and 2006 ipo market comes to a close

9 deals this week to end the bloated December calendar. With all the aggressive pricings and opens, most of the December ipo crop has not been able to hold initial opens short term. It has been a fantastic environment for those high fee generators able to grab large allocations. For the individual though, it has been a tricky period…almost the opposite of August/September/October when no one was paying attention to ipos and many of the good ones opened in the aftermarket at very good risk/reward levels.

2006-12-05
DBTK – Double-Take Software

DBTK – Double-Take Software plans on offering 7.5 million shares at a range of $9 – $11. 2.5 million shares of the offering will be sold by insiders. Cowen and Weisel are lead managing CIBC and Pacific Crest co-managing. Post-offering DBTK will have 20.5 million shares outstanding for a market cap of $205 million on a $10 pricing. 1/4 of the ipo proceeds will go to pre-ipo preferred shares, 3/4’s for general corporate purposes.

ABS Capital Partners is the primary selling shareholder and will own 30% of DBTK post-offering. ABS is a venture capital firm involved in a number of ipos over the years. Portfolio highlights the past several years have been Symbion(SMBI) and Liquidity Services(LQDT).

From the prospectus:

‘Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments and that our business is distinguished by our focus on software license sales, our productive distribution network and our efficient services infrastructure.’

DBTK backs up primary servers by replicating data on them. By continuous replication of data and applications changes on a company/organization’s primary servers, DBTK’s software provides and instant back-up in case of primary server failure. The duplicate server is ready to go in an instant should the primary go down. DBTK’s software products have been around awhile, since 1995. In the ever changing tech world that nearly makes DBTK ancient. Note that prior to 2006, Double-Take was doing business as NSI software. They altered the name to match their primary product, Double-Take software.

DBTK’s software monitors and captures file system activity and replicates only changed files. It also protects data. DBTK’s software works primarily with servers running Microsoft and Microsoft Windows type file applications. These servers and applications include Microsoft Exchange Server, Microsoft SQL Server, Microsoft SharePoint Portal Server and Oracle Database. DBTK recently released a version of their software for virtual networks.

DBTK’s solutions costs approximately $4,000 and easily loads onto servers. Price point for the DBTK software has not materially changed since 2003. To date DBTK has sold over 100,000 licenses to over 10,000 organizations including over half the Fortune 500. DBTK sells through distribution partners including manufacturers Dell and Hewlett Packard and distributors such Tech Data and Bell Microproducts.

Competitors in this space include EMC owned Legato, Neverfail Group, Symantec owned Veritas. and CA owned XOsoft.

In 5/06, DBTK purchased Sunbelt System Software which they renamed Double-Take EMEA. Purpose of the acquisitions was to increase sales outside the US. Revenues of Sunbelt accounted for 10-15% of DBTK’s 2005/2006 revenues.

In 12/05 DBTK resolved a lawsuit filed by EMC’s Legato unit. In the agreement, DBTK agreed to pay EMC/Legato $3.6 million and purchase $500,000 of product annually from 2007-2010.

Financials

$2 a share in cash post-offering, no debt. No dividends planned.

Software licenses account for 65%, maintenance and service fees 35%.

DBTK’s revenues were fairly small through 2001. In 2003 and 2004 revenues increased to the $20+ million annual level. Fueled in part by growing organic demand as well as the purchase of Sunbelt, revenues have increased more strongly in 2005 and through the first 9 months of 2006. Assuming the Sunbelt purchase had been made 1/1/05. DBTK would have booked $51 million in revenues in 2005. Backing out the one time legal settlement charge, 2005 would have been the first year DBTK booked positive net earnings.

2006 – Through 9 months revenues are on track for $62-$65 million in revenues for the full year, a 25% increase. As is often the case in the software sector, gross margins are strong at 85%. As is also customary in this sector, operating expenses are dominated by sales and marketing expense. Total operating expenses for ’06 look to be approximately 73% of total revenues. This is an improvement on 2005’s 83% operating expense margin. DBTK seems to be moving in the right direction with expenses, to really become profitable however they’ll need to get the operating expense margin down closer to 50%.

Plugging in full taxes, net margins for 2006 look to be in the 8% range. Earnings per share should be approximately $0.25 per share. Note that due to loss carry forwards, DBTK will have a very low tax rate in 2006 and their actual earnings per share numbers will be reported higher. I like to plug in full taxes in order to have a better view of the company going forward post-ipo. On a pricing of $10, DBTK would be trading 40 X’s 2006 earnings.

Looking into 2007, much depends on DBTK’s ability to grow the top-line. Based in growth since 2001, there does appear to be a solid organic demand growth for DBTK’s software. The price point of $4,000 coupled with the critical need fulfillment of DBTK’s product really should prevent a steep revenue decline if enterprise spending on technology slows appreciably. If we assume 20% revenue growth in 2007, DBTK should be able to expand net margins due to better operating expense ratios. If DBTK is able to book $75-$80 million in 2007 revenues they should earn $0.35 – $0.40 per share. At $10, DBTK would be trading 27 X’s forward earnings.

DBTK’s Double-Take software product has been around for a decade. It appears to be one of the more cost-efficient and easy to implement data protection and replication products on the market. Data and application protection is a good spot to be. As is usual with these small tech ipos, DBTK will not be priced at bargain levels. They will need to continue to book solid revenue growth to grow into initial valuation. At a $200 cap though in a solid sector booking 25% revenue growth in 2006, this deal should work in range. Solid small cap software ipo