include the first mobile service provider to deploy VoLTE and RCS 5 services to its subscribers, MetroPCS, which deployed these services utilizing MVNR technology. MVNR’s solutions can be deployed on-premise within the mobile service provider’s network or hosted in a mobile cloud environment. Its solutions enable mobile service providers to generate additional revenues by providing their subscribers with rich communications and cloud-based services

Recent developments

MVNR expects to report total revenues between $24.9 million and $25.5 million for the three months ended September 30, 2013, compared to total revenues of $25.8 million for the three months ended June 30, 2013, representing a decrease of 1% to 3%.

This expected decrease in revenues was attributable to lower revenues in the Europe, Middle East and Africa (EMEA) region partially offset by higher revenues in the Americas and Asia regions.

The year-over-year change in expected revenue represents an increase of 46% to 49% compared to total revenues of $17.1 million for the three months ended September 30, 2012. The increase in its expected year-over-year revenues reflects strong year-over-year growth in both the Americas and EMEA regions.

MVNR expects to report total gross profit between $12.0 million and $12.5 million for the three months ended September 30, 2013, compared to its gross profit of $13.5 million for the three months ended June 30, 2013, representing a decrease of 7% to 11%.

This expected decrease in gross profit was mainly driven by a number of sales to customers who are in the early stages of their network deployments, which leads to a greater proportion of hardware in the initial customer sale versus later-stage deployments where software is a larger percentage of the overall customer sale.

MVNR expects to report an operating loss of $(3.8) million to $(3.2) million for the three months ended September 30, 2013, compared to its operating loss of $(0.9) million for the three months ended June 30, 2013, representing an increase in the loss of 256% to 322%.

This expected increase in operating loss was due to lower gross profit and greater operating expenses (consisting of research and development, sales and marketing, and general and administrative expenses) attributable to increased staffing to meet customer demand and internal control requirements.

Intellectual property

As of June 30, 2013, MVNR had been issued 17 U.S. patents and 24 non-U.S. patents.

In addition, as of June 30, 2013, MVNR had a total of ten patent applications pending in the United States, and 19 pending non-U.S. patent applications. Many of the non-U.S. patents and applications are counterparts to the U.S. patents or certain of the U.S. patent applications.

Competition

MVNR’s principal competitors include major network infrastructure providers such as Alcatel-Lucent, Ericsson, Huawei, Nokia Siemens Networks, Samsung Electronics and ZTE Corporation as well as specialty solutions providers such as Acision, Acme Packet (recently acquired by Oracle), Broadsoft, Comverse, Metaswitch and Sonus Networks.

MVNR’s brand is not currently as well-known as those of its larger and more established competitors. In addition, many of its competitors have significantly broader product bases and intellectual property portfolios, as well as significantly greater financial, technical, sales, marketing and other resources than MVNR does.

5% stockholders

Entities affiliated with North Bridge Venture Partners  24.5%

AustinVentures VIII, L.P. 23%

Alloy Ventures 2005, L.P.  17.1%

August Capital V Special Opportunities, L.P. 16.3%

Cisco Systems, Inc. 10.9%

Use of proceeds

MVNR expect to net $64.5 million from its IPO from selling 4.7 million shares.  Shareholders intend to sell 129,7089 shares.

Proceeds are allocated for working capital and other general corporate purposes, which may include financing growth (including payment of increased levels of expenditures), developing new products and funding capital expenditures, acquisitions and investments