IPO Preview: Aerohive Networks

Mar.28.14 | About: Aerohive Networks, (HIVE)

Summary

Networking hardware company, with 91% of revenue from hardware sales.

Not to be confused with subscription-based, recurring revenue enterprise software networking companies.

Revenue up 50% for 2013 vs 2012, still losing money.

Based in Sunnyvale, CA, Aerohive Networks (NYSE:HIVE) scheduled a $75 million IPO on the NYSE with a market capitalization of $436 million at a price range midpoint of $10 for Friday, March 28, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint managers: Goldman Sachs, BofA Merrill Lynch
Co-Managers: Piper Jaffray, William Blair, JMP Securities, Stephens Inc.

End of lockup (180 days): Wednesday, September 24, 2014

End of 25-day quiet period: Tuesday, April 22, 2014

Summary
HIVE is basically a networking hardware company, with 91% of revenue from hardware sales.

HIVE is not to be confused with subscription-based, recurring revenue enterprise software networking companies.

Most of HIVE's sales are comprised or orders received and shipped in the same quarter, so backlog is not a meaningful number for HIVE.

For the each of the three quarters ended December '13 revenue was essentially flat, although HIVE says business can be seasonal (which means lumpy quarterly results).

Valuation
Glossary
Pre-IPO grade-score summary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (MM)

Sls

Erngs

BkVlue

TanBV

In IPO

Aerohive Networks

$436

3.6

-14.0

6.68

6.71

17%

Click to enlarge

HIVE has an accumulated deficit of -$120 million.

Conclusion
The rating on HIVE is neutral to slightly positive (slightly positive only because the market recently has been kind to companies with significant top line revenue increases). HIVE is a money-losing hardware company with very little recurring revenue, and revenue for the June, September and December 2013 quarters was essentially flat.

Top line revenue was up 50% for 2013 vs. 2012, to $107 million. That 50% revenue increase is enough to give HIVE a slightly positive rating, in spite of the non-recurring revenue and losses.

Business is seasonal (this means quarterly result progression can be uneven), and for the education segment the June quarter is the strongest and the December quarter is the weakest.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business
HIVE has designed and developed a leading cloud-managed mobile networking platform that enables enterprises to deploy a mobile-centric network edge.

The network edge is the point at which devices access the enterprise network.

HIVE had 13,100 end-customers in over 40 countries as of December 31, 2013.

End-customers represent a broad range of industry verticals, including K-12 and higher education, healthcare, retail and distributed enterprises.

For the year ended December 31, 2013, 65% of total revenue was generated from the Americas, 26% from the EMEA, and 9% from APAC.

Managing the network edge
Managing the network edge is becoming more complex because of the proliferation of mobile devices and the ways in which such devices are used in business. Increasingly, employees and clients are using Wi-Fi-enabled smartphones, tablets, laptops and other mobile devices instead of desktop computers for mission-critical business applications.

As the difficulty and complexity of managing the network edge expands, HIVE's platform offers cost-efficiency, scalability, reliability, manageability and ease-of-deployment and use. Additionally, HIVE's platform gives end-customers context-based visibility and policy enforcement, providing a high level of intelligence to the network. HIVE's hardware products include intelligent access points, routers and switches.

These products are managed by HIVE's Cloud Services Platform which delivers cloud-based network management and mobility applications giving end-customers a single, unified and contextual view of the entire network edge.

Mostly hardware
HIVE derives 91% of its revenue by selling its hardware products. Related software licenses or software subscriptions and services comprise the remaining 9%.

HIVE's product revenue consists of revenue from sales of its hardware products, which includes wireless access points, branch routers and switches, all of which are embedded with its proprietary operating system, HiveOS, and perpetual licenses of HIVE's unified network management system, HiveManager, and other software applications, as well as related accessories.

HIVE's software subscriptions and service revenue consists of revenue from sales of its service offerings that are delivered over a specified term.

These offerings primarily include post-contract customer support, or PCS, related to HIVE's perpetual software licenses and subscriptions to HiveManager and other software applications delivered as a service, or SaaS, including related customer support.

When HIVE's end-customers purchase new hardware products, they are generally required to purchase a software license for every hardware unit, either as a perpetual license with PCS or as a SaaS license with a one-, three- or five-year term.

Both HIVE's PCS and SaaS offerings include updates and upgrades of HIVE's software applications and HIVE's HiveOS operating system that is embedded in its hardware.

Dividend Policy
No dividends are planned.

Intellectual Property
As of December 31, 2013, HIVE had eight issued patents and 31 patent applications pending in the United States relating to its current and next-generation networking products, operating platform and cloud-based applications, and the ability to claim priority to most of the patent applications worldwide. HIVE's first issued patents begin to expire in 2028.

Competition
HIVE operates in a competitive market for enterprise mobility and network edge infrastructure, which has experienced high growth and constant change. HIVE's competitors fall into three main groups:

General networking vendors, such as Cisco, Hewlett-Packard and Juniper Networks, whose portfolios include enterprise mobility solutions;

Enterprise mobility companies, such as Aruba Networks, that have a broad networking portfolio and are primarily focused on enterprise mobility; and

Independent Wi-Fi vendors, such as Ruckus Wireless and Meru Networks, which are primarily focused on wireless access products.

5% stockholders
Entities affiliated with Northern Light Venture Capital 21.8%
Entities affiliated with Lightspeed Venture Partners 20.3%
Entities affiliated with New Enterprise Associates 13.0%
KPCB Holdings, Inc. 11.0%
Entities affiliated with DAG Ventures 8.3%
David K. Flynn 5.3%
Krishna 'Kittu' Kolluri 12.9%
Changming Liu 5.2%

Use of proceeds
HIVE expects to net $65 million from its IPO. Proceeds are allocated as follows:

Primarily for general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures, although HIVE does not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes.

Disclaimer: This HIVE IPO report is based on a reading and analysis of HIVE's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.