Description

Idea: Long Gigamon Inc (GIMO)

Description: GIMO provides software and hardware for companies to visualize, monitor and optimize network traffic. Their solution acts as a neutral party allowing companies to deploy various security solutions and routing hardware, and yet still be able to visualize and monitor traffic across an entire hybrid network environment.

•  “I look at data center architectures and I go it is no-brainer. If you really understand what Gigamon does and the expandability of our solutions, it's a no-brainer to put us in your environment because you will save money. Your ROI is powerful from an initial connection standpoint. Instead of having spaghetti with every tool touching every network element, you put us in, we touch it once, everybody plugs in to us. Take it to traffic and then condition the traffic, so people only get what they need and therefore -- I'll be candid about it -- if you throw all your traffic and security tools, you'll need a heck of a lot more of them, whereas if you do it efficiently, then you can have less equipment sitting behind us. I don't think people really understand that, to be honest with you, and they don't understand the power of that. As far as anything else, I think people stub their toe a little bit on security side. They think we're a security company as opposed to a security enablement company, so I'm glad you answered that question.” (Source: GIMO - Transcript: Gigamon Inc at Deutsche Bank Technology Conference, Wed 09.13.17 11:20 AM  

Data:

• $1.6B market cap - $42.85 price
• Revenue

o   $310mm 2016, $325mm 2017e, $380mm 2018e

o   Revenue Split

§  70% product

§  30% services

§  (30% recurring)

·         Gross Margin: 80%+ (so the value is in the software, not hardware)

·         EPS

o   $1.26 2016, $0.77 2017e, $1.13 2018e

·         #1 market share – 36% of market according to IHS (2x nearest competitor)

o   GIMO has been trying to create this market for years, since founding in 2004…has been successful generating $300mm+ in revenue last 12 months.

o   GIMO has 2,500 customers.  1,000 of them drive their business, and the top 25 are REALLY massive.

o   Greater than 90% customer retention rate

·         Tailwinds: increased network complexity, more cyber security

·         Sales Model: Primarily goes to market through re-sellers, with a 275 internal sales force that supports re-sellers and touch every deal they do.

·         Largest customer has deployed over $105mm of solutions (lifetime value)

o   “Most of that investments is products as opposed to support. And what we do for them, above and beyond just providing the kind of the connectivity that I mentioned earlier which is making sure that the performance management tools and the security tools could connect to the other side of the network. In their case is what we call Subscriber Aware Visibility. And it's the ability for them to identify a data traffic down to the level of a specific subscriber. And it's one of the things that has allowed them to provide very aggressive data packages and other types of things to subscribers. They have been able to stratify their services.” (Source: GIMO - Transcript: Gigamon Inc at Deutsche Bank Technology Conference, Wed 09.13.17 11:20 AM)

Background on current Opportunity:

·         Stock stumbled in late 2016, early 2017

o   Reported Prelim 4Q results in Jan 2017, which were light of estimates. Company cited delayed orders from existing and new customers in North America. Revenue growth was still 27% y/y. 

o   Stock which had been falling from 60 in late 2016 to 45 before the announcement, gapped down to low 30s.

o   Q4 results were reported on Feb 2^nd, and guidance for Q1 was also light, but expected to have stronger growth in back half.

o   It was a high multiple stock at the time and market reaction was swift and merciless.

·         In May 2017, GIMO was pitched at Ira Sohn conference by Dave Thomas

o   His view was that the stumble was not due to structural issues, rather a temporary hiccup and growth could get re-ignited.

·         On the same day as Ira Sohn presentation – Elliot Management disclosed a 15% stake in the company and that they were pushing for a sale of the business.

·         Company reported Q1 & Q2 results with revenue coming in flat/slightly under guidance, though earnings coming in better on improved margins and cost management.

·         In June, GIMO announced company is planning to hold talks with possible suitors.

o   Several analysts put out reports that GIMO could be worth $47-55 to an acquirer

·         In September – Evergreen, private equity firm affiliated with Elliott, announced an offer to buy GIMO.

o   Analysts come out and say GIMO could be worth $55-60 in a bidding war.

Thesis:

·         Two ways to win: 1) M&A completed (Evergreen or multiple other bidders) or 2) GIMO revenue growth resumes.

·         Elliott team was likely convinced there were multiple other potential bidders for the company before getting involved.

·         Believe we are 30-60 days to resolution for the Evergreen offer and/or multiple other bidders coming out…upside could be 25-50%.

·         If M&A does not happen, current premium in the name, $5-10 likely comes out of the price before company can prove growth is resuming.

·         Resumption of Growth

o   New product introductions:  Gigamon launch of HC3 is a higher end version of HC2 that became GA in June.

o   Recent sell-side checks on HC2 and HC3 have been favorable

o   Addition of AWS products substantially broadens their cloud capabilities

o   Starting Q4, they will be comping significantly easier growth rates

o   Management indicated on the Q2 conference call that growth should resume at the 20% level, while street is currently projecting 16% growth

o   Security breaches like EFX will add interest in security products.

Bear Case:

·         M&A is not consummated

·         Growth fails to materialize

·         Stock gets re-rated lower - $18-23

o   Assumes $315mm revenue

o   2x-2.5x price/revenue

§  (at the lows in 2014, stock traded at 2.2x price/revenue)

Technical:

·         Has been a historically volatile stock. High of 36 in 2014, fell to 10 before rebounding to 35 in mid 2015. Then bounced up to 30 in mid 2016 and then went on a tear to 60 over next 7 months before falling to 30 in early 2017.

o   Stock bottomed around 30, the level where it spent some time early 2014 and again in mid 2016 before it went on a tear to the high of 60.

·         Current chart pattern looks encouraging, though M&A optionality will significantly drive stock price from here.

Catalyst

Consummation of M&A/strategic alternatives