Blue Coat Systems - Having the Blues over Syria Again

Just when you thought, it was over. More Blue Coat Systems proxy servers appear to be in Syria. Not a good may for Blue Coat COO and president David Murphy.  This technology is forbidden to be sold into the country.  This was conveniently ignored by a rogue reseller in 2011.    

In a statement made in December 2011 by Blue Coat  after a number of Blue Coat servers were discovered to being used by the Syrian government  – “We don’t want our products to be used by the government of Syria or any other country embargoed by the United States.  If our review of the facts about this diversion presents solutions that enable us to better protect against future illegal and unwanted diversion of our products, we intend to take steps to implement them.”

Fast forward to March, 2013.  Advocacy group Reporters Without Borders named Blue Coat Systems (now a private company held by Thoma Bravo) as among the "corporate enemies of the internet".  They stated that Blue Coat was among five companies whose equipment has been used for surveillance and censorship by "authoritarian regimes."

On March 23, a group of computer hackers known as Telecomix released data it says show that 34 devices manufactured by California-based Blue Coat Systems Inc. were being employed by Syrian telecom operators.

In April, Blue Coat issued a statement  acknowledging that Dubai-based Computerlinks ZFCO has been penalized for the “unlawful diversion of Blue Coat ProxySG appliances to Syria” in 2011. Blue Coat also said that  have  taken additional steps to guard against future diversions of its products by third parties and that they have built up their compliance program.  All good, then, until April.

On May 23, group computer hackers known as Telecomix released a report stating  that 34 Blue Coat System devices were being used by the Syrian government, despite the US embargo.

Steps against “unwanted diversion” may need to be strengthened.  Enforcement is difficult for Blue Coat and other security vendors.It isn't a necessary evil. It's necessary.   They rely on a network of resellers to sell their products, and unfortunately, some of them do go rogue.  Fortunately, Blue Coat and others can and do try to prevent these systems from being upgraded and receiving any update files. 

http://www.bluecoat.com/company/news/update-blue-coat-devices-syria

http://channelnomics.com/2013/04/26/blue-coat-distributor-fined-sales-syria/  

http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-240175/  

Blue Coat Systems to Operate as a Privately Held Company under Thoma Bravo

Blue Coat Systems, founded as Cacheflow, is no more on the NASDAQ. The private equity firm, Thoma Bravo completed its $1.3 billion acquisition of Blue Coat Systems on February 15.

“This marks our fifth platform investment in the security technology sector and our fourth in networking,” said Seth Boro, partner at Thoma Bravo. “We’re confident our approach and experience in identifying strategic opportunities, coupled with Blue Coat’s innovative solutions and proven leadership in Web security and WAN optimization, establishes a platform for the company’s continued success.”

Thoma Bravo (www.thomabravo.com) has a nice stable of technology companies. These include Blue Coat Systems, SonicWall, Attachmate Corporation Embarcadero Technologies, Inc., Entrust, Inc., Hyland Software, Inc., LANDesk Software, Inc., Roadnet Technologies, Inc., Sirius Computer Solutions, Inc., SonicWALL, Inc., Tripwire Inc., Vision Solutions, Inc.

The nice thing about being private is you can literally say as much or as little as you want to the public (incidents such as equipment ending up in Syria notwithstanding (a rogue reseller)) Missing earnings targets may involve the management team being given a talking to, but it won’t result in dramatic swings in stock price/market capitalization, because there is no stock. No Henry Vanderbilt like quotes, "The public be damned! I am working for my stockholders." will be issued.

Blue Coat has remained in the Leaders portion of the Gartner Secure Web and WAN Optimization Magic Quadrants over the last several years. However, companies like Zscaler, a cloud based web security solution (www.zscaler.com) “providing a high performance solution at low TCO” and Riverbed Technology (www.riverbedtechnology.com) have gotten a good share of buzz and market share recently. Riverbed Technology pulled away slightly from others in the most recent Magic Quadrant for WAN Optimization Controllers.

http://kensek.blogspot.com/2012/02/riverbed-technology-leader-in-2012.html .

Riverbed Technology (and who doesn’t) has an announcement planned with a partner during RSA San Francisco later this month. Something to do with best-of-breed wide area network (WAN) optimization and public Internet optimization.

"We were under a microscope, and when you are a public company you invest and have to know what the impact is going to be three or four quarters later," said Steve Daheb, Blue Coat's chief marketing officer and senior vice president of corporate and business development. "Now we have the kind of freedom to move quickly and invest where we need to.”

So what is the future for Blue Coat? They brought aboard Gregory Clark as their CEO in September, replacing Michael Borman. In November, they announced that total net revenue for the second quarter of fiscal 2012 was $114.1 million compared with net revenue of $109.5 million in the first quarter of fiscal 2012 and $121.0 million in the second quarter of fiscal 2011. Blue Coat Systems fiscal year isn’t the normal calendar year.

