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Optical/IP

Netscreen Goes for an IPO

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
rjmcmahon 12/4/2012 | 7:36:24 PM
re: Netscreen Goes for an IPO This is a VPN terminator, not a router nor a switch, which targets a service provider selling VPNs to multiple customers. To compete with an integrated switch product they'll need to maintain a price/performance lead.

-Bob
flanker 12/4/2012 | 7:36:24 PM
re: Netscreen Goes for an IPO Ok, so can't you configure a Cisco Catalyst Switch to do most if not all of these functions? Furthermore, why would you want to layer another level of device and network management onto an VPN instead of staying with a single vendor?

I can see that the throughput is wirespeed, but this is appears only to be for VPN tunneling. Can this sucker route packets?
flanker 12/4/2012 | 7:36:22 PM
re: Netscreen Goes for an IPO Thanks,

That's where I was going. And doesn't Cisco make low end switches for enterprise use with built in firewalls? I dont think they have the same throughput, but you can be Cisco will introduce a line to compete with these boxes.
emma 12/4/2012 | 7:36:19 PM
re: Netscreen Goes for an IPO Hi,

I've worked very closely with Netscreen in the past. They put a stake in the ground three years ago with a low gate count ASIC that performed stateful inspection firewall, traffic management and IPSec tunnel termination and nailed the requirements right on the head because one of the cofounders used to run an IT organization.

No competitor that has arrived on the scene since that time has been able to match what Netscreen could do in 1998. Execution up and down the line on this company is top notch. Compared to Cisco PIX and Nokia firewalls, Netscreen offers at least 2X the performance for up to 5X less cost. Remember that Cisco enterprise routers are software based and cannot keep up with hundreds, much less thousands of TCP flows, NAT them, provide firewall, and encrypt them at the same time.

Since 1998, Netscreen has upped the ante by going 10X faster (to Gigabit speeds) with a carrier box that can be partitioned for multiple customers (Netscreen 1000) and they have made great improvements in software functionality on both the management and firewall policy side that will be hard for others to match.

Evidence of the statements above comes from the fact that Netscreen has had two offers to buy them out already: 400M in October 1999 from Redback and
900M from Efficient in March 2000. The Redback offer was rejected and the Efficient one unraveled as Efficient's stock price plunged. Netscreen is also #1, #2 or #3 in marketshare in all market segments that they are in.

The financials are super strong with this company, they have a strong business case for all their product line, they have top notch people across the organization, and they have sustainable technology advantages. I hope them all the best in the IPO, because they deserve it big time.
flanker 12/4/2012 | 7:36:18 PM
re: Netscreen Goes for an IPO ...No competitor that has arrived on the scene since that time has been able to match what Netscreen could do in 1998. Execution up and down the line on this company is top notch. Compared to Cisco PIX and Nokia firewalls, Netscreen offers at least 2X the performance for up to 5X less cost. Remember that Cisco enterprise routers are software based and cannot keep up with hundreds, much less thousands of TCP flows, NAT them, provide firewall, and encrypt them at the same time...

There's the key

rjmcmahon 12/4/2012 | 7:36:15 PM
re: Netscreen Goes for an IPO Since 1998, Netscreen has upped the ante by going 10X faster (to Gigabit speeds) with a carrier box that can be partitioned for multiple customers (Netscreen 1000) and they have made great improvements in software functionality on both the management and firewall policy side that will be hard for others to match.
__________________________________________

The long term technical challenge may be moving their solution from a centralized model to a distributed model. More specifically, having the edge switch perform packet duties, such as NAT, firewall, and DES while a central server performs control plane duties such as authentication, key management and key distribution, may scale better and offer better security, particularly with the introduction of 802.11b bridges.

-Bob
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