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Blue Coat Systems, Inc

Blue Coat Systems, Inc.

420 North Mary Avenue
Sunnyvale, California 94085
U.S.A.
Telephone: (408) 220-2200
Fax: (408) 220-2250
Web site: http://www.bluecoat.com

Public Company
Incorporated:
1996 as CacheFlow, Inc.
Employees: 336
Sales: $96.2 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: BCSI
NAIC: 334112 Computer Storage Device Manufacturing; 511210 Software Publishers

Blue Coat Systems, Inc., makes hardware devices that protect corporate networks from viruses and guard against legal liabilities associated with inappropriate surfing on the Internet, peer-to-peer file sharing, and instant messaging. Blue Coat's family of Proxy SG and Proxy AV appliances arm customers such as CompUSA Inc., Merck & Co., Inc., and Maxtor Corporation with the means to inspect and to filter both inbound and outbound web content. The company maintains offices in North America, Europe, Asia, and the Middle East.

ORIGINS

During its first decade of business, Blue Coat changed its name, its headquarters location, and the type of product it made, transforming from a Redmond, Washington-based developer of caching appliances into a company headquartered in Sunnyvale, California, that made security appliances. The company's start in suburban Seattle, near Microsoft Corporation's headquarters, was engineered by Mike Malcolm, the founder of Sunnyvale, California-based Network Appliance, Inc., a company that developed into a market leader in the network storage business. Malcolm founded Network Appliance in 1991, three years before he enlisted the help of Joe Pruskowski and Doug Crow to start Blue Coat's predecessor, CacheFlow, Inc. Pruskowski, who had provided some of the start-up capital for Network Appliance, had founded a Seattle-based connectivity software company, Interconnections, where he worked alongside Doug Crow. In 1996, using $1 million in seed money, the three entrepreneurs started CacheFlow, intending to be the leader in an emerging market.

The founders set their sights on the market for caching products, a breed of devices developed to accelerate performance on the Internet. Caching products, which came in a variety of forms such as proxy servers, cache appliances, enterprise cache servers, and caching service providers, stored frequently visited web sites, thereby increasing the speed at which they could be accessed. Malcolm, Pruskowski, and Crow focused their efforts on developing a cache appliance, a hardware solution to the problems posed by poor performance in accessing the Internet and corporate intranets. Acting as an intermediary between users and servers on the Internet and intranets, a cache appliance used its own operating system, storing the most frequently used data requested by the user in its memory and disk subsystems. The device was touted as being ideal for small-to medium-size businesses, requiring little expertise to install and to manage and selling for between $3,000 and $10,000.

When CacheFlow began operating in March 1996, it relied solely on venture capital and other investment funds to survive. Revenue and profits could not be realized until the company's engineers completed work on the first CacheFlow cache appliance. In November 1996, when the company received $5.1 million in much needed financing from investment firm Benchmark Capital, hopes for the introduction of the company's first product brightened. CacheFlow's staff, no more than a dozen people working in offices in Redmond, had registered a promising start in their research and development efforts. "CacheFlow is on the cutting edge of performance in a market where every microsecond counts," a Benchmark Capital executive said in a November 29, 1996 interview with Puget Sound Business Journal. "They have a product that's very well matched to the current computing needs of the Internet and intranets, and it's a very difficult product to get right." The Benchmark Capital executive, Val Vaden, offered his assessment of work still in its developmental stage (CacheFlow hoped to have a beta, or test, version of its computer server completed in early 1997) but the early signs were promising. Meanwhile, the company endured the financial pains of a purely research and development firm. CacheFlow, its losses mounting, ended 1996, 1997, and 1998 without any revenue.

INITIAL PUBLIC OFFERING: 1999

CacheFlow's debut as a commercially active company coincided with the arrival of Brian NeSmith, the executive who would lead the company through the profound changes that lay ahead. A 1984 graduate of the Massachusetts Institute of Technology, NeSmith studied electrical engineering, but his professional career was highlighted by entrepreneurial achievements. In 1993, NeSmith cofounded Newbridge Networks' VIVID business unit, a local-area networking firm. He served as the business's first general manager, spending two years at Newbridge Networks' headquarters in Kanata, Canada, where he presided over revenue growth from $10 million to $1 billion. After his stay in Ontario, NeSmith moved to northern California to cofound Ipsilon Networks, regarded as the pioneer of Internet Protocol switching technology. NeSmith served as Ipsilon Networks' chief executive officer, and remained with the company for two years after its acquisition by Nokia in 1997. From there, his path crossed with CacheFlow's rise in the caching market. "One of the venture capitalists that funded Ipsilon was also on the board at CacheFlow," NeSmith explained in a July 2001 interview with Communications News. "What excited me was that I saw an opportunity. CacheFlow had very good technology, and there looked to be a tremendous market segment."

COMPANY PERSPECTIVES

The company's growth strategy is focused on meeting the growing demand for solutions that can accelerate the delivery of business applications to remote users across the distributed enterprise. In addition, Blue Coat continues to focus on providing security at the Internet gateway for Web users and applications. The same set of appliances is able to address both market opportunities because they incorporate a comprehensive set of security capabilities (optimized through Blue Coat's proxy technology) and performance capabilities (optimized through Blue Coat's caching and compression technologies leveraged from its prior focus as CacheFlow). This unique combination of security and performance enhancement features, along with comprehensive policy-based control capabilities, is what makes Blue Coat unique in the industry. Because these appliances can be broadly deployed and centrally managed, customers are using Blue Coat solutions to establish intelligent points of control in branch offices, Internet gateways, data centers, and individual end points.