There could be another earnings announcement any day, now. The Thoma Bravo press release trumped an anticipated earnings announcement this week, it appears.

http://www.bluecoat.com/company/press-releases/blue-coat-operate-privately-held-company-and-aggressively-advance-its

Riverbed Technology Leader in 2012 Gartner Magic Quadrant for WAN Optimization Controllers

In the thought and technology leadership battle for supremacy in the WAN Optimization Controller market, Riverbed Technology is the clear leader among those in the 2012 Gartner Magic Quadrant for WAN Optimization Controllers (WOC). (January 2012 ID:G00219270)

Only three companies are in the Leaders portion of the magic quadrant- Riverbed Technology, Blue Coat Systems, and Silver Peak Systems. Riverbed Technology was rated both the highest in Ability to Execute, and Completeness of Vision. Silver Peak Systems and Blue Coat Systems are adjacent to each other and (noticeably) further down in the leaders quadrant. Kudos for being in the leaders section for all three! Eight products total are in the quadrant.

Cautions that may have cost Blue Coat Systems according to Gartner include – late features, management turnover, declining market share, weak softWOC.

Note - Private equity firm Thoma Bravo is acquiring Blue Coat Systems for $1.3 billion. This deal was announced in December. Thoma Bravo also owns SonicWall. http://dealbook.nytimes.com/2011/12/09/thoma-bravo-acquires-blue-coat-systems-for-1-3-billion/

Cautions that may have cost Silver Peak Systems include - No softWOC, lacks some application-specific optimization, some video on demand limitations for remote-office caching streaming.

Strengths for Riverbed Technology mentioned by Gartner – Broadest set of capabilities in the industry, overall innovations, broad solution for dynamic browser-based applications like SharePoint.

How Do You Use Gartner Magic Quadrants?

The below is from a great Gartner piece in utilizing their Magic Quadrant.

Clients use Magic Quadrants as a first step to understanding the technology providers they might consider for a specific investment opportunity.

Keep in mind that focusing on the leaders' quadrant isn't always the best course of action. There are good reasons to consider market challengers. And a niche player may support your needs better than a market leader. It all depends on how the provider aligns with your business goals

http://www.gartner.com/technology/research/methodologies/research_mq.jsp

Security Acquisitions 2011

Interesting slide show by Channel Insider on the major security acquisitions 2011. No explanation for the order. It’s neither alphabetical nor by value of the acquisition (many of the values not provided).

Dell purchasing SecureWorks, Thoma Bravo acquiring TripWire and Blue Coat Systems (the guys at Thomas Bravo were busy with these two and also have SonicWall), Symantec buying Clearwell, IBM acquiring Q1, McAfee buying Nitro Security and Sentrigo, Sophos buying Astaro, Wave Systems buying Safend, and GFI buying Monitis.

http://www.channelinsider.com/c/a/Security/Top-10-Security-Acquisitions-of-2011-742914/

SC Magazine had their own list in the Reboot 2011 December issue. Ones they had that didn’t overlap with Channel Insider – Check Point acquiring Dynasec, EMC acquiring Netwitness, HP and Autonomy (now that got a lot of news!), IBM with Platform Computing, Algorithmics, and i2 (big companies have to do something with all that cash). Imation purchasing IronKey, Oracle acquiring RightNow and Endeca Technologies (what’s a couple of billion $ here and there), redhat purchasing Gluster, and VMware acquiring Shavlik Technologies.

You can pick your reasons for the acquisitions.

• Broadening a security product portfolio.
• Buying over making.
• Innovation coming from smaller companies.
• Seeing good technologies being poorly managed.
• Perceived synergy.
• Buying share.
• Having a lot of money in the bank.

There were also smaller acquisitions by other security vendors in 2011 but the above seem to be the larger ones. Look for more of the above to occur in 2012. Discussions on the 2011 initial public offering (IPO) market will be a separate blog. 2011 was not a stellar year for IPO’s.

It’s a new year. The RSA Conference 2012 is coming up in late February. Scoping out companies and intercompany bonding to take place over drinks at the W Hotel across from Moscone Center. This is the place to hang. For a bit more discretion, the Clift.

http://www.rsaconference.com/events/2012/usa/

What Would Avast Software’s Valuation be as a Public Company?

On December 20, Avast Software filed with the SEC for an initial public offering (IPO) of $200 million in common shares. UBS Limited and Deutsche Bank Securities Inc. are acting as joint bookrunning managers and Pacific Crest Securities LLC, Morgan Keegan & Company, Inc. and Macquarie Capital (USA) Inc. are acting as co-managers for the proposed IPO. Avast promotes that they are protecting over 146 million active users and 189 million registered users. Nice installed based to talk about for an initial public offering The freemium model covers a substantial number of these users.

