April 29, 2007, 6:19 pm

EDN - Edenor

EDN - Edenor

EDN - Edenor plans on offering 15.2 ADS on the NYSE and 4.07 ADS equivalent shares in Argentina at a US dollar price range of $16-$18. 11.4 million of the 19.9 million total ADS offering will be coming from selling insiders. Citigroup and JP Morgan will be co joint book runners on the ipo. Post ipo EDN will have 45.3 million ADS equivalent shares outstanding for a market cap of $770 million on a $17 pricing. IPO proceeds will be utilized to repay debt, capital expenditures and general corporate purposes.

Electricidad Argentina will own 51% of EDN post-ipo.

From the prospectus:

'We are the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2006...We believe we are also one of the largest electricity distributors in Latin America in terms of customers and volume of electricity sold.'

EDN has the exclusive concession to distribute electricity to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires. Electricity distribution area comprises 4,637 square kilometers and a population of approximately seven million people. In 2006, EDN sold 16,632 GWh of energy and purchased 18,700 GWh of energy. EDN purchases 19% of all electricity wholesale purchases in Argentina.

Approximately 2.5 million total customers in 2006. 32% of total energy revenues are derived from residential customers. EDN has averaged 11%-11.5% losses of energy power the past three years. This being power that EDN purchased but did not pass through to paying customers. EDN is reimbursed by the Argentina government for lost energy up to 10% annually.

Regulation - EDN is regulated by the Argentinian government. EDN passes through to customers their cost of energy plus a regulated distribution margin. In January '07 EDN received a a 28% increase in the distribution margin charged to non-residential customers.This is the first margin increase approved for EDN since 2002. The increase was effective retroactively to 11/05. EDN's non residential customers will be charged the retroactive margins monthly over 55 months. The upshot for EDN is that the margin increases they're now able to charge non-residential customers coupled with the retroactive payments mean their gross margins in 2007 should be significantly stronger then historical gross margins. EDN's long term viability is a public company depends squarely on EDN's ability to continue to receive distribution margin increases from the Argentinian government.

Dividends - Since electricity distribution isn't normally a growth business, there is often a pretty significant dividend to entice shareholders. Note though that EDN does not plan on paying a dividend initially. In fact they're not permitted to pay dividends until mid-'08 at the earliest. Expect then no yield here for at least the first year public. All things being equal, a significant negative.

Argentina - During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. The inflation rate in 2002 reached 41%. Beginning in 2003, the Argentinian economic climate has stabilized and since Argentina has outpaced most of the rest of the world. Inflation still tends to be high in the country with inflation rates topping 12% in 2005 and nearly 10% in 2006. GDP growth has averaged 9% annually since 2003. Argentina's strong economic growth the past few years has boosted electricity demand in the country. EDN estimates that overall electricity demand in Argentina has grown 5.8% annually from 2003-2006.

EDN collects revenues in pesos but their debt is denominated in US dollars. EDN does not hedge for currency risk.


Debt - In 4/06 EDN restructured the bulk of their debt. Note that until this restructuring EDN had been in default on this debt since 2002. Post-ipo EDN will have a substantial amount of debt on the book, approximately $358 million. In a very slim operating margin business, you don't want to see substantial debt on the books. This is particularly the case here in which the slim operating margin is strictly regulated by the Argentina government.

1.3 X's book value in a $17 pricing.

Thanks to a strong economy in Argentina, EDN has been able to grow electricity sold and revenues by 8% - 10% the past 3 years.

Note that EDN seems to consistently be fined substantial amounts of monies. In 2006 EDN was fined approximately $8 million, in 2005 approximately $22 million and in 2004 approximately $12 million.

2006 - Total revenues were $450 million a 9% increase over 2005. Gross margins were 42%. If EDN's retroactive distribution margin increase was in effect for 2006, gross margins would have been a much stronger 57%. Operating margins were a very slim 2 1/2%. EDN has plenty of relatively fixed costs, the only hope they've got of growing operating margins are government regulated increases in the distribution margins. Again if those 2/07 retroactive distribution margin increases had been in place for all of 2006, operating margins would have been 18%. Debt servicing ate up all actual operating margins in 2006. Losses for the year were in the $0.50 range for 2006. Actual numbers look quite different in the prospectus due to 1) a one-time $59 million gain from debt restructuring and 2) $55 million in income tax gain. EDN lost massive amounts of money in 2001 and 2002 and still has substantial tax breaks and refunds assisting the bottom line. Neither of these are operational earnings, so I folded both out.