NeSmith was appointed president and chief executive officer of CacheFlow in March 1999, gaining control over technology that quickly established formidable market strength. There were numerous cache appliances on the market when NeSmith joined CacheFlow, including servers offered by Cobalt Networks, Compaq Computer Corp., and Dell Computer Corp, but the CacheFlow model distinguished itself from its competitors. Influential industry publication PC Magazine selected CacheFlow's cache appliance as its "Editor's Choice" winner in 1999, praising the server for its "excellent performance" and referring to it as "the hands-down winner in terms of management" in its September 21, 1999 issue. NeSmith moved to take advantage of the company's early success, leading CacheFlow through its initial public offering (IPO) of stock in November 1999, which raised net proceeds of $126.5 million, compelling evidence of the company's esteem within the investment community. The company ended the year with its first annual revenue total, generating $7 million in sales.

CacheFlow's initial success enabled it to seize a significant portion of its market. Although the company continued to rack up heavy losses, it recorded a 21 percent share of the $433 million caching market and more than 35 percent of its specific segment within the market, the $251 million caching appliance market. Revenue increased from $7 million to $29 million during the year. NeSmith fought to maintain the company's leading market position by adapting to the ever changing technological issues affecting the Internet. New types of content required new technology to ensure the content's timely arrival at its destination, and one type of content, streaming media, posed a challenge to the caching market. Some data, such as streaming media, could not be stored by a cache appliance, a phenomenon referred to as a "cache miss." The inability of a server to cache streaming media did not represent much of a shortcoming because streaming media was not prevalent during the 1990s, but once streaming media began to proliferate at the beginning of the 21st century, the magnitude of the problem increased commensurately. "A year ago," NeSmith explained in a July 2001 interview with Communications News, "if you didn't have a piece of content on your appliance, it was not a big deal: you'd go back to the source server and get itthat was called a miss. Now, a miss with a streaming file is a much more significant situation [because] that user takes a long time to download that file. The first-user's experience is very poor, and he may not even want to complete the experience."

Despite an increase in revenue from $29 million to $97 million in 2001, NeSmith responded to the challenge with the urgency of an executive watching his sales decline. His willingness to adapt to the demands of the market foreshadowed his actions in what would become CacheFlow's ultimate example of adaptation. NeSmith confronted the problem of cache misses and delivered his response in 2001: a new content delivery architecture called "cIQ," which managed and distributed static, streaming, secure, and dynamic content. "The market has evolved from being about box-level caching appliances to network-wide content delivery solutions," he said in his interview with Communications News. "That's ultimately the way our company has evolved as well." It was only a matter of months before NeSmith found himself confronting an evolutional step much more profound than developing a new technological solution. In the wake of the introduction of cIQ, which was offered as a family of products including cIQ Edge Accelerator, cIQ Server Accelerator, and cIQ Starter Kit, the transformation into Blue Coat began to take place.

A CHANGE IN STRATEGY IN 2002

One of the first signs that CacheFlow, based in Sunnyvale by this point, was executing a major change in strategic direction occurred in early 2002. Its customers required security, control, and acceleration for their web security infrastructure beyond the capabilities of traditional fire-walls, proxy servers, and caching devices, prompting NeSmith to spearhead the riskiest move in CacheFlow's history. He decided to guide the company into the emerging security gateway market, an estimated $1.4 billion market that was five times the size of the cache appliance market. NeSmith explained his reasoning in a February 2002 interview with Canadian Corporate News: "Our new focus is a culmination of understanding our business, our core expertise, and what our customers care about. Our new strategy and products address what we believe is a new layer of security infrastructure for Web application that blends policy-based security and protection functionality with the traditional control of the proxy server and the content acceleration of the cache."

NeSmith's decision marked the end of one era and the beginning of another, one heralded by a new name for the company and the introduction of a new product. In August 2002, CacheFlow changed its name to Blue Coat Systems, Inc., a corporate title meant to evoke a policeman, or a guard. The company also introduced its first security product, the SG800, an appliance installed behind the network firewall that was designed to inspect and to filter both inbound and outbound web traffic.

KEY DATES

1996:
Blue Coat is founded as CacheFlow, Inc.
1999:
Brian NeSmith is hired as chief executive officer and leads the company through its initial public offering of stock.
2002:
CacheFlow changes its name to Blue Coat and enters the security appliance market.
2004:
Blue Coat acquires Cerberian Inc.
2005:
The company posts its first annual profit, registering $5.3 million in net income.
2006:
Blue Coat acquires Permeo Technologies and Network Appliance's NetCache unit.

As CacheFlow transformed into Blue Coat, the company's financial performance began to transform as well. Revenues fell appreciably during the period, dropping from $97 million to $55 million between 2001 and 2002, but the company was able to staunch its losses. As CacheFlow, the company recorded a staggering $519 million loss in 2001. The following year, as CacheFlow became Blue Coat, losses were cut in half, totaling $247 million. From that point forward, evidence of improvement was on display: Blue Coat posted a $15 million loss in 2003, which was reduced to a $348,000 loss in 2004 and was followed by the company's first annual profit, more than $5 million in net income, in 2005.

Blue Coat's improved financial standing provided the backdrop for its activity on the acquisition front, which gave the company its profile in the mid-2000s. NeSmith added a small maker of anti-virus appliances in 2003, purchasing Ositis Software Inc. Ositis sold both hardware and software products, but its mainstay device was the eShield security appliance, which provided anti-virus, anti-spam, and content filtering capabilities. In mid-2004, the company announced the acquisition of Cerberian, Inc., a Draper, Utah-based developer of Internet filtering applications. In 2006, amid tenth anniversary celebrations, NeSmith added two companies to Blue Coat's operations. In January