Fortinet plans $100m IPO

Fortinet, the Silicon Valley network security firm, disclosed plans on Monday to raise as much as $100m in an initial public offering, the second technology company to announce IPO ambitions in just a week., a consumer genealogy site, filed a prospectus aimed at a $75m public offering the previous Monday. Two other companies got out the door in May: software company SolarWinds and online reservation site OpenTable. Before that, there had been no tech IPOs in nearly a year.

Fortinet’s filing strengthens the belief in the Valley that venture-backed firms can start thinking about exits once more. It comes days after the official US unemployment rate unexpectedly decreased and at the same time as two acquisitions in other hot segments of the tech industry, as social networking firm Facebook bought the real-time updating service FriendFeed and virtualisation leader VMWare spent $362m on a cloud computing specialist, SpringSource.

Even companies slashing technology spending during the downturn have spared security expenditures as they struggle to keep pace with rapidly evolving cyber-threats. Beleaguered security officers must worry about new regulations from Washington and other countries covering data protection, and their employers insist they extend their mandates as more corporate data and programs are put off-site.

At the same time, determined criminals are switching to fast-changing viruses that evade traditional screening methods based on blacklists. Hackers are also taking advantage of new entryways to corporate data, ranging from social networks to flash drives that can infect any employee’s computer before spreading internally.

In the past, security firms have focused on warding off one type of penetration or another. But Fortinet is among those benefiting by trying to tackle everything at once, with gear known in the industry as Unified Threat Management. Like Check Point Software Technologies, McAfee and others, Fortinet simultaneously fights onetime intrusions, viruses, spam, phishing and other hazards.

The combination can save companies money, and Fortinet swung from years of losses to a profit of $7.4m in fiscal 2008 as revenue increased from $155m to $212m. The company logged a loss of under $1m in the six months ended June 28, but sales continued to increase.

According to IDG research cited in the prospectus, Fortinet had the leading share of the fragmented first-quarter market for Unified Threat Management hardware appliances, with 12.9 per cent. The overall segment is projected to grow from $1.3bn in 2007 to $3.5bn in 2012. Such hardware is particularly popular with small and medium-sized businesses.

The cautionary notes in the prospectus include the fact that the company failed to register its stock when ownership spread past 500 individuals, although Fortinet said it is no longer violating regulations because of an exemption granted later when such broad distributions form part of a compensation plan.

Fortinet has also been involved in a running dispute with big Japanese security firm Trend Micro. That company complained of patent infringement, and Fortinet settled the case by agreeing to pay $15m and royalties of not more than 1 per cent of revenue.

Fortinet last year began trying to get the patents ruled invalid and stopped paying Trend Micro. Trend Micro filed suit again, this time for breach of contract, just last week. Trend Micro declined to comment on the case.

Chief Executive Ken Xie and his brother Michael Xie, the company’s chief technical officer, together hold a 32.5 per cent stake. Investors Redpoint Ventures and Meritech Capital have another 15.5 percent and 10.9 per cent, respectively.

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