IPO Could Save The Day for FileTek

IPO Could Save The Day for FileTek

By Bob Starzynski
Staff Writer

FileTek Inc. officials are betting that a $50 million initial public stock offering will carry the small data warehousing company to a higher playing field where many adversaries have found success.

Founded in 1984, the Rockville, Md.-based company saw growth in the early data warehousing and storage years that made it $20 million a year by 1993. Since then, its revenue has been on a roller coaster, and the 98-person company brought in $23.7 million last year. All the while, competitors like Oracle, International Business Machines and NCR have experienced explosive growth in the same market segment.

Deciding that a booster shot of a sales and marketing blitz is the only way to really grow their business, FileTek executives filed documents with the Securities and Exchange Commission July 2 to take the company public.

The company has not yet outlined how many shares will be sold or price per share. Company officials did not return a call seeking comment. The SEC mandates that companies preparing for IPOs do not discuss any matters that are not outlined in the prospectus filing.

If FileTek's wishes come true, the offering will go through in the next two months and bring the company tens of millions of dollars. That money will be used to significantly expand sales and marketing efforts and for product development, international expansion and possible acquisitions, according to the prospectus.

Data warehousing has rapidly gained popularity in computer circles over the last 10 years. The ability to store vast amounts of information and cross-reference multiple databases is increasingly important to large companies. International Data Corp., Framingham, Mass., estimates the data warehouse market will grow to $24 billion in 2001 from $8 billion in 1996.

Companies that have successfully exploited that market growth, like Platinum Technology Inc. of Oakbrook Terrace, Ill., and EMC Corp. of Hopkinton, Mass., have grown profitably at a pace of more than 20 percent per year. FileTek, on the other hand, has seen its revenue fluctuate between $14 million and $24 million in the past five years. Three of those years have been modestly profitable, but two years - 1994 and 1996 - saw losses of $3.9 million and $6.7 million, respectively.

The primary reason for the instability with FileTek's numbers is the company is promoting one product suite, StorHouse, a big-ticket purchase that can cost a customer $1 million or more. The products were introduced last year and have been sold to only four companies so far.

Through the years, FileTek has had 50 customers, such as Citibank, United Airlines, AT&T and U.S. West Communications. "Not counting companies like IBM and [Oracle], the larger companies in that market have 350 customers or so," said John Ladley, a data warehousing analyst with the Meta Group in St. Louis. "[FileTek] is not a very big player in this market."

FileTek officials realize they are butting heads with much larger competitors who can undercut prices and sell through well-developed channels. "There can be no assurance that ... some other storage technology will not render obsolete the benefits of the FileTek technology," reads the prospectus.

While the company hopes proceeds from an IPO will allow its newfound sales muscle to boost those numbers, fluctuations are likely to continue. "There can be no assurance that the company will be profitable on a quarter-to-quarter basis in the future," the prospectus reads.

In the first quarter of 1998, FileTek's revenue jumped 40 percent over the same quarter of 1997, to $8.6 million. That growth was primarily attributed to the release of StorHouse. But the company also warned that such growth would not continue. According to the prospectus: "The company does not expect to sustain the same rate of revenue growth in future periods."

Software giant Microsoft Corp. also poses a threat that could prove formidable, Ladley said. The Redmond, Wash.-based software company is scheduled to release competitive data warehouse capabilities later this year. "That will really change the market," he said. "At the minimum, they will put a lot of price pressure on the market."

Furthermore, FileTek faces an uphill battle with year 2000 software problems. A number of its older products are not year 2000 compliant. While FileTek has told its customers, most of which are commercial businesses, it will consult and help solve any problems, the company has not set aside specific money to fund such an effort.

What's more, the new StorHouse software products released last year have not "completed a comprehensive test ... to determine whether they are year 2000 compliant," the company said in its prospectus.

Investors will pay careful attention to such risk factors, considering that many recent IPOs have not been greeted with the benefit of the doubt that was customary in the IPO market for the past three years. But FileTek and its underwriters, NationsBanc Montgomery Securities and BancAmerica Robertson Stephens, are pushing forth with the move to the Nasdaq National Market.

The capital raised through the offering will be enough to carry the company for at least 12 months, according to the prospectus. The company has $683,000 in working capital, but has operated with a deficit for the last four years. Before turning to the public market, the company bridged such gaps by borrowing money from William Thompson, the founder, chairman and chief executive.

Between 1995 and 1997, Thompson loaned the company $4.1 million. And Centennial Computer Corp., a small business that shares office space with FileTek in Rockville and is owned by Thompson and his family, loaned FileTek another $15.5 million. All of those loans have been paid off.

Thompson may be turning his business loose on the public market, but he will still hold a controlling stake in the company. Before any public offering, he owns 8.1 million shares, or 91 percent of FileTek. He has not disclosed how much of his holdings he will sell in the initial public offering.

FileTek Inc.
1993 1994 1995 1996 1997
Annual Revenue $19.7 M $13.9 M $22.4 M $17.8 M $23.7 M
Net Income (loss) $886,000 ($3.9 M) $2.7 M ($6.7 M) $1.5 M

Source: Securities and Exchange Commission documents

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