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Cache Flow IPO: Inktomi, Slow On Revenue; Big On Speed

Given the high-flying debut of broadband chipmaker Broadcom (NASDAQ:BCRM), which jumped 150% on its initial public offering April 17, we think speedy Net software maker Inktomi's planned IPO could fare well with Wall Street. Never mind that BCRM trades north of 80x last year's revenue, on a fully-diluted basis.

We look a little closer, though, and ask: Part search engine software maker, part network application cache hero, is Inktomi's planned initial public offering a cash cow in the making or will Wall Street wince at the thin revenue line?

The San Mateo-CA based firm, best known for being the search engine behind Wired's HotBot, wants to sell 2.2 million shares at a target $13 per share through Goldman Sachs and others.

Our analysis of the fully-diluted shares outstanding after an IPO values Inktomi pro forma at $310 million. Once we factor the $28 million IPO proceeds and total $35 million working capital it yields an enterprise value of about $280 million. After the IPO insiders, a bevy of PhDs from UC Berkeley, own about 45%.

Search the numbers here:

Cache This: Inktomi's IPO

Inktomi  
Pro forma IPO valuation estimates  
Offering 2.00
Greenshoe 0.20
Total offer with greenshoe 2.20
Target IPO price per share $ 13.00
IPO gross proceeds w/ greenshoe $ 28.60
   
Shares out pro forma 20.53
Plus options 3.32
Fully-diluted shares (FDS) 23.86
IPO market cap $ 310.12
Plus long-term debt 5.19
Less working capital $ 35.73
= IPO enterprise value $ 279.58
   
Revenue  
1997 $5.79
Six months ending 3/31/98 $5.88
of that, how much from search? 88%
of that, how much from network applications? 12%
Estimated 1998 revenue $15.00
Loss  
1997 -$8.66
Primary share loss 1997 -$0.72
Six months ending 3/31/98 -$7.88
Revenue multiples  
IPO market cap/1997 revenue 54
Enterprise value/1997 revenue 48
IPO market cap/est. 1998 revenue 21
Enterprise value/est. 1998 revenue 19
   
Internet software high end 10
Internet software low end 3
   
all figures in millions except  
multiple and share prices  
© 1998 Mecklermedia. www.internet.com  

Six month revenue ending March 31 was $5.88 million, more than 1997's entire revenue generated. Of the recent revenue, 88% came from licensing its search engine to companies that include Wired and Japan's NTT. A new licensee, Microsoft, plans on using Inktomi in its pending Start search page.

Net net we forecast $15 million revenue for 1998, putting Inktomi's value at an estimated 20x revenue, while Internet software makers trade on average about half that. Of course the Broadcom IPO, while a chip maker and not software outfit, provides an insight into the frenzy for anything that speeds up the Internet.

Bandwidth matters and whoever provides the solution to make the pipes faster may be hot, be it hardware or software or both. Cisco, Ascend, Bay, 3Com, Microsoft, MCI, and others all pursue making the Net faster.

Inktomi's cache network application conveniently distributes Web pages closer to the end user so that the network isn't clogged with one million copies of the same file coming from one server array in one location. Inktomi's cache product generated 12% of Inktomi's revenue for the six month's ending March 31. Customer using it include AOL, DIGEX, and Intermedia. Inktomi aims at the 4,000 ISPs out there for sellthrough.

For all the hoopla, however, Inktomi's search software side provided 88% of revenue, and from a handful of customers at that. Losses for 1997 reached $8.6 million and for the six months to March 31 were $7.8 million.

After catching our breath from the latest round of search euphoria, as Yahoo!, Excite, Lycos, and Infoseek all run up, we think Inktomi's engine status (and not portal) benefits it in some ways because it can keep licensing software to anyone who wants search.

But if Inktomi itself was a portal we think its valuation could be greater, at least on par with Infoseek. Inktomi's search engine has won numerous awards from the industry trade press for providing more relevant results than its competitors.

The ironic part is that in late 1996 when Inktomi was busy on search, nobody cared about search so it began working on network caching. Now search engines-turned online services are hot while Inktomi pursues caching and never built a search brand portal of its own.

If cache is its market focus, there's little dispute that Inktomi's product is hot, maybe the hottest. The question we have: with 15 sales people how will it reach sellthough to 4,000 ISPs in the U.S. and perhaps 3,000 globally before the competition (with global distribution channels firmly in place) catches it feature for feature?

Inktomi may be a hot IPO but competing on a global scale in software is expensive. It could make it to the big leagues, but why didn't Cisco, Ascend, Bay, or IBM already acquire it? Or will one of them do so before it goes live on Wall Street?