2007 - Revenues should grow strongly due to 1)the distribution margin increase for non-residential customers; 2) received payments for the retroactive increases covering 9/05-1/07; 3) the continued strong economy in Argentina. I would expect overall revenues in 2007 to increase in the 25% ballpark to $550-$570 million. EDN estimates that the non-residential distribution margin increases alone should account for a 17% increase in revenues. Gross margins will be much strong as well thanks to the the margin increase. Operating margins should approach 19%-20% in 2007. Net margins(excluding income taxes and income tax carryfowards) should be in the 14% range.

Earnings per share(before any income tax refunds from prior years) in 2007 should be in the $1.70 ballpark. Keep in mind these are untaxed earnings. On a $17 pricing, EDN would be trading 10 X's 2007 earnings. The ruling allowing a more favorable distribution margin for EDN shifted them from a money losing operation to a nicely profitable one.

Conclusion - Argentina's economic growth the past fours years has opened the door for an operation such as EDN to come public. The deal only works in range however due to EDN's winning approval of a distribution margin rate increase to non-residential consumers. That approval shifts them into a nice bottom line profit operation. What EDN is not - EDN is not a high growth enterprise. They will experience substantial growth in 2007 due to a couple of one-time factors.In the future(2008 and beyond) I would expect EDN's revenues to by closely tied to Argentina's economic climate. EDN is also not paying a dividend. This is the type of business, electricity distribution, in which I'd like to see a nice slice of the cash flows returned to shareholders. However I do think this deal works in range due to Argentina's strong economic climate in recent years. Investors have been eager to find companies operating in countries growing faster then the US and Europe and EDN fits the bill. I expect this deal to work in range, recommend. One reason I believe EDN will work is that they'll be reporting stronger financials in 2007 then anytime in their operating history. I tend to like ipos that will be reporting very strong quarter first year public and that will be the case here.

April 21, 2007, 1:23 pm


http://www.tradingipos.com pre-ipo analysis piece on VRAZ. Piece was on site for subscribers 4/1. On 4/5 VRAZ priced at $8, below the $10-$12 range. VRAZ currently trades near $7 a share.

VRAZ was touted by a nationally televised financial program to be a 'buy' up to $15, tradingipos.com disagreed with that assesment as the piece below indicates. This isn't a bad company, just yet another tech ipo coming public a little too soon on the growth and earnings curve for my tastes.

VRAZ - Veraz Networks

VRAZ - Veraz Networks plans on offering 9 million shares at a range of $10-$12. Insiders will be selling 2.2 million shares in the deal. Credit Suisse and Lehman Brothers are lead managing the deal, Jefferies and Raymond James will be co-managing. Post-offering VRAZ will 39.5 million shares outstanding for a market cap of $435 million on an $11 pricing. IPO proceeds will be utilized for capital expenditures, working capital and for general corporate purposes.

ECI, the selling shareholder, will own 25% of VRAZ post-ipo.

From the prospectus:

'We are a leading global provider of Internet Protocol, or IP, softswitches, media gateways and digital compression products to established and emerging wireline, wireless and broadband service providers. Service providers use our products to transport, convert and manage voice traffic over legacy and IP networks, while enabling voice over IP, or VoIP, and other multimedia communications services.'

IP Products:

ControlSwitch softswitch solution - Manages and directs the IP traffic (such as a voice call) to its appropriate destination, whether it starts out as IP traffic or is traditional traffic that has been converted.

I-Gate 4000 family of media gateway products - convert traditional telephone voice traffic into IP, compress the data packets and transport this data on IP networks.

VRAZ two product families work in conjunction with each and according to the company, 'convert traditional voice traffic to IP and back allows our customers to operate two distinct networks as a single network and thereby continue to utilize their existing wireless and wireline legacy networks while simultaneously offering next generation IP applications and services.'

Advantages include: 1)seamless migration of legacy networks to IP; 2)cost reduction; 3)rapid introduction of new services; 4) compatibility with current systems.

