Eyes on CacheFlow's cash flow

The Sunnyvale, Calif.-based company saw net sales increase to $22.4 million, up from $12.8 million a quarter earlier.

Excluding stock compensation and other factors, CacheFlow lost $4.7 million, or 14 cents a share. Analysts polled by First Call/Thomson Financial had predicted a loss of 17 cents a share. A quarter earlier, the company lost $6.2 million, or 20 cents a share.

Besides a sequential net sales gain of 75 percent, gross margins for the company increased to 63 percent from 62 percent.

CacheFlow has announced only two full quarters of results since its IPO last November.

"With these appliance companies, any improvement in the bottom line is actually a huge improvement," Piper Jaffray analyst Amir Ahari said. "They've been growing so fast at the top line with improving margins that they've worked down at the bottom line, because they've been increasing their sales force and research and development to stay competitive.

"These appliance guys are getting it, in the sense the market wants more results now instead of simple growth at the top line and more out of the bottom line...and being a viable company both technologically as well as investment-wise," Ahari said.

But CacheFlow is still nearly a year away from profitability, in line with projections set at the IPO.

"This is our third quarter, and our expectation is we will be profitable in about three quarters," CacheFlow chief executive Brian NeSmith said. "While we do get upside revenue growth, we continue to invest heavily in the overall infrastructure of the company, mainly on the belief the market is a lot bigger than everyone's expectations, and we're looking to establish a market-leading position."

CacheFlow, like competitors Network Appliance and others, sells Internet service providers, application service providers and large corporations specialized appliances that cache Web content. Rather than force Web browsers to access all content directly from a single server, the caching appliance keeps popular Web content at hand for faster retrieval, cutting down the wait time for pages to load.

During the first quarter, Exodus Communications signed on to use CacheFlow's products to speed data transfer. The company also picked up Lycos as a customer and strengthened its relationship with Akamai.

With today's earnings announcement, CacheFlow said that based on information available on publicly traded companies, it has become the leader in the Internet caching segment over rival Network Appliance.

But the claim could be short-lived.

Network Appliance, which announced its first-quarter 2001 earnings Monday, saw caching products drop to 4 percent of revenue from 8 percent a quarter earlier.

Dan Warmenhoven, Network Appliance's chief executive, said caching was "big in the fourth quarter, but it softened in the first quarter," in part because of several deals that closed late. "We have almost as much booked this quarter in two weeks as we reported for revenue last quarter," he said.

Long term, CacheFlow's rival expects caching products to make up 10 percent to 12 percent of revenue.

CacheFlow also is looking to the future and expanding its products into a new area.

"In the last quarter we've also seen a new application segment begin to take off, what we call Web server acceleration," NeSmith said. "That's where we take our caching appliances, and we sit right in front of their Web servers. In Web server acceleration, it's about improvement in scalability for that particular Web site, as well as improvement in response time for that Web site."