Return to search

Carbon Black’s IPO is another unicorn in the making

By Rohit Kulkarni, SharesPost

Carbon Black, the Cambridge, Massachusetts cybersecurity company, recently filed for its IPO, and it could well be the next unicorn.

Carbon Black makes software that collects, stores and analyzes massive amounts of raw cloud data to predict and detect cybersecurity threats. Carbon Black’s IPO comes on the heels of a successful IPO by another cybersecurity startup, Zscaler.

Below are the top 10 observations from Carbon’s S-1. Stay tuned as we learn more about the company’s IPO plans via subsequent filings.

  1. Carbon Black seeks to raise $100 million with Morgan Stanley and J.P. Morgan the lead underwriters. The company plans to trade on Nasdaq under the ticker symbol CBLK.
  2. Carbon Black generated $162 million in annual revenue last year. Subscription and licensing fees account for 92 percent of its revenue, up from 90 percent in 2016. Carbon Black’s revenue growth has decelerated from 65 percent year-on-year growth in 2016 to 39 percent in 2017. In the most recently completed quarter, Carbon Black’s revenue increased 31 percent on a year-on-year basis. We expect investors to focus on Carbon’s expected revenue growth in 2018 and beyond.
  3. Carbon Black’s market opportunity is large. The company addresses the enterprise endpoint-security market. Its solutions can address an increasing subset of additional use cases in public-cloud security software, IT-asset management, and security and vulnerability management. Third-party industry research firms estimate its primary and adjacent markets to grow from an estimated $19.1 billion in 2016 to $37.3 billion in 2021.
  4. Its gross margin in 2017 was 78 percent, a tad below 2015-2016 levels. The company expects its gross margin from subscription, license and support revenue to continue to decline as more customers purchase cloud-based offerings, but at a reduced rate compared to the decline from 2016 to 2017. Investors would view a gross margin hovering around 80 percent as a healthy sign over the longer term.
  5. Operating losses have increased with its growing revenues. Carbon reported an operating loss of $55 million in 2017. This is a step-up from from $36.6 million in 2015 and $45.6 million in 2016. On the margin, incremental losses have declined, but the ongoing operating losses should be a concern to investors.
  6. Negative cash flows. The company reported a negative free cash flow at $14 million in 2017 and a cash balance of $36 million. The company expects free cash flow to stay negative in 2018 driven by an accounting policy change. Along with #4 above, the bottom line is that investors should expect Carbon Black to remain in a cash burn mode throughout 2018.
  7. Competition includes a wide variety of public and private companies. Competitors include McAfee, Symantec, Palo Alto Networks, FireEye and Cisco Systems, along with privately held Crowdstrike and Cylance. We believe Carbon Black’s market opportunity is large and growing, but also filled with a large number of market participants.
  8. Top institutional holders own greater than 55 percent of the company. We believe such a proportion of institutional ownership could lead to lower volatility in Carbon’s post-IPO stock performance. CEO Patrick Morley owns about 5.25 percent of the company. Top institutional investors are Atlas Capital (17 percent), Highland Capital Partners (14.9 percent), Sequoia Capital (9.9 percent) Kleiner Perkins Caufield & Byers (8.8 percent) and .406 Ventures (7.7 percent).
  9. The most recent series of preferred shares was issued in January 2016. The company has raised $274 million in private funding capital, including the most recent Series F round completed between October 2015 and January 2016. The company also agreed to grant Sequoia the right to nominate a director to the board after the IPO.
  10. Carbon’s executive officers, directors and holders of substantially all of its common stock and securities convertible into common stock have agreed that, subject to certain exceptions, a lock up should exist for a period of 180 days from the date of the company’s final prospectus prior to IPO.

Rohit Kulkarni is managing director and head of research of SharesPost Inc.

Photo of IPO Ahead sign courtesy of hanibaram/iStock/Getty Images.