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Based in San Mateo, California, IntelePeer (PEER) scheduled a $75 million IPO with a market capitalization of $334 million at a price range mid-point of $10 for Thursday, January 26, 2011.

This week two other IPOs are scheduled. Seven are scheduled for the week of January 30, so far ... (see our IPO calendar).

SUMMARY

PEER would have you believe it is a "leading provider of on-demand, cloud-based communications services to service providers and enterprises." PEER's basic business is connecting IP-based networks to each other.

Although sales increased from $43 million in 2008 to $145 million in 2011, PEER has generated consistent losses.

Down December quarter -- PEER is projecting December quarter revenue of $38.5 million, down 5% from September quarter's revenue of $40.6 million. That's not good going into an IPO.

In addition, gross margin is consistently only 29%, which suggests a lack of any proprietary advantage, perhaps confirmed by this statement …

"There are few substantial barriers to pursuing business from our customers, and we expect to face additional competition from new market entrants in the future." Page 17, S-1

CONCLUSION

Based on sales increases from 2008 and on PEER's attempt to market itself as a 'cloud' company, we believe PEER may pop a little on the IPO in spite of the 5% sales decline in the December quarter relative to the September quarter.

Nevertheless, we would not chase PEER in the IPO after market.

NOT CLOUD-BASED IN THE TRADITIONAL SENSE

Cloud-based companies get high P/E ratios. IPO examples in the last year and the P/E's include Servicesource International (SREV), P/E 86; Cornerstone OnDemand, (CSOD), loss; Carbonite (CARB), loss. Source: Google Finance

And those cloud-based companies all have higher gross margins than PEER's 29% gross margin. The gross margins are Servicesource International 44%; Cornerstone OnDemand 73%; and Carbonite 61%.

Plus, those cloud-based companies' customers are more retail-oriented. PEER is offering a non-differentiated service deep in the bowels of the telecom industry, with no end-user branding.

BUSINESS

PEER says it is a leading provider of on-demand, cloud-based communications services to service providers and enterprises. Its customers can leverage PEER's proprietary Communications-as-a-Service, or CaaS, platform, which PEER refers to as its CloudWorx CaaS Platform, to deliver multimodal communications services, including voice, unified communications, video and other rich-media applications, to communications devices with reduced cost and improved quality compared to existing alternatives.

PEER says its CloudWorx CaaS Platform allows customers to rapidly and easily transition from legacy network infrastructures to our flexible, software-based, multimodal, IP-based solutions. Service provider customers include wireless and wireline carriers, as well as cable and voice over IP, or VoIP, providers. PEER's enterprise customers include businesses seeking integrated multimodal communications solutions.

MARKET

The global telecommunications industry is undergoing a shift to next-generation IP-based communications technologies from legacy telephone networks. This transition is being driven by the widespread availability of broadband Internet connectivity and the emergence of cloud-based infrastructures and on-demand service delivery models such as Software as a Service, or SaaS.

PEER believes these trends, along with the inability of legacy infrastructures to support the convergence of business and next-generation communications services, such as VoIP and rich-media communications, will continue to drive demand for a flexible and high-quality cloud-based communications platform such as PEER's.

SIP trunking

Connecting IP-based networks to each other or the PSTN, which is referred to as SIP trunking, represents one of the fastest growing segments within the VoIP services market, and is forecast to increase at a compound annual growth rate of 52 percent from $599 million in 2010 to $4.8 billion in 2015 worldwide and at 49 percent from $342 million in 2010 to $2.5 billion in 2015 in the U.S.

In addition to the migration of communications traffic from the PSTN to IP networks, a number of other trends in the industry are driving the growth in demand for a new cloud-based communications service platform including the proliferation of broadband connectivity, emergence of cloud-based service architectures, the proliferation of SIP/IP-based devices, increased demand for multimodal and unified communications.

VOICE TRAFFIC

Substantially all of PEER's revenue to date has been derived from the transmission of voice traffic and related value-added services. Service provider and enterprise customers direct communications traffic to PEER, which PEER routes through its peering partners so that the traffic can be delivered to the ultimate recipient of the communication, which is the end-point device.

PEER typically charge customers based upon minutes of use for traffic delivered through its platform. The minutes of use for traffic delivered through PEER's platform increased from 3.8 billion in 2008 to more than 23 billion in 2011, and the number of customers increased from 78 to 365.

Similarly, the number of service provider peering partners increased from 34 in 2008 to more than 60 in 2011, and the number of telephone numbers and end point identifying addresses in PEER;s SuperRegistry directory increased to over 450 million in 2011.

Revenue growth has been driven by a combination of increases in revenue from existing customers and the addition of new customers.

SuperRegistry directory

As PEER continues to grow the size of its SuperRegistry directory, PEER expects an increasing portion of traffic will be delivered as a result of direct peering and that PEER's costs, as a percentage of revenue, will decrease.

ENTERPRISE CUSTOMERS

Historically, substantially all of PEER's revenue was derived from service provider customers. In 2010, revenue from enterprise customers increased significantly but still represented a small percentage of revenue.

PEER has made investments in research and development to create services more targeted to enterprise customers and in sales and marketing to build and manage enterprise focused sales channels. As a result, PEER expects that revenue from enterprise customers will represent an increasing percentage of revenue in future periods.

CUSTOMER CONCENTRATION

Revenue from Sprint (S) and Qwest (CTL) is expected to represent 21 percent and 11 percent of revenue in 2011, respectively, compared to 29 percent and 16 percent of revenue in 2010.

REGULATION

PEER is a regulated provider of telecommunications services.

As a competitive service provider, PEER has offered communications services at prices that generally have not been heavily regulated by the FCC or state utility agencies.

COMPETITION

The services PEER provides are also offered by others and in the future may be offered by an increasing number of parties. Currently, PEER faces competition from legacy telecommunications service providers as well as emerging providers of voice peering services.

Competitors include traditional telecommunications carriers and other providers of specialized communications services.

"There are few substantial barriers to pursuing business from our customers, and we expect to face additional competition from new market entrants in the future." Page 17, S-1

COMPETITIVE ADVANTAGES & DIFFERENTIATION

PEER believes it benefits competitively from its cloud-based all-IP solution, its extensive SuperRegistry directory, the speed and flexibility of implementation of service and lower prices.

PEER has tried to differentiate its service offerings in several ways:

  • Innovative multimodal services-PEER provides cloud-based, rich media communication services that exceed the capabilities of PSTN voice services;
  • Rapid activation-PEER can quickly activate new customers;
  • High reliability-PEER's fully managed, geographically distributed platform provides carrier-grade quality and reliability for communication services;
  • On-demand availability-customers can quickly increase or decrease amount and types of services they purchase using online portals; and
  • Platform neutrality-allowing service providers to use PEER's peering and registry services despite competitive pressures between each other in their service areas.

INTELLECTUAL PROPERTY

PEER has been issued five patents in the United States. Additionally, PEERe has eight patent applications pending in the United States and eight patent applications pending in each of Europe, Japan and South Korea.

EMPLOYEES: As of December 31, 2011, PEER had 128 full-time employees.

VENTURE CAPITAL OWNED

75% venture capital-owned pre-IPO, including VantagePoint Venture Partners 2006, Entities affiliated with Kennet II L.P, Entities affiliated with IVS Fund II K/S and Entities affiliated with EDF Ventures III, Limited Partnership

USE OF PROCEEDS

PEER expects to net $64 million from the IPO, with $50 million allocated to repay debt, and balance for general corporate purposes.

Source: IPO Preview: IntelePeer