Legacy Products:

Digital circuit multiplication equipment(DCME) - Communications systems that use proprietary signal processing technology to increase the effective capacity of transmission links by compressing voice and fax traffic while maintaining the quality of that traffic.

While DCME products made up 38% of revenues in 2005, they've been declining in recent years. The growth driver for VRAZ has been their IP products which doubled in revenues in 2006. VRAZ is leveraging their installed base of DCME customers to position to be the provider of IP network solutions to customer base as they migrate to IP networks. Much like a slew of recent tech ipos, VRAZ is a play on the increased traffic growth over networks and the upgrade cycle of said networks by service providers. Pushing this growth is increased subscriber demand for advanced voice, video and data telecommunications services and the broad adoption of broadband.

Customer base includes 400 service providers that have deployed VRAZ DCME products and 55 customers that have deployed VRAZ IP Products.

As with most of the networking sector, competition in the Internet Protocol space is fierce. Direct competitors to VRAZ include Alcatel-Lucent, Ericsson, Nortel Networks, Siemens, Cisco Systems, Sonus Networks, Tekelec and Huawei. Note that this has also been a notoriously cyclical sector. Business for IP networking products has been robust the past few years. However even in a robust environment, VRAZ has never been able to book a profit. Another cyclical slowdown at some point in the future would hurt a company like VRAZ a great deal.

VRAZ sells their products mainly through resellers and distributors. VRAZ largest shareholder ECI has been responsible for generating 25%-30% of VRAZ sales the past two calendar years.

82% of revenues are derived outside the US. Much of VRAZ research and development staff is based in India.

Flextronics manufactures all of VRAZ IP products, largest shareholder ECI manufactures all VRAZ DCME products.


$2 a share in cash post-offering, no debt

Revenues have been increasing annually past few years solidly if not spectacularly. All of the growth has been fueled by VRAZ IP products. Their legacy DCME products appear to be slowly drying. DCME product revenues has declined each of the past two years and is expected to once again in 2007. In comparison, IP product revenues have doubled the past two years.

2006 - Total revenues were $99.5 million, a 30% increase over 2005. All of that revenue increase was due to VRAZ IP product line. Gross margins were 54%, a decline from 2004/2005's 56%. Led by R&D and sales & marketing, operating expenses were hefty at 58% of total revenues. Operating expense ratios have really not declined all that much past few years as revenues have increased. This is just not what one wants to see. Unless VRAZ either ramps revenues much fast then they've been or somehow manages to lower operating expense ratios, they'll never be able to put much on the bottom line. Losses in 2006 were steep at $0.34. VRAZ did approach break-even in the fourth quarter of 2006, however they've noted a few times in prospectus that they expect hefty losses to resume the first quarter of 2007.

2007 - VRAZ expects DCME product revenues to continue to decline, so revenues growth will depend on their IP products line. It appears VRAZ did not have a stellar first quarter of 2007. In fact they expect overall revenues to decline sequentially in the first quarter of 2007. Why? Apparently their IP product revenues did not grow in the first quarter of 2007. So we've got an operation losing significant monies whose growth driver looks as if it may have stalled...at least for a quarter. I would expect 2007 revenue growth here to be in the 10%-20% range overall. Losses should be in the $0.25 - $0.35 ballpark.

Conclusion - VRAZ is another tech ipo coming a bit too early. The revenue growth and steady losses just do not justify appreciation from ipo range. Pass.

April 16, 2007, 6:23 am


Other then BBND, I've really not been enamored by the recent tech ipos...a little too much enthusiasm and a little too many operating losses seem to be the norm of later. VRAZ latest example of an unrealistic ipo range.

SMCI priced below range at $8, which was quite appealing. We like SMCI anywhere in single digits actually.

Following is our pre-ipo piece on SMCI.

Note that tradingipos.com does currently have a position on SMCI.

SMCI - Super Micro Computer

SMCI - Super Micro Computer plans on offering 9.2 million shares (assuming over-allotments) at a range of $9.50 - $11.50. Merrill Lynch is lead managing the deal, Needham and UBS co-managing. Post-offering SMCI will have 28.6 million shares outstanding for a market cap of $300 million on a $10 1/2 pricing.

