Enterprise Software IPO: ArcSight

ArcSight (ARST) is a leading provider of security and compliance management solutions for enterprises and government agencies. The company plans to float an IPO this week.

All quotations are from the company's most recent S-1 filing with links provided.

Business Overview (from prospectus)

We are a leading provider of security and compliance management solutions that intelligently mitigate business risk for enterprises and government agencies. Much like a “mission control center,” our ArcSight ESM platform delivers a centralized, real-time view of disparate digital alarms, alerts and status messages, which we refer to as events, across geographically dispersed and heterogeneous business and technology infrastructures. Our software correlates massive numbers of events from thousands of security point solutions, network and computing devices and applications, enabling intelligent identification, prioritization and response to external threats, insider threats and compliance and corporate policy violations. We also provide complementary software that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, as well as appliances that streamline threat response, event log archiving and network configuration.

Offering: 6.9 million shares at $9.00 - $11.00 per share. Net proceeds of approximately $51.9 million will be used offering for working capital and other general corporate purposes. The company may choose to expand its business through acquisitions of or investments in other complementary businesses, products or technologies, using cash or shares of common stock, though there are no specific plans for this at this time.

Lead Underwriters: Morgan Stanley, Lehman Brothers

Financial Highlights:

Product revenues for the six months ended October 31, 2007 included revenues of $12.0 million from sales to 63 new customers and revenues of $15.9 million from sales to existing customers. New customer revenues for the six months ended October 31, 2007 increased by $5.0 million compared to new customer revenues for the six months ended October 31, 2006. Existing customer revenues for the six months ended October 31, 2007 increased by $6.2 million compared to existing customer revenues for the six months ended October 31, 2006. There was a net deferral of $0.2 million of product revenues in the six months ended October 31, 2006 related to sales transactions that included an undelivered product element for which we did not have VSOE, while for the six months ended October 31, 2007 there was a net recognition of product revenues of $1.4 million from those transactions. As of October 31, 2007, deferred product revenues included $3.5 million related to similar transactions... Product gross margin as a percentage of product revenues remained constant at 93.5% for the six months ended October 31, 2007, compared to 93.7% for the six months ended October 31, 2006... The increase in research and development expenses for the six months ended October 31, 2007 of $2.2 million compared to the six months ended October 31, 2006 was primarily attributable to an increase of $1.5 million in compensation expenses, including an increase of $0.4 million in stock-based compensation expense, associated with an increase in research and development personnel from 76 to 96 at the respective period ends, and to an increase of facilities-related expense of $0.4 million as a result of our expansion of our headquarters in Cupertino, California. Research and development expense as a percentage of revenue was 20.5% and for the six months ended October 31, 2007, compared to 25.0% for the six months ended October 31, 2006.

Competition

Our primary product is our ArcSight ESM software platform, the key elements of which are the ESM Manager, the connectors and related toolkit for the creation of custom connectors and our Consoles that serve as the platform interface. In addition, we offer complementary software for our ESM platform that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, and have recently introduced our complementary TRM, Logger and NCM appliances that assist our customers in threat response, log archiving and network configuration.

We believe that the market for a security and compliance management software platform that collects and correlates event data from across a heterogeneous IT infrastructure, which we are addressing with ArcSight ESM, is a developing market. Existing competitors for a platform-wide solution such as this product primarily are specialized, privately held companies, such as Intellitactics and NetForensics, as well as larger companies such as CA (CA) and Symantec (SYMC), and EMC (EMC), IBM (IBM) and Novell (NOVL), through their acquisitions of Network Intelligence, Micromuse and Consul, and e-Security, respectively. A greater source of competition is represented by the custom efforts undertaken by potential customers to analyze and manage the information produced from their existing devices and applications to identify and remediate threats. In addition, some organizations have outsourced these functions to managed security services providers.

In addition to our existing competitors for our ESM platform, we believe that we face potential competition from a wide variety of sources that could become effective competitors. Many large, integrated software companies offer suites of products that include software applications for security and compliance and enterprise management. Hardware vendors, including diversified, global concerns, also offer products that address other security and compliance needs of the enterprises and government agencies that comprise our target market. If and to the extent that the market for our software platform continues to grow, we expect that large software and hardware vendors may seek to enter this market, either by way of the organic development of a competing product line or through the acquisition of a competitor.

Additional Resources:

• Company website
• Online road show
• Computer Business Review: 'ArcSight plans IPO'
• SC Magazine: 'ArcSight announces IPO plans'
• John Ogg: 'IPO FILING: ArcSight, Inc., A Data Security Play'