April 23, 2018 | Blog

Another Unicorn In The Making? A Look At Carbon Black’s IPO filing

Summary: Carbon Black, the Massachusetts cybersecurity firm, recently filed for its IPO, and it could become another potential unicorn. Carbon Black makes software that collects, stores and analyzes massive amounts of raw cloud data to predict and detect cybersecurity threats. Carbon Black’s IPO comes on the heels of a successful IPO by another cybersecurity startup, Zscaler.

Below are top 10 observations from Carbon’s S-1. Stay tuned as we learn more about the company’s IPO plans via subsequent filings.

  1. Carbon Black seeks to raise $100 million. Morgan Stanley and J.P. Morgan are lead underwriters. The company plans to trade with Nasdaq under the ticker symbol CBLK.
  2. Carbon Black generated $162 million in annual revenue last year. Subscription and licensing fees account for 92 percent of its revenue, up from 90 percent in 2016. Carbon Black’s revenue growth has decelerated from 65% year-on-year growth in 2016 to 39% in 2017. In the most recently completed quarter, Carbon Black’s revenue increased 31% on a year-on-year basis. We expect investors to focus on Carbon’s expected revenue growth in 2018 and beyond.
  3. Carbon Black’s market opportunity is large. The company addresses the enterprise endpoint security market. Its solutions can address an increasing subset of additional use cases in public cloud security software, security and vulnerability management and IT asset management. Third-party industry research firms estimate its primary and adjacent markets to grow from an estimated $19.1 billion in 2016 to $37.3 billion in 2021.
  4. Gross margin in 2017 was 78%, a tad below 2015-2016 levels. The company expects gross margin from subscription, license and support revenue to continue to decline as more customers purchase cloud-based offerings, but at a reduced rate as compared to the decline from 2016 to 2017. Nonetheless, investors would view a gross margin hovering around 80% as a healthy sign over the longer term.
  5. Operating losses have increased with growing revenues. Carbon reported an operating loss of $55 million in 2017. This is a step-up from from ($36.6) million in 2015 and ($45.6) million in 2016. On the margin, incremental losses have declined, but the ongoing operating losses should be a concern to investors.
  6. Negative cash flows. The company reported a negative Free Cash flow at $14 million in 2017 and a cash balance of $36 million. The company expects free cash flow to stay negative in 2018 driven by accounting policy change. Along with #4 above, the bottomline is that investors should expect Carbon Black to remain in a cash burn mode throughout 2018.
  7. Competition includes a wide variety of public and private companies: Competitors include McAfee and Symantec Corporation, Palo Alto Networks, Inc., FireEye, Inc. and Cisco Systems, Inc., and privately held Crowdstrike and Cylance. We believe Carbon Black’s market opportunity is large and growing, but also filled with a large number of market participants.
  8. Top institutional holders own >55% of the company. We believe such a proportion of institutional ownership could lead to lower volatility in Carbon’s post-IPO stock performance. CEO Patrick Morley owns about 5.25 percent of the company. Top institutional investors are Atlas Capital (17 percent), Highland Capital Partners (14.9 percent), Sequoia Capital (9.9 percent) Kleiner Perkins Caufield & Byers (8.8 percent), and Point 406 Ventures (7.7 percent).
  9. Most recent series of preferred shares issued was in January 2016. The company has raised $274 million in private funding capital, including the most recent round completed between October 2015 and January 2016 (Series F). The company also agreed to grant Sequoia the right to nominate a director to the board after the IPO.
  10. Standard 180 day lock-ups: Carbon’s executive officers, directors and holders of substantially all of its common stock and securities convertible into common stock have agreed that, subject to certain exceptions, for a period of 180 days from the date of the company’s final prospectus prior to IPO.
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Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

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This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

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