*Note* - This SMCI deal is another of those tech ipos structured more like a 1999 ipo than should be in this day and age. This means there are excessive outstanding, already in the money and exercisable, options here. SMCI has a whopping 15 million shares of common stock issuable upon the exercise of stock options outstanding at a weighted average exercise price of $2.12. You can bet over the next few years these options will be exercised, converted into shares and sold. Factoring in this dilution, SMCI would have 43.6 million shares outstanding for a market cap of $458 million on a $10 1/2 pricing. This is a trend we've been seeing way too much of lately and one I do not care to see. While these options will not effect early trading of SMCI, they do create a pretty significant headwind for a stock over the first few years of trading. What we will see here with SMCI is a continued stream of insiders exercising and selling options beginning at the 180 day market and most likely continuing quarterly for a few years. SMCI as a company will have to outperform operationally to simply 'stand still' on stock price as these options will be growing market cap, even with stock at same price. Please keep this in mind for those looking to hold SMCI longer term - you will be diluted heavily by insiders. Many of the options shares are part of SMCI's 1998 stock option plan. As most options need to be exercised within 10 years, there is a pretty good chance that many of the 15 million option shares will be exercised and sold by the end of 2008.

Approximately 1/3 of ipo proceeds will be used to repay all debt, 2/3's for general corporate purposes.

Chairman of the Board, President and Chief Executive Officer Charles Liang will own 32% of SMCI post-ipo.

From the prospectus:

'We design, develop, manufacture and sell application optimized, high performance server solutions based on an innovative, modular and open-standard x86 architecture. Application optimized servers are configured to meet specific customer needs in contrast to typical servers which are offered in limited standardized configurations.'

Customizable server company. SMCI customizes their servers to meet specific customer requirement by adjusting memory, processing power, and/or input/output capabilities. SMCI's servers are based on x86 which is the open standard utilized by both Intel (INTC) and Advanced Micro Devices(AMD) in their microprocessors. INTC and AMD are SMCI's only suppliers of microprocessors. Note that SMCI does not participate in the traditional UNIX server market. The open architecture server market in which SMCI participates is growing much faster than the traditional UNIX server market. Going forward the UNIX server market is expected to grow 6%-7% annually the next 4 years, while open architecture servers are anticipated to grow 40%+ over the same period of time.

SMCI's open architecture approach allows for easy integration of their servers as well as allowing for the ability to 'stack' their servers to create scalable server systems. The selling point for open system servers is the ease of scaling when compared to the traditional UNIX server market. SMCI also offers server components to OEM's. Majority of revenues are from individual servers and server components, not complete server systems. As SMCI sells through distributors, this is not surprising. Companies purchasing from distributors can/do stack SMCI's servers and components to create their own specialized server system.

SMCI commenced operations in 1993 and has been profitable every year since. Pretty impressive considering the various tech cycles since. SMCI sells primarily through distributors, whom accounted for approximately 70% of revenues past two years. In 2006, 400 companies in 70 countries purchased SMCI servers and server components.

SMCI believes their advantages include: 1) Customizable and flexible; 2) Rapid time to market; 3) Power efficiency and thermal management; 4) High density - Density is amount of space required by a server. By being 'high density', SMCI's servers require less floor space.

As of 12/31/06, SMCI did not offer a 'high performance blade server' solution. However SMCI expects in the first half of 2007 to launch a high performance blade server solution, called Superblade. Blade servers are specifically designed for high density by sharing power, cooling, networking and other resources within a single server-rack enclosure, compared to standard servers which each require their own independent resources. By eliminating these repetitive components and locating them in one place, a greater number of blade servers can be used in a smaller physical area as compared to standard servers. This would appear to be SMCI's answer to servers offered by companies such as Rackable (RACK).

No single customer accounted for more than 10% of revenues each of 2005 and 2006.

SMCI utilizes Ablecom Technology for contract design and manufacturing coordination support. SMCI’s purchases from Ablecom have accounted for roughly 1/3 of cost of sales expense the past 5 years. Ablecom is a private company owned by the brother of SMCI President/CEO Charles Liang.

Legal - In 9/05 Rackable Systems filed a patent infringement suit against SMCI. In 2/07 the Court threw out much of the lawsuit, ruling very favorably for SMCI. The remaining claims in the suit are set to go on trial in 8/07. Also SMCI was fined by the US Government for sales to Iran during the 2001-2003 period. In 2006, SMCI settled the charges and paid what appears to be approximately $500,000 in fines to the US government.


