File this under “Who knew”? With no public announcement whatsoever, firewall solutions producer Netscreen Technologies Inc. filed with the SEC to go public on October 5. Despite the lack of fanfare, it’s a significant move, observers say.

“It’s a good sign,” says Jeff Wilson, an analyst with Infonetics Research Inc. “They might just turn out to be a lifeline for the IPO market.”

The question now is: Does Netscreen have what it takes to make it? Or will the lifeline itself be gasping for air?

On the plus side, Netscreen’s revenues for the nine months leading up to June 30 rose to $59.2 million, $49.5 of which were product-related, from $14.3 million last year. That Netscreen filed for an IPO only a day after the company closed a $30 million round of preferred stock financing, can’t hurt either. The $18.7 million that the California company reported having on its balance sheet, might just mean that they’ve set aside enough cash to make it through the process of going public.

At the same time as Netscreen’s revenues have grown, however, so have its losses. As of June 30, the company had an accumulated deficit of $84.3 million. It also has large, fixed expenses that it expects to only grow in the future. But while high expenses don’t bode well for the company’s cash flow, they could be exaggerated. Many companies hike up their prices right before going public in order to make their first-year earnings results look all the more impressive.

Netscreen might not stand up to competitors like Cisco Systems Inc. (Nasdaq: CSCO) and Nokia Corp. (NYSE: NOK) financially, but by replacing slow, software-based firewall and VPN solutions with faster, hardware-based alternatives, the company has definitely found an edge in a very hot market. It has also managed to snag three major customers: Cable and Wireless (NYSE: CWP), Cox Communications Inc. (NYSE: COX), and Williams Communications Group (NYSE: WCG).

“Netscreen is immensely powerful technologically,” says Joel Conover with Current Analysis. “I have often said that they are a good acquisition target, and I still believe that, even though the market has dried up.”

Unlike its larger competitors, Netscreen only concentrates on security products. “This is an area that hasn’t been as hard-hit as other parts of the networking industry,” says Infonetics' Wilson. “VPN and firewall production has really stood up to the economic conditions much better than other markets.”

Even so, when the economy is bad, people and companies have less money to spend -- and that goes for security systems as well. Check Point Software Technologies Ltd., a firewall and VPN software vendor and one of Netscreen’s major competitors, has seen its stock drop from a year's high of $115.25 to $36.22 at noon today.

“It’s a tough time for anyone to come out right now,” says Chris Bulkey, a research analyst with Light Reading. “And it’s hard to tell how big this IPO is going to be until they announce the amount of shares they’re offering and the price. They do have a lot of CSEs [common stock equivalents -- options, warrants, etc.] in their capital structure, and, as a result, a lot of shares are going to hit the market. That’s typical of any IPO, though.”

Bulkey disagrees with observers that say that this is a significant signal for the IPO market: “One IPO’s not going to do anything. If you see 10 to 15 IPO’s a day, that would be significant.”

But while the IPO market might not have begun thawing, Netscreen’s move toward going public might not be a bad idea. “Netscreen might have the potential to make it,” says Jason Wright, an industry analyst with Frost & Sullivan. “They’re becoming more and more commonplace, and they are reaching into the high end of the market, while still maintaining a very low price.”

Wilson cautiously agrees. “Netscreen might end up shooting themselves in the foot,” he says, “but I don’t think so.”

Netscreen is part of a growing market sector. Other companies that play in this area are: Check Point, Cisco, Nokia, CloudShield Technologies Inc., RapidStream Inc., ServGate, and Symantec Corp. (Nasdaq: SYMC).

— Eugénie Larson, special to Light Reading
http://www.lightreading.com