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CacheFlow Heads for Launch Pad

One of the biggest Internet IPOs of this week could come from caching appliance vendor CacheFlow Inc.

In much the same way as Cobalt Networks (COBT), CacheFlow has put together a number of elements that combine for a compelling public offering. Among them:

The company has targeted a "hot" sector - infrastructure - that has spawned a number of IPO moonshots in the past few months (including an offering two weeks ago from Akamai Technologies (AKAM), a CacheFlow competitor).

A top-flight underwriter, Morgan Stanley Dean Witter, which leads the offering of 5 million shares slated to be priced between $11 and $13, and a prestigious early backer in Sand Hill Road venture powerhouse Benchmark Capital.

Recently acquired "star power" in the form of Netscape co-founder Marc Andreessen, who earlier this month was named to CacheFlow's board of directors.

Just off what's listed above, I think you'll see CacheFlow close at triple its offer price when it begins trading on the Nasdaq under the symbol CFLO.

But after the first-day fireworks, CacheFlow will be left with some daunting tasks. For starters, it competes against several formidable caching vendors: Cisco Systems Inc. (CSCO), Inktomi (INKT), Network Appliance (NTAP) and Akamai.

CacheFlow's entry into the caching competition is what the company likes to call "Internet accelerators," which is a marketing term for caching appliance. Internet caching products are designed to store frequently accessed Web-based information closer to the user, thus reducing bandwidth congestion and improving network performance.

CacheFlow argues that its caching hardware is easier to install, configure and manage than the caching software sold by competitors. And if you're running a large network, the "plug and play" nature of CacheFlow's appliances is enticing.

The company now has more than 100 customers, including ISPs such as Road Runner and germany.net and corporations such as Delta Air Lines and Xerox. CacheFlow had sales of $7 million in the fiscal year ended last April 30 and is on track to more than double that amount this year, with $8.4 million in revenue for the six months ended Oct. 31.

However, CacheFlow is playing catch-up with some giants. Caching market leader Inktomi's revenues from its Traffic Server software alone was $16 million in the quarter ended Sept. 30, and the company has a current market cap of $6.2 billion. Network Appliance is valued at $6.9 billion, Akamai at $15.4 billion and Cisco Systems at an astounding $273 billion.

That's a lot of firepower to overcome, and it's likely that CacheFlow, which had an accumulated deficit of $26.7 million through July, will continue to spend heavily to stay in the game. Indeed, last fiscal year's net loss of $13.2 million already has been surpassed by the $24.2 million in losses in the two quarters ended Oct. 31.

CacheFlow investors should get a nice ride for awhile, but long-term altitude hinges on the company's ability to grow market share without seriously increasing losses.


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