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IPO Pick of the Week: Masergy Communications

February 15, 2011 | Kendal Kirby
masergy_logo.jpgVia Seeking Alpha

Masergy Communications (MSGY) is expecting a $100 million IPO with a market capitalization of $218 million at the price range mid-point of $13, scheduled for Wednesday, February 16, 2011.

CONCLUSION -- MSGY is a clean company with no significant debt, 95% recurring top line revenue and good growth potential based on higher usage of HD video and telepresence applications on virtual private networks.

Mid-range pricing of 31x annualized tax adjusted earnings seems fair and 2.2 times book value appears reasonable. Recent revenue growth of 10.5% tracks projected overall projected market growth of 11% for virtual private networks, not particularly exciting. However, the market for HD video & telepresence equipment & services is expected to have an annual compounded growth rate of 36% through 2014.

MSGY Valuation Metrics

Financials --
For the six months ended December 2011 MSGY generated 10.5% revenue growth . Earnings up 27% in large part because the gross profit increase to 47% to 44%. There is no significant debt. 46% to be sold on the IPO, half from private equity shareholders who own 94% pre-IPO.

BUSINESS -- MSGY provides virtual private networks for enterprises and services customer locations in 51 countries, representing most major industry verticals.

MSGY enables customers to seamlessly deploy and manage video, voice and other data applications on a global basis by integrating MSGY's proprietary cloud-based software with its network.

95% of revenue is recurring. The initial term of a customer contract typically ranges between two and three years, with an average initial contract length of 28.4 months for new customer service contracts entered into during fiscal 2010.

MARKET GROWTH DRIVER -- As large corporations seek to reduce travel expenses and increase collaboration and productivity across their enterprises, they have increasingly adopted HD video conferencing and Telepresence applications.

In a market analysis report entitled Worldwide Enterprise Videoconferencing and Telepresence 2010 - 2014 Forecast dated March 2010, International Data Corporation, an independent market research firm, estimates that the global market for video conferencing and Telepresence equipment and services will grow from $1.9 billion in 2009 to $8.8 billion in 2014, representing a compounded annual growth rate of 36%.

VIRTUAL PRIVATE NETWORK MARKET GROWTH -- Infonetics Research estimates that the global market for IP MPLS VPN services was $17 billion in 2009 and will grow to $29 billion by 2014, representing a compounded annual growth rate of approximately 11%.

CLOUD COMPUTING -- MSGY's network services platform is purpose-built and designed to deliver consistent performance across the enterprise and around the globe. The model of leveraging third-party long-haul fiber assets and utilizing local access connections allows MSGY to increase capacity and scale the network as dictated by customer demand, avoiding the cost of unused network capacity typical of legacy networks.

MSGY provides standard Ethernet connections to all customer locations, regardless of the available local access technology, to simplify the customer interface to MSGY's services. By overlaying MSGY's proprietary cloud-based software on a private IP architecture, MSGY believes it offers customers more flexible and measurable application performance.

COMPETITION -- Includes enterprise solutions business units of established network telecommunications companies, including Verizon Business (VZ), AT&T (T), British Telecom, Tata Communications (TCL), and Global Crossing (GLBC).

Competition also includes global systems integrators that manage complex application delivery solutions, including IBM (IBM), Dell/Perot Systems (DELL), and HP/EDS (HPQ).

USE OF PROCEEDS -- $45mm from sale of 3.85mm shares. Shareholders intend to sell 3.85mm shares. For general corporate purposes, including capital expenditures and working capital. May also use a portion of the net proceeds for the future acquisition of businesses that could enhance MSGY's sales footprint or broaden product and service offerings, although there are no agreements or commitments for any specific acquisition at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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