OHMYGOD - Sourcefire to IPO

Submitted by Mike Rothman on Wed, 2006-10-25 18:06.


I feel like a giddy schoolgirl because I'm seeing something that many of us haven't seen since 2001. A security IPO. OHMYGOD!!!!

Sourcefire has filed a S-1, which is the first step to going public. You can read the document for yourself here. They propose to raise up to $75 million and Morgan Stanley and Lehman are the leads. Hmmm.

I'm fired up (no pun intended) because you always get lots of juicy stuff in a S-1. Revenues, earnings, senior management salaries, employment agreements, investor positions. Oh the wonder of the S-1.

I don't have time to go through the filing with a fine tooth comb, but here are the highlights.

  • Total revenue in 2005: $32.9 million
  • 2005 loss of $8.1 million
  • Current cash of about $25 million
  • Existing shareholders have put about $56 million into the company
  • Revenue ramp starting in 2002: $1.9MM, $9.4MM, $16.6MM, $32.9MM
  • Services currently running about 36% of total revenues
  • Last 4 quarters have been: $11.6MM, $8.5MM, $9.5MM, $10.8MM
  • Profitable and cash flow positive for Q3 2006
  • Over 80% of revenue from the US
  • Marty Roesch owns about 9% of the company
  • Sierra Ventures is the biggest venture investor with a 28.8% position

So what's the conclusion? I guess I thought they were bigger. TippingPoint is a bulk of 3Com's $25 million in security business last quarter. I had heard the CheckPoint deal kind of hurt momentum for Sourcefire and I guess that's right. They still haven't beat the Q4 2005 number yet in 2006, which is odd for a strongly growing company.

But what should be a bit over $40 million in 2006 is a good number for a deal to get done. I figure other companies (Arbor, IronPort, Postini, MessageLabs, Crossbeam) are roughly that size if not a bit bigger, but haven't filed yet - so we could have the security IPO extravaganza in early 2007. CyberTrust is probably 4x that size, but services shops are valued differently. But the profitability thing is big hurdle to get a deal done, and Sourcefire now has that.

This could also be a ploy to force the hand of potential suitors. Brightmail played that card magnificently by filing the S-1 and then using that as leverage to extract a sweeter deal from Symantec. You figure SourceFire would have a $300-400 million valuation on the IPO (maybe?), so any suitor would need to beat that price. Rumors are swirling that Check Point is sniffing around again and some others as well.

Going public also gives Sourcefire currency to start buying other stuff. So it'll be interesting to see if they can get the deal done and then the long security IPO winter will be over. That would be a good thing, especially for my sell-side analyst friends, who haven't had any exciting security stuff to cover in a long time.

Congrats to Marty, Wayne and the rest of the team. An IPO is a big deal for all of us security folks.

Submitted by Stiennon (not verified) on Thu, 2006-10-26 11:04.

Thanks for wading through the S-1 for us Mike. Nice highlights. This IPO would have been a no-brainer in 1999. Today I wonder. For some reason everyone talks about the death of single product vendors. While I disagree with that idea it *will* have an impact on the prospects of Sourcefire. But, hey, if a security SPAC can raise $25 million on a lick and a promise ,as the firm who merged with St Bernard did, why shouldn't a profitable, growing company like Sourcefire raise a paltry $75 million. Then they can use their stock to quickly fill out their product portfolio.



Submitted by Mike Rothman on Thu, 2006-10-26 11:29.

Your point is exactly right. It's OK to get going as a single product company, but if they want longevity and sustainability, they'll need to figure out what is Act 2. With a publicly traded currency that will likely be inflated for a little while after the deal, they can buy a whole bunch of stuff and also hit the gas on the international business and have a few years of running room.

Hmm. Sounds like Netscreen to me, no? They were are firewall/VPN shop when they went public. Took on an IPS and then a SSL VPN, drove the box through distribution, especially internationally and then got taken out by Juniper for $4 Billion.

I'm not saying Sourcefire has those kind of chops, but if that's the playbook (and it seems it is), then it's one that's worked before.

Submitted by Mitchell Ashley (not verified) on Thu, 2006-10-26 14:48.

Not only is SF a one trick pony but they've lost serious momentum since the Check Point deal sunk. Don't get me wrong, I'd love to see them do well.

I hear the rumors too that SF might be doing this to be taken out. But by who? Symantec, McAfee? Nope. HP? Nope. (Everyone thinks HP is buying every company for sale.) CA? Yuk.

My friends in the financial community say they think SF wants to get taken out for at least the Check Point offer amount (~about $250m wasn't it?) but won't go for more than $200m if that. What are you hearing?

Submitted by Mike Rothman on Thu, 2006-10-26 15:16.

I think SF can get $300-400 if they actually get the IPO done. I mean look at Riverbed (RVBD),$18 million dollar Q3 and a $1.5 BILLION dollar market cap. Sure they are in the red hot WAN optimization space, but still. Public market investors will pay up if they think a consistent growth story is there. If SF does $12MM or $13MM in their Q4, I think it's enough to convince the Street that they are on the right path.

In terms of acquisitions, probably not Symantec because they have tried to get out of the perimeter appliance business. I've heard Check Point is sniffing around again and 3Com/TippingPoint and McAfee would be consolidation plays. Never count out Cisco and the reality is that IPS is the weakest part of JNPR's security story. So I don't think there will be a lack of buyers, but they'd need to come forward with something that would be better than SF can get in the public markets.

Submitted by Tim (not verified) on Sat, 2006-10-28 21:46.
There is another security IPO out there on file; Guidance Software

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