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IPO Update: CacheFlow rockets up 427 percent

CacheFlow Inc. (Nasdaq: CFLO) soared up 102 7/8, or 427 percent, to 126 3/8 Friday, after it pricing its 5 million-share offering at $24 a share. The stock surged as high as 138 1/4 in early trading.

Given that any company that speeds up the Internet has rocketed after an IPO this year, the success of CacheFlow (Nasdaq: CFLO) was a foregone conclusion.

The company speeds up the Net by bringing content closer to the end user and eliminating redundant requests on web servers. Morgan Stanley, CS First Boston, and Dain Rauscher are underwriters for the offering. The company priced its 5 million shares at $24 per share, well above its raised range of $18-$20.

CacheFlow's technology works by storing popular sites in its appliances, so users don't have to go to a site's web server to get content. CacheFlow's products have been popular with international ISPs, whose users are constantly accessing web servers in the U.S. and broadband ISPs who are serving content rich pages.

"Akamai was a big winner in this area, any thing speeding the download time of content should be a winner," said Tom Taulli, an analyst at Internet.com. "CacheFlow is growing quickly in a red hot market," he added. Akamai (Nasdaq: AKAM), which speeds up content delivery using its proprietary software, has seen a high of 204 since its recent IPO.

While other companies operate in this field, CacheFlow sells caching appliances, which are specialized devices that are designed for Internet caching. The company's proprietary operating system, CacheOS, operates directly on the hardware of our appliances and supports software that it also designs.

CacheFlow is a unique company with a timely technology, though the company is small and profits are far off. Sales for the year ending April 30, were $7 million with a net loss of $13.2 million. For the quarter ended October 31, CacheFlow had net sales of $4.8 million, an increase of $1.2 million, or 34 percent over the previous quarter on the strength of higher sales, especially the new 3000 Series products.

Though sales have increased, a big chunk of net sales comes from a small number of customers. For the fiscal year, three customers accounted for about 33 percent of CacheFlow's net sales, and for the quarter ended July 31, one customers, Road Runner, accounted for about 17 percent of net sales.

Gross margin for the quarter looked good, at about 61 percent, and the company said operating loss for the quarter was $17.6 million, which included a whopping $12.3 million stock compensation charge. The company has an accumulated deficit of about $26.7 million as of July 31, 1999.

CacheFlow said it expects the already tough competition to increase in the future because there are relatively low barriers to entry in the Internet caching market. Cisco Systems (Nasdaq: CSCO), Inktomi (Nasdaq: INKT), Network Appliance (Nasdaq: NTAP), Novell (Nasdaq: NOVL) and other companies using publicly available, free software are CacheFlow's current competitors.

CacheFlow recently faced a lawsuit from Nokia, which charged that Brian NeSmith, the company's President and CEO, and Alan Robin, Senior Vice President of Sales, acted improperly in hiring Nokia's employees. Both were former employees of Ipsilon Networks, Inc., which was acquired by Nokia in December 1997. A settlement was reached which doesn't require CacheFlow to make any monetary payments to Nokia, but it does require that CacheFlow not hire or solicit Nokia employees for six months after November 14, 1999.