IPO Preview: Imperva

| About: Imperva (IMPV)

Based in Redwood Shores, California, Imperva (proposed IMPV) scheduled a $75 million IPO with a market capitalization of $332 million at a price range mid-point of $15 for Wednesday, November 9, 2011. The full IPO calendar for the week of November 7 includes five scheduled IPOs.

IMPV is a data security company whose sales increased 45% for the nine months ended September 30, 2011, to $55 million from $38 million. Losses held steady at $9 million. However, revenue for the last two quarters, June and September, were $18.8mm and $19.7mm: the September quarter was essentially flat in top line revenue compared to the June quarter.

Conclusion & Valuation
IMPV has never made money although it has increased top line revenue. IMPV makes a big case about deferred revenue - future monies due on service and maintenance contracts - which increased 51% for the September, 2011 nine months, to $26 million from the year earlier $17 million number. However, top line revenue for the last four quarters is essentially flat, while quarterly losses are consistently in the -$2.6 million to $3.2 million range.

Therefore, we believe the IMPV IPO will happen, but for the time being at least it seems prudent to watch IMPV from the sidelines.

Quarterly results June '10 Sept '10 Dec, '10 March, '10 June, '11 Sept '11
Revenues ($mm) $13.4 $13.6 $17.0 $16.4 $18.8 $19.7
Gross profit % of rev 77% 78% 79% 80% 79% 78%
Net income (loss) % -$2.8 -$2.8 -$3.1 -$3.2 -$2.9 -$2.6
Net income (loss) % -21% -21% -18% -20% -15% -13%

IMPV Valuation Metrics

IMPV is leader of a new category of data security solutions focused on providing visibility and control over high-value business data across critical systems within the data center.

Incapsula Majority Owned Subsidiary
IMPV believes there is a significant opportunity to provide data security solutions to smaller businesses faced with increasing security threats and compliance mandates. Incapsula delivers on-demand web application security that IMPV believes is cost-effective and reduces the need for customers to deploy additional hardware or augment IT staff.

IMPV plans to increase its business with mid-market enterprises and SMBs by expanding distribution channels and promoting the cloud-based web application firewall service that IMPV provides through Incapsula, optimized for mid-market enterprises and small businesses. However, Incapsula appears to be a development-stage operation: "This limited operating history, as well as the early stage of our relationships with many of our channel partners, makes financial forecasting and evaluation of our business difficult." (S-1 page 10)

Deferred Revenue
Deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of deferred revenue balance consists of the unamortized portion of services revenue from maintenance and support contracts. IMPV monitors deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. IMPV also assesses the increase in deferred revenue balance plus revenue recognized in a particular period as a measure of sales activity for that period.

Sept 9 mos Sept 9 mos
2008 2009 2010 2010 2011
Deferred revenue ($mm) $8 $13 $21 $17 $26
Deferred rev % of total rev 25% 34% 38% 45% 47%
# of customers 587 926 1,309 1,181 1,584
Rev per customer ($mm) $55 $42 $42 $33 $35
Deferred rev per cus ($000) $13.6 $14.5 $16.0 $14.4 $16.2

Intellectual Property
IMPV currently has four issued patents in the United States, relatively small number compared to competitors. As of September 30, 2011, IMPV had nine pending U.S. patent applications, and may file additional patent applications in the future

Third-party software reliance
IMPV relies on the availability of licenses to third-party software and other intellectual property. Many of IMPV's products and services include software or other intellectual property licensed from third parties, and IMPV otherwise uses software and other intellectual property licensed from third parties in the business.

IMPV products, services and other technologies contain software modules licensed from third-party authors under so-called "open source" licenses.

Competitors include companies Citrix Systems (NASDAQ:CTXS), F5 Networks, Inc., International Business Machines (NYSE:IBM), McAfee, Inc. (a subsidiary of Intel, INTC), Oracle (NASDAQ:ORCL), Symantec (NASDAQ:SYMC).

Current or potential competitors may be acquired by third parties with greater available resources, such as IBM's acquisition of Guardium, Inc., Oracle's acquisition of Secerno, Ltd. and McAfee's acquisition of Sentrigo, Inc.

Use Of IPO Proceeds
IMPV expects to net $62 million from the sale of 4.75mm shares by IMPV. Shareholders will sell 250,000 shares

$3.5 million is allocated to buy by 4,375,000 preferred shares of Incapsula, a majority owned subsidiary. The balance for working capital and general corporate purposes.

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