A Quick But Often Used Valuation Methodology for an IPO

In the interest of brevity, methods of valuing a company for IPO purpses include - Book Value, Internal Rate of Return (IRR) Profit/Sales Multiple, P/E (Price/Earnings ratio), Dunn-Rankin formula, free cash flow. In the link to the attached article, the author also talks about the asset approach, the earnings approach, and the market comparison approach. Discounted cash flow analysis would be great, but does involve a fair amount of conjecturing.

So, let’s use the price multiple approach for an Avast IPO. For the six months ended June 30, Avast reported a profit of $23 million. This was an increase from $4.4 million during the same period last year. Revenue increased 87% to $37.9 million. Double that revenue to annualize it, and assume a little growth over the second half of the year. Instead of $75.8 million, let’s say $80 million. Their total 2010 revenue was $48.5 million. This is probably still conservative since their first halve 2010 revenue was $20.2 million.

From an earlier blog, Symantec paid a revenue multiple of 5x and 4.8x for PC Tools and Message Labs, respectively in 2008. In 2009, McAfee paid a revenue multiple of 4.9x for its acquisition of MX Logic. These were all security acquisitions.

Different industries have different price multiples. The risk is different. Margins are different. A software company isn’t a steel com company, nor is it an appliance company.

Intel’s acquisition of McAfee wouldn’t be a valid comparison because McAfee obtains a substantial portion of its revenue from appliances. Ditto for any multiple that could be back calculated from the Thomas Bravo December 8 $1.3 billion proposed acquisition of Blue Coat Systems. Blue Coat obtains a substantial amount of revenue from its appliances. Bravo paid a 48% premium over the previous day’s stock closing price and about 19 percent off the highs of Blue Coat’s share price in January. http://dealbook.nytimes.com/2011/12/09/thoma-bravo-acquires-blue-coat-systems-for-1-3-billion/

And the Answer is

Using the 5x figure for Avast Software, suggests a total valuation of $400 million. This may not be unreasonable give their rapid growth. The paperwork filed with the SEC lays out a number of potential risks. But that's what this paperwork is for.

Again, the above is crude. There are multiple better methods. It does provide a rough estimate. The company is generating cash. They are profitable. As of June, they had about $85 million in the bank. Let the underwriting number crunching continue.

For a May update 

http://kensek.blogspot.com/2012/05/avast-gradually-moving-forward-with-ipo.html

To view Avast’s F-1 form filed with the SEC, go to http://www.sec.gov/Archives/edgar/data/1537133/000104746911010159/a2206699zf-1.htm

http://kensek.blogspot.com/2011/12/avast-software-files-for-200-million.html

Interop Las Vegas 2011 – III

It was a low-key day at Interop Las Vegas the first day the exhibition hall was open. One thinks that that this year’s Interop may be a bit slow when they have drawings for iPads at the keynote. The giveaway du jour at this year’s event is remains the iPad, similar to RSA San Francisco, several months ago.

Traffic on Interop Las Vegas exhibition floor seemed okay, though not stupendous. Rows began with 500, rather than 100. Interesting… Best tchotchke? A car giveaway is going on. The iPad giveaway seems to be fairly common. Shirts are not as prevalent as they once were.

McAfee put out a press release about their cloud security platform but were referring people to their parent company, Intel, to learn about it. Perhaps it was discussed during the presentations. Riverbed Technology and Akamai announced a partnership. Results of this partnership will not be seen until 2012. http://www.theregister.co.uk/2011/05/10/akamai_riverbed_cloud_optimizer/ . Trend Micro? No booth but they were talking about their cloud offering in the Cisco booth and will be giving a session on “The Evil Hack in the Sky, Cloud Security”, on Wednesday. Blue Coat Systems is leading three sessions, “The New Age of Wan Optimization” (Thursday), “Breakthrough Wan Technologies” (Wednesday), and “Cloud, Video and Internet: Redefining the Requirements for WAN Optimization” (Wednesday). Blue Coat also had a pair of press releases on Tuesday, “Blue Coat breaks the Barrier for Public Cloud Optimization” and “Blue Coat Defines Next Generation WAN Optimization”.

Workouts people could have at the show for prizes? Virtual boxing, putting, riding a mechanical bull, and racing miniature racecars.

Internet Security vendors ESET, Comodo, McAfee, and G Data were all within close proximity of one another on the floor. No barbs were being thrown. ESET had the largest booth and tallest employee. Comodo seemed to be talking partnerships.

If you had to pick one booth for having the hired booth staff that most epitomized Las Vegas? Securence.

Wednesday should be the busiest day on the show floor in the afternoon with the 3:00 to 5:00pm pub-crawl.

They keynote panel on Wednesday “How to Avoid Post Cloud Traumatic Stress Disorder”. Representatives from Citrix, Terremark Worldwide, and Rackspace Hosting will be on the panel. http://www.interop.com/lasvegas/conference/keynote-speakers.php