Imperva IPO: Management's Previous Success Draws Investors

| About: Imperva (IMPV)

Imperva, Inc (NYSE:IMPV) priced their 5 million share IPO at $18.00, $2 above the top of the indicated range of $14.00-16.00. Of the shares being offered, 4.75 million are being offered by the company, and 250,000 are being offered by selling shareholders. Proceeds from the offering are anticipated to be used for working capital and general corporate purposes. In addition, they intend to invest $3.5 million in Incapsula, their majority-owned subsidiary. Based on the $18.00 pricing, the company will have a market capitalization of approximately $398 million. JP Morgan (NYSE:JPM) and Deutsche Bank (NYSE:DB) are leading the offering.

Imperva provides data security protection for high value business data within the enterprise. Their products include their SecureSphere Data Security Suite for enterprise data centers and their cloud-based security services for mid market and SMBs. SecureSphere is a modular, integrated solution providing database, file and web application security, which is designed to address what they see as a large and growing market opportunity to protect enterprises from advanced threats. Imperva also has a majority owned subsidiary, Incapsula, which is a web application firewall in the cloud, which is optimized for mid to small businesses.

Founded in 2002, Imperva has global operations with over 1500 direct customers in more than 50 countries, and thousands of more cloud based customers. Their customers include: 3 of the top 5 financial data service firms; 4 of the top 5 telecommunication firms; 3 of the top 5 global computer hardware companies; 3 of the top 5 U.S. Commercial Banks; and over 150 government agencies and departments.

The worldwide spending on IT security products is expected to grow from $27B 2010 to $38B in 2014 (according to a 2011 IDC report). The company believes that only a small fraction of this is spent today on protecting high-value business data in the data center. There is a disconnect between the threat versus the spend currently in this market, with 76% of all data breached in 2010 coming from database, web and other servers, while over 95% of the $27B spent on security products do not directly address data security. Imperva seeks to provide a complete solution to solve the data security problem by providing a new protection layer positioned closely around business data and systems in the data center.

While the security software market is highly competitive, bigger security companies have been losing share to smaller ones. Top competitors include: F5 Networks (NASDAQ:FFIV) and Citrix (NASDAQ:CTXS) (in the web app security); IBM (NYSE:IBM), Oracle (NYSE:ORCL) and McAfee (in the database security); and EMC and Semantec (in the file security). Imperva is the only one that has an integrated platform and is considered the best of breed. Other competitors in network security include: Cisco (CSC), CheckPoint (NASDAQ:CHKP), Fortinet (NASDAQ:FTNT), and Sonicwall. All of these that have products in this category have had to end of life these products or they are marginal players.

Revenue has grown at a 45% CAGR from 2007 to 2010, from $17.7 million to $55.4 million. For 9 months 2011, revenue is up 43% year over year to $55 million. Deferred revenue as of Sept. 30, 2011 was $25.5 million. 40% of product sales in 2011 have been from repeat sales and 33% of the 2011 revenue is recurring revenue. Gross margin for 2010 and 9 months 2009 was 78% and 79% respectively (close to their long term target of 80%). The company has yet to turn profitable, but has improved their operating margin from a loss of 31% in 2009 to a loss of 13% for the third quarter 2011. Customer count has risen from 587 in 2008 to 1584 for the 9 months ended 2011.

Last but possibly most importantly is Imperva’s management team. Led by the CEO and co-founder Shlomo Kramer, the management team may be the biggest draw for this offering. Every company that gets out for their IPO roadshow touts there management team. But one thing is for sure, and that is investors like to put there money behind management that has made them money in the past. Enter Shlomo Kramer…otherwise known as the former co-founder of CheckPoint Software. Mr. Kramer was named CEO of the year by SC magazine in 2008 and was named one of the top 20 people who changed the network industry by Network World. Shlomo Kramer and his team have set out to create a new category of enterprise data security, much as he did with the enterprise firewall while with CheckPoint. Based on the demand for the offering, investors remember the last time around and are eager to jump onboard the Imperva IPO.

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

Additional disclosure: I may initiate a long position in IMPV over the next 72 hours.

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