$2 per share in cash, no debt post-ipo.

The server market is notorious for lumpy revenues. A large order in any particular quarter can help a server company blow away estimates and.....conversely a company pushing out an order into another quarter can mean a pretty ugly looking quarterly earnings miss. Servers are generally not purchased on long term contracts, or even that far in advance. SMCI notes in the prospectus that most sales in a given quarter come from orders placed in that specific quarter. The fact that SMCI has been able to achieve and maintain profitability for 15 years in this highly competitive 'lumpy' sector is a pretty strong selling point here.

Note that SMCI accounts for revenues upon shipment to distributors, not the final sell-through from distributor to end user/customer. This has led to approximately $1-$3 million annually in 'inventory writedowns' for returned and/or excess product inventory.

SMCI's fiscal year ends 6/30 annually. FY '07 will end 6/30/07. 50% of revenues are derived from US customers, 50% from outside US. Revenues from outside US are growing more briskly and SMCI should generate more non-US revenues than US revenues in FY '07. Specifically SMCI is focusing future growth in China and throughout Asia.

Revenues have ramped impressively since 2002. Revenues in fy '05 (ending 6/30/05) were $211 million, $302 million in FY '06 and on pace for $400-$425 million through first half of FY '07.

Gross margins are slim in this niche. Through the past 18 months, SMCI has had gross margins in the 18%-20% range. This does not leave much margin for error. To be a successful company with these gross margins, managing operating expenses is crucial. In a niche in which SMCI must continue to develop new/better servers annually, R&D is the heftiest operating expense annually. Fortunately sales & marketing expenses are controlled at a low rate thanks to SMCI selling most of their products through distributors. Overall operating expenses equaled 10% of revenues in FY '06 and 11% through first two quarters of FY '07. SMCI has kept operating expenses in that 10%-11% of revenue area the past three fiscal years. I would expect that to continue to be the case going forward.

Net margins for FY '06 were 6%. EPS for the officially post-ipo share-count of 28.6 million was $0.63. When option shares are included, EPS dips to $0.41. On a 10 1/2 pricing, SMCI would be trading 17 X's trailing earnings without options shares included, 26 X's trailing earnings with future option dilution factored in. Big difference.

FY '07 (ending 6/30/07) - Based on first half of FY '07, we should expect full year revenues in the $400 - $425 million range. This would be approximately a 33% revenues increase from FY '06. Gross margins and operating expense ratios look to be in range of previous few fiscal years. Note however, that gross margins ticked down a bit in the 12/31 quarter from that 18%-20% range to 17%. While not dramatic, this will most likely drop FY '07 net margins by 1% for the full fiscal year. Net margins then should be in the 6% range, instead of FY '07's 7%. Earnings per share based on 28.6 shares outstanding should come in $0.80-$0.85. When factoring in option shares, earnings for FY '07 should be $0.55. On a $10 1/2 pricing, SMCI would trade 13 X's FY '07 earnings when no option dilution is factored in, 19 X's FY '07 earnings when full dilution is factored in.

Rackable Systems is the recent ipo most similar to SMCI. This will even be more the case when SMCI starts shipping their blade server product and components the first half of calendar year 2007. Let's take a brief look at the two. Note, in looking at SMCI's metrics below, we'll 'split the difference' on options and factor in 50% option dilution. As mentioned above, these options will not be in play until beginning approximately 180 days after ipo, although some may hit 90 days post-ipo. These options will be exercised, so when looking at SMCI we must factor in a good chunk of these options. The numbers below reflect SMCI as if 50% of outstanding in the money options were exercised.

RACK - $525 million market cap. Currently trades 1.1 X's FY '07 revenues and 22 X's FY '07 earnings estimates. Note that these estimates have been reduced substantially the past 90 days. RACK is expected to post a 27% revenue increase in FY '07.

SMCI - $380 million market cap (assuming 1/2 option dilution) on a $10 1/2 pricing. Would trade just less than 1 X's FY '07 revenue estimates and 16 X's FY '07 earnings with an expected 33% revenues increase in FY '07.

