ARPT - FFIV - ATON
Arrowpoint quivers at 248.4 percent rise
By Gracian Mack
Redherring.com, April 03, 2000
Arrowpoint Communications (Nasdaq: ARPT) rose 248.4 percent in its first day of trading on Friday, indicating that although the IPO market cooled somewhat this week, there is still plenty of interest in the market for cutting-edge networking gear.
The company, which makes network switches designed to manage Web content and traffic, closed at $118.47, up $84.47 from the offering price of $34.
Goldman Sachs (NYSE: GS), along with Robertson Stephens and comanagers Deutsche Bank Alex. Brown and J.P. Morgan (NYSE: JPM), priced 5 million shares of common stock at $34, $2 above the expected price range of between $30 and $32 per share. The premium in the pricing gave the company $170 million in proceeds instead of the $160 million analysts had expected. In fact, buying-interest in Arrowpoint's issue was so keen that a couple of days before the offering, the underwriters were obliged to almost double the price range from the original filing range of between $15 and $17 per share. Until the price hike, the company was only expecting an $85 million windfall from the IPO.
With exactly twice as much money as it had originally planned to raise, CEO Chin-Cheng Wu now hopes to position Arrowpoint as a leading producer of "intelligent Web switches" -- networking gear that is capable of prioritizing Web content or transaction traffic, which in industry terms is referred to as quality of service (QoS). The switches are also capable of load balancing, or distributing the traffic to network servers that are most available at any given time.
"The IPO for Arrowpoint illustrates the fact that the sector is so new and growing so rapidly that at this point there is room for a lot of different players who are able to provide sort of niche switches," says Peter Rubicam, an analyst with McDonald Investments.
COOKIE HEAVEN
Indeed, Mr. Rubicam points out that the switch sector is split down the middle between technologies based on software applications and those that are hardware-based. Within that, there are the Web content switches such as those coming from Arrowpoint and competitor F5 Networks (Nasdaq: FFIV), which are designed for single Web-site management, and then enterprise players such as king-of-the-hill Cisco (Nasdaq: CSCO). Arrowpoint's switches are application-aware, providing management for UDP (user datagram protocol), SSL (secure sockets layer), or even shopping-cart transactions.
"In Arrowpoint's case, they place a cookie on the user's hard drive that identifies specific streams of traffic, where it comes from, and where it should go," explains Mr. Rubicam. "For example, if you go to the Sears (NYSE: S) site, the cookie identifies you as a premium Sears customer and directs you to a part of the site where presumably you will get faster access."
Alex Benik, an analyst at the Yankee Group, notes that the delineation of value among switching companies "is less about throughput and more about being intelligent enough to direct a user request based on a URL. Arrowpoint is good at that and is even getting developing licensee relationships with hosting companies." The company's client list includes Exodus (Nasdaq: EXDS), NaviSite (Nasdaq: NAVI), and Toysmart.com.
"But Arrowpoint is certainly not a first-mover in the sector," says Mr. Benik. "Foundry Networks (Nasdaq: FDRY) is in the space. Although they're more router-specific, Alteon Websystems (Nasdaq: ATON) has more of the market mindshare and F5 has done very well in load balancing."
ARMED COMPETITION
In fact, Bob Lam, an analyst at Bear Stearns (NYSE: BSC), pounds the table on behalf of F5. "If I had to rank them, F5 would be No. 1 because it is much more a pure-play switcher than the others in the group. It is certainly the only profitable one," says Mr. Lam.
In F5's last quarterly report, covering the three months ended December 31, 1999, the company reported net income of $4.2 million on sales of $19 million, compared to a loss of $2 million on sales of $2 million in the year earlier period.
To compare, for the year ended December 31, Arrowpoint had a net loss of $12.6 million on revenue of $12.4 million. In 1998, net loss was $9.4 million on revenue of $201,000.
"Alteon would come after F5, then Arrowpoint, and finally Foundry," says Mr. Lam.
Falling in the middle of a ranking is not necessarily the best news, but Arrowpoint's public debut was a pleasant note for early institutional investors such as Matrix Partners, which holds a 22.5 percent post-IPO equity position; North Bridge Venture Partners, which holds a 16.3 percent position; and Accel Partners, with a 7 percent stake.
LINES DRAWN, NOT
Even though revenues are soaring, celebrations may be a bit premature, as the company has some significant risks. Arrowpoint derived about 47 percent of its revenues from sales outside the United States, exposing itself to a number of risks it does not have in its U.S. operations.
There is a consensus word-of-caution among Wall Street's analytic community, however, that a real ranking is difficult to etch in stone due to the fact that the technology produced by these companies is almost as new as the companies themselves.
F5 launched its IPO on June 6, 1999, at $10 a share, and now is selling about $84 a share, with a market capitalization of about $1.4 billion. Alteon was priced at $19 a share on September 4, 1999, and is now at about $102 a share, with a market value of $3.7 billion. And Foundry's IPO soared 525 percent from its offering price of $25 a share when it closed at $156.25 its first trading day on September 28, 1999. Foundry now trades about $151 a share, after a two-for-one split in January, and has a market capitalization of over $16 billion.
"The bottom line is that going forward, there is going to be room for a lot of companies in this space," declares Mr. Rubicam, pointing out that HolonTech, a privately held company, is yet another entrant onto the field of play. |
