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Little Thunder Seen for Loudcloud IPO


By Hal Plotkin
Silicon Valley Correspondent

Ever since Web wunderkind Marc Andreessen decamped from America Online Inc. {AOL} last September after that firm acquired Netscape Communications Corp. and subsequently announced plans for a new start-up, investors have had only one question about the 29-year-old: Can he do it again, that is, launch another company that creates shareholder wealth as quickly as Netscape did? After all, the Netscape initial public offering was the original Internet overnight sensation, turning Andreessen and Chairman James Clark into billionaires when the stock went up from an offering price of 28 to 72 in its first trading day.

The answer, alas, is probably not. Analysts who have taken a peek at the registration statement for the pending IPO of Andreessen’s Loudcloud, filed this week, see no Netscape II.

Instead, they say that the money-hemorrhaging firm – which manages Internet infrastructures — has little to show for the more than $100 million it has already consumed, has yet to prove itself in a market that is becoming increasingly crowded with deep-pocketed competitors, and is too closely tied to many dot-com customers who have shaky futures of their own.

“I was really, really surprised when I read Loudcloud filed for an IPO,” says Joel Yaffe, an analyst at the Giga Information Group in Boston. “I’m not sure what’s pushing them to go public so soon. They’ve assembled a bunch of impressive things, but they haven’t really proven that what they have works yet.”

“The Loudcloud offering will test the market’s appetite for another unprofitable Internet firm that promises some big payoff sometime in the future,” adds Greg Blatnik, an analyst at Zona Research, based in Redwood City, Calif. “The current market sentiment would seem to argue against that.”

Like several other analysts, Blatnik quickly adds that Andreessen’s star power, which stems from the credit he received for helping to create the first popular Internet browser, might be enough to attract a sufficient number of investors for a successful IPO.

But analysts who follow the sector also warn that Loudcloud’s post-IPO performance is almost sure to disappoint unless and until the company demonstrates considerably more traction in its targeted markets.

Earlier this week, Loudcloud filed documents with the Securities and Exchange Commission indicating plans to raise $150 million dollars in an initial public stock offering. As is customary at this early stage of the process, precise details of the pending offering, such as the total number of shares to be sold, the price of those shares or the date of the offering, weren’t released.

Andreessen is the single largest individual Loudcloud shareholder, with 18.2 percent of the firm’s stock prior to the offering. Several other members of Loudcloud’s executive team, including Benjamin Horowitz, Timothy Howes and In Sik Ree, own stakes worth more than five percent each in the pre-public company while Menlo Park, Calif.-based Benchmark Capital venture-capital firm and its associates control just under 20 percent of the remaining stock.

Loudcloud, based in Sunnyvale, Calif., has lost $122 million since its inception just over a year ago on total revenue of about $1.9 million, according to the recently filed documents, which show remaining cash on hand of about $142.5 million as of July 31. The company also lists an additional $124.8 million in “working capital” on its balance sheet.

Representatives of Loudcloud didn’t respond to several interview requests from CNBC.com.

“If you do the math and divide their losses by the number of employees, it means they lost something like $1 million dollars per employee over the last 12 months,” says Harry Tse, vice president at the Yankee Group, based in Boston. “I’m not sure I know how you do that,” he says. “I mean you’d have to have a bonfire in the parking lot and get everyone busy burning dollar bills.”

What troubles analysts most, they say, is that Loudcloud seems to have very little to show for those losses. Products very similar to the company’s proprietary technology, called Opsware, are already available from other vendors with more such products expected to come to market soon. They also say Loudcloud’s current list of customers seems quite thin and evidences too heavy a reliance on the dot-com firms that were Loudcloud’s initial target market.

Loudcloud’s biggest-name current customers include Britannica.com, Mercury Interactive Corp. {MERQ} and SkillsVillage.com, according to the firm’s filing.

Loudcloud bills itself as a next-generation Internet infrastructure provider. The company’s forte is allocating appropriate bandwidth for, monitoring, and management of heavily trafficked Web sites. Users of Loudcloud’s services can take advantage of a variety of features, including redundant systems that it says virtually eliminate the possibility of downtime because of hardware or software failures. Loudcloud promises lower costs to end users over time by facilitating the purchase of whatever infrastructure and bandwidth is needed at any particular moment rather than forcing businesses to pay for systems that anticipate peak demand which, once paid for, often go unused.

Loudcloud customers can also take advantage of the firm’s independent monitoring of the performance of the web hosting firms with which they do business.

“If you buy rack space and hosting services from some provider, you don’t necessarily want to hire that same provider to do the monitoring,” says Lewis Clark, senior analyst with Gartner Group’s Dataquest, based in Boston. “Loudcloud is one of several new companies that are closely coupled with other parts of the IT [information technology] structure that are also new, such as Web hosting and application service providers.”

Application service providers are firms that offer pay-per-use software applications over the Internet.

Clark says the type of services Loudcloud offers will be a critical part of the Internet infrastructure of the future. But he also says increasing competition and marketing obstacles make it unclear how much of that future will belong to Loudcloud, if any.

Smaller competitors targeting the same market, he notes, include San Mateo, Calif.-based Logictier Inc.; MimEcon Corp., based in San Francisco and Sitesmith Inc., based in Santa Clara, Calif.

More worrisome for Loudcloud, though, are the bigger telecommunications guns, NTT {NTT], which recently acquired Web-hosting firm Verio Inc.; WorldCom Inc. {WCOM}, which recently acquired Web-hosting firm Digex Inc., and AT&T, which is rolling out its own similar offerings. And finally, there are the many already well-established Web-hosting firms such as Exodus Communications Inc. {EXDS}, which will probably be reluctant over the long run to let firms such as Loudcloud get in between them and too many of their customers.

“The really big thing you’re seeing now is the emergence in this market of the big branded names, the AT&T’s, the NTT’s, and the [regional bell operating companies],” says Stephen DeWitt, president and CEO of Cobalt Networks, an ASP hardware and software provider whose acquisition by Sun Microsystems Inc. {SUNW} in a $2 billion stock-for-stock merger was announced earlier this month.

“When you look at companies like Exodus, or the way WorldCom stepped in and bought Digex, that’s what Loudcloud is going up against,” adds Chris Nicoll, vice president of Current Analysis, based in Sterling, Va. “The big players are where Loudcloud will find its biggest challenge.”

DeWitt agrees there is a clear need for Web-site provisioning and site management firms such as Loudcloud. But he also says he much prefers his end of the business; selling the boxes those firms use to compete with each other. “The more they compete the better we do,” he says. “The Loudclouds and the Sitesmiths, they’re really like what EDS was to General Motors, they help bring all the tools together to increase efficiency.”

Offering such services could leave Loudcloud with a winning hand eventually. But industry watchers question the decision to take the company to the public market so soon.

“At this stage, you really have to wonder why they can’t get more money from private sources,” Yaffe says. “It may be they think they’ll do better on the public market. It will be interesting to see if investors are swayed by the names involved or whether they will put the screws to the company and ask them to explain why the money already invested hasn’t made it viable.”

Clark adds that Loudcloud also faces the problem of convincing potential customers among Fortune 1000 companies of their need for the firm’s services.

“When Loudcloud got started, it was pretty much focused around serving the dot-coms,” Clark says. “That was an easier sale since those companies had nothing and needed everything. It’s going to be a much slower sales cycle working with the big, established companies Loudcloud needs, and that will slow them down.”

The analysts also note that Andreessen has a somewhat spotty post-IPO track record. Although Netcape’s IPO was spectacularly successful, the company rather quickly faded into Silicon Valley’s woodwork until it was eventually acquired by AOL, where Andreessen worked briefly in a top operational post.

“Andreessen has shown he can do a good IPO,” Nicoll says. “But running a successful company over the long term is not the same thing.”

“Andreessen’s name will certainly help the company,” Blatnik says. “But the real task is to convince the market that what they offer is a superior product. The small number of customers they now have makes it difficult to give the company much of a track record at this point.”

Loudcloud’s filing indicates the anticipated IPO proceeds will be used for unspecified purposes.
Read other articles by Hal Plotkin

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