IPO Preview: Envivio

Jun.27.11 | About: Envivio, Inc. (ENVI)

Based in South San Francisco, California, Envivio (NASDAQ:ENVI) is scheduling a $66 million IPO with a market capitalization of $257 million at a price range mid-point of $6 for Thursday, June 30. The full IPO calendar includes four IPOs.

ENVI provides video compression and encoding software to the telecommunications industry. ENVI is in a very competitive market, sells through distributor channel partners, and one enumerated risk is that it “expects to encounter direct competition in the future from one or more larger traditional network infrastructure providers that may be one of ENVI’s channel partners.” Also, a material weakness was discovered in ENVI’s accounting and control systems, and ENVI "intends to hire additional finance and accounting personnel” -- not comforting to an investor.

ENVI has never made money on an annualized basis, and has shown a profit, according to the S-1 filing, for only one quarter -- the October 2010 quarter (S-1, page 63). ENVI is scheduled to price at 6.7 times sales, 4.3 times book value and showed a loss for the April 2011 quarter. Quarterly revenues have plateaued since the October 2010 quarter.

It’s possible that ENVI will get some large new customers, but the risks in this IPO seem to outweigh the potential rewards. 6.7 times annual revenue seems too high, especially for a technology company that has never shown an annualized profit, and whose quarterly revenues are not showing growth.

ENVI Valuation Metrics

ENVI makes video compression and encoding software that runs on industry standard hardware. Most of ENVI’s products are installed into networks operated by telecommunications, cable, and satellite companies, and OTT. OTT refers to “outside the boundaries of their network over the open Internet providers” (S-1, page 1). ENVI’s products deliver high-quality video to a consumer.

ENVI outsources the manufacturing of products to a single manufacturer, FutureQuest Incorporated, which is a risk. ENVI is in a high-tech business where price decreases are common. Several key components and subassemblies are purchased from single-sources, which is a risk. ENVI does not have long-term contracts or minimum purchase commitments with any of its channel partners. ENVI’s contracts with channel partners does not prohibit channel partners from purchasing or offering products or services that compete with ENVI’s products.

ENVI intends “to hire additional finance and accounting personnel with the appropriate expertise and experience, and further develop and document our accounting policies and financial reporting procedures around our revenue practices for fiscal 2012" (S-1, page 17).

Historically, a majority of ENVI’s revenue has been derived from relatively few customers. Sales to the 10 largest customers in fiscal 2011 together accounted for 63% of total revenue. In fiscal 2011, sales to Huawei Technologies, Birtel Network Technologies and Ericsson (NASDAQ:ERIC), each a channel partner, accounted for 12%, 12% and 11%, respectively, of total revenue.

At the same time, ENVI is currently targeting large customer accounts which, if successful, could increase the concentration risk on an even smaller group of customers.

Currently, ENVI competes with companies focused on more traditional broadcast delivery, including Harmonic Inc. (NASDAQ:HLIT). ENVI also competes with companies focused on multi-screen encoding, including Inlet Technologies LLC, recently acquired by Cisco Systems (NASDAQ:CSCO), and RGB Networks, Inc. (through its acquisition of RipCode, Inc.).

Due to the evolving competitive landscape and growing market opportunity, ENVI expects to encounter direct competition in the future from one or more larger traditional network infrastructure providers that may be one of ENVI’s channel partners. These network equipment companies may provide, as a package, encoding solutions in combination with other equipment that they traditionally sell to service providers.

As of April 30, ENVI had eight issued U.S. patents and five issued European patents. ENVI’s patents will expire on various dates from 2022 to 2028. In addition, ENVI has four patent applications pending in the United States and one patent application pending in Europe.

As of April 30, ENVI had 122 full-time employees.

ENVI expects to net $57 million at the price range mid-point of $11. The proceeds are allocated to general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.