Isilon Reveals IPO Plans

NAS vendor files to go public despite lack of profits

September 6, 2006

4 Min Read
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Isilon is the fourth storage company -- and the first storage systems vendor -- to file for an IPO this year. (See Isilon Files for IPO.)

Following in the footsteps of backup software vendors CommVault and Double Take, and WAFS startup Riverbed, Isilon filed documents with the SEC Friday afternoon before the long weekend. (See Double-Take Seeks IPO, CommVault's Taking the Plunge, and Riverbed Hedges IPO Bet.) Isilon's filing details plans to raise up to $86.25 million in a public offering underwritten by Morgan Stanley, Merrill Lynch, Needham & Co., and RBC Capital Markets.

All four storage companies, who also have plans to go public, will be watching each other closely. CommVault, which first filed in March, said last week it is looking to list its common stock at a price from $12.50 to $14.50 per share. (See CommVault's One Step Closer.) Riverbed has set a target range of between $7.00 and $8.50. Both could begin trading shares within a month.

An interesting trend has developed among the IPO hopefuls: Riverbed, Double Take, and Isilon plan to go public without having turned a profit yet. Isilon, despite impressive revenue growth since it started selling its Isilon IQ clustered NAS systems in 2003, lost more than $19 million last year and is $10 million in the red for the first half of 2006.

Isilon's revenues have grown substantially, however, from $7.6 million in 2004 to $21 million in 2005, and $23.8 million for the first half of 2006 -- a 245 percent year-over-year increase. Isilon's backers hope that its revenue growth and an anticipated increase in the clustered storage market will lure investors."Clustered storage has come into its own, and Isilon is killing it as far as revenue growth," says analyst Arun Taneja of the Taneja Group consultancy. "But by filing an IPO before profitability, they're violating conventional wisdom. Conventional wisdom is to increase revenue and increase profitability for several quarters, then you go do an IPO."

Isilon will have its work cut out for it in order to make it as a successful public company. Competitors include EMC, Hewlett-Packard, Hitachi Data Systems, IBM, Network Appliance, and Sun. These and other vendors are increasingly targeting clustered storage and the media and broadcast markets Isilon has penetrated. (See Cluster Clamor and Storage Shapes Up for Multimedia.)

According to Isilon's filing, the company has more than 200 customers, but several large deals have bumped up revenue. Eastman Kodak made up 20 percent of Isilon's revenue in 2005 and 15 percent of its revenue for the first half of 2006. Comcast Corp. accounted for 17 percent of Isilon's revenue through the first two quarters this year.

A company's SEC filing for an IPO usually includes interesting secrets, and Isilon's had a few.

One is that CEO Steven Goldman has been named as a co-defendant in lawsuits involving F5 Network's improper stock options practice. Goldman was an SVP in sales and marketing at F5 before Isilon in 2003. (See Vendor Options Draw SEC Scrutiny and F5 Receives Subpeona.) According to Isilon's filing, Goldman has hired counsel to defend him and "believes that he has meritorious defenses to all claims against him."Isilon also disclosed that it received a letter on July 31 from video server vendor SeaChange suggesting that Isilon products are illegally using SeaChange patented technology. Isilon responded with a letter saying it believes SeaChange patents are not relevant to its products.

The Seattle-based company has 232 employees. It has raised $70 million in funding, including $10 million in July 2006. Isilon has $11 million in cash. (See Isilon, PolyServe Pick Up Funding.)

All the IPO activity is notable in the storage sector. The last attempted storage systems IPO was aborted 13 months ago when LSI Logic pulled its plans to spin off its Engenio systems division when it found preliminary bids well below its target range. (See Engenio Gets Cold Feet.)

Dave Raffo, News Editor, Byte and Switch

  • F5 Networks Inc. (Nasdaq: FFIV)

  • RBC Capital Markets

  • Comcast Corp. (Nasdaq: CMCSA, CMCSK)

  • CommVault Systems Inc.

  • Double-Take Software Inc. (Nasdaq: DBTK)

  • Eastman Kodak Co.

  • EMC Corp. (NYSE: EMC)

  • Hewlett-Packard Co. (NYSE: HPQ)

  • Hitachi Data Systems (HDS)

  • LSI Logic Corp. (NYSE: LSI)

  • IBM Corp. (NYSE: IBM)

  • Isilon Systems Inc. (Nasdaq: ISLN)

  • Merrill Lynch & Co. Inc.

  • Needham & Co.

  • Network Appliance Inc. (Nasdaq: NTAP)

  • Riverbed Technology Inc. (Nasdaq: RVBD)

  • SeaChange International Inc. (Nasdaq: SEAC)

  • Sun Microsystems Inc. (Nasdaq: SUNW)

  • Taneja Group

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