Conclusion - due to the lumpiness of revenues and the low gross margins, this should never be a sector in which a company is valued aggressively on forward PE's. RACK holders discovered this recently as a few good quarters in a notoriously lumpy sector were then forecast as the 'norm' going forward. Factoring in a huge quarter as the norm going forward will nearly always be a mistake in this sector. SMCI has done a terrific job over the years managing their business and growth through 13-14 profitable years in a row. This tells me a couple of things: 1) SMCI has been able to continually innovate over the years. This is a must in this sector as new products/components are constantly being introduced. 2) SMCI has done an excellent job managing operating expenses in a low growth margins sector. Both these are exactly what you need in a lumpy low gross margin sector. You need constant innovation and strong management. SMCI's years of continued profitability would seem to indicate they've both.

Revenue growth has really ramped here the past three years. I'm skeptical that this swift growth will continue. However if SMCI is simply able to grow in the 20%-25% range in FY '08, this is a very attractive ipo in range. The wild card for FY '08 and beyond is SMCI's Superblade server being introduced first half of 2007.

Keep in mind, the coming option dilution is a big negative here as ipo buyers will be massively diluted over the next few years. However even factoring in this dilution, SMCI still looks attractive to me in range. This dilution, coupled with low gross margins would lead me to pass here on any aggressive opening prints as it is doubtful those would be long-term sustainable.

This is not a sector in which you ever want to pay high multiples. In range and $1-$2 above however, SMCI is a recommend.

April 13, 2007, 11:53 am

FCSX part 2

Looks like rest of market discovered FCSX today --- the appeal of digging into ipos has always been finding one like this before the rest of the market realizes exactly what they do and how much money they will make.

FCSX has been a sweet backdoor way to play the commodities derivatives boom. Company today released their first earnings report since they went public at $24 last month.

Disclosure - at time of post on 4/13/07, tradingipos.com has a position in FCSX.

April 2, 2007, 6:12 am


With the ipo calendar slowdown during holiday week, we'll not have a free blog piece next weekend. Will continue with weekly free piece 4/15.

full analysis pre-ipo and active trading forum in membership section: http://www.tradingipos.com

ARUN - Aruba Networks

ARUN - Aruba Networks plans on offering 9.2 million shares(assuming over-allotments) at a range of $8-$10. Goldman Sachs and Lehman are lead managing, JP Morgan and RBC Capital co-managing. Post-offering ARUN will have 76.4 million shares outstanding for a market cap of $688 million on a $9 pricing. Note - In a trend we've seen with a few ipos lately, ARUN has excessive option/warrant/employee incentive shares already outstanding and ready to be converted to shares. ARUN has 19.9 million options outstanding with an average exercise price of $2.71 per share.In addition ARUN has approximately 1.6 million warrants and employee incentive shares already awarded. These 21.5 million options/warrants/employee incentive awards will be converted into share sooner then later and must be added into the initial market cap. Factoring in this upcoming dilution, ARUN will have 97.9 million shares for a market cap of $881 million on a pricing of $9.

IPO proceeds will be used for working capital and general corporate purposes.

4 venture capital firms will own between 55%-60% of ARUN post-ipo. Fully expect these firms to divest a portion of their holdings at the 180 day lock-up expiry.

From the prospectus: 'We provide an enterprise mobility solution that enables secure access to data, voice and video applications across wireless and wireline enterprise networks. Our Aruba Mobile Edge Architecture allows end-users to roam to different locations within an enterprise campus or office building while maintaining secure and consistent access to all of their network resources.'

Yet another networking ipo whose primary competition is Cisco and Motorola. As we'll see in the financials, Cisco's size and ability to compete on price are greatly effecting ARUN's ability to book a net profit even while growing revenues.

ARUN's focus is enterprise WLAN or 'wireless local networks'. ARUN,, which began shipping product in 2003, calls their product Aruba Mobile Edge Architecture(AMEA).

Industry - Enterprise wireless networking has grown appreciably due to the desire for mobile computing. WLAN or VPN(Virtual Private Networks) have been the solution enabling open access on wired network ports. These type networks extend the fixed network over the air. ARUN believes their AMEA product takes WLAN's to another level by providing additional security features, allowing secure roaming over the entire network, increased performance, easy scalability and integration etc...Essentially ARUN believes they've built a better enterprise WLAN product.

According to ARUN:

'Our architecture allows end-users to roam to different locations within an enterprise campus or office building while maintaining secure and consistent access to all of their network resources. Our architecture also enables IT managers to establish and enforce policies that control network access and prioritize application delivery based on an end-user’s organizational role and authorization level.'

ARUN's differentiators from traditional WLAN's:

1 - Secure mobility - Enables secure roaming over the network in various remote locations.

2 - Improved application performance - non-fixed port user centric and application aware allowing prioritization and optimization of data, voice and video services based on the specific user and/or the application being delivered.

3 - Ease of deployment and integration - Designed as an overlay to existing enterprise networks, allowing customers to deploy ARUN's products without causing any disruption to existing network operations.

4 - Scalability - Can be scaled to support up to 100,000 concurrent users from a centralized point-of-control.

5 - Flexibility - Designed for ease in introducing new applications.

The majority of ARUN's revenues are derived through resellers, distributors and OEM's, not ARUN's direct sales force. Third parties accounted for 75% of 2006 revenues. Largest channel partner/re-seller of ARUN's products is Alcatel-Lucent which accounted for 18% of revenues the past 18 months. ARUN has two interesting agreements with Alcatel-Lucent: 1) ARUN is restricted from selling products to other 3rd party sellers without consent of Alcatel-Lucent. Lot of power for a company that was responsible for just 18% of revenues past 18 months. 2) A 'most-favored nations' clause in which Alcatel-Lucent is guaranteed a match of the lowest price-point ARUN is selling their product to another channel partner/re-seller.

ARUN also has a strategic relationship with Microsoft, which began in June 2005. Microsoft chose ARUN's products for a worldwide company deployment in Asia, North America and Europe. Sales to Microsoft have totaled $3.5 million. In addition ARUN will essentially 'gift' MSFT approximately 400,000 shares of ARUN stock on ipo. Essentially MSFT is getting either free equipment or free ARUN shares from ARUN for choosing ARUN products.

ARUN's products have been sold to over 200 end customers. Flextronics handles the majority of ARUN's manufacturing.


$1 per share in cash post-ipo, no debt.

Revenues have been growing steadily if not rapidly. For the past 5 quarters ending 1/31/07, ARUN's revenues were(in millions): $20.1, $20.1, $24, $24.5, $26.6. Operating expenses have also grown steadily the past 5 quarters. In fact ARUN's operating expense growth has kept pace dollar for dollar pretty much with revenue growth.This really isn't what you want to see in a young growing company. The past 5 quarters of ARUN's operating expenses ending with the 1/31/07 quarter(in million): $12.4, $12.6, $14.7, $14.8, $16.4. the % of operating expenses to revenues the past 5 quarters are 62%, 63%, 61%, 60%, 62%. 5 quarters of solid revenue growth, yet ARUN is no closer to lowering their operating expense ratio.

ARUN's fiscal year ends 7/31 annually. FY '07 then will end 7/31/07. Through the first 6 months, ARUN's revenues are on pace for approximately $105-$110 million. This would represent a 48% increase over FY '06. Keep in mind ARUN was essentially in start-up revenue stage as recently as FY '04. Also at that revenue run rate, ARUN will be selling a hefty 9 X's 2007 estimated revenues.

Gross margins appear on track for the 60% ballpark. As noted above, operating expense levels are where ARUN runs into trouble. By growing their operating expenses in the ballpark of dollar for dollar, ARUN is not shifting close to profitability even with the increased revenue growth. This is a very competitive niche and it appears ARUN is plowing a substantial amount of expense money into sales and markets to compete with Cisco. The result is that ARUN will actually lose more money in FY '07 then in FY '06 even with the 44% revenue growth.

Assuming the fully diluted 98 million shares outstanding, ARUN lost $0.12 in FY '06(ending 7/31/06) and appear on pace to lose $0.20-$0.25 in FY '07. Until ARUN is able to reduce their operating expense ratio significantly, they will not be able to turn a profit. Thus far ARUN has not been able to lower that ratio much at all.

Conclusion - ARUN appears more then fully valued when all those option/warrant/employee incentive shares are factored in. These are shares that will be exercised over the next 1-2 years, so you've got to include them in the initial market cap. ARUN to me does not look anything like a $1 billion market cap company should look. We've seen a number of good tech ipos the past 6 months, ARUN at this initial market cap is not one of them. There just isn't remotely enough here under the hood to justify a a nearly $1 billion dollar cap on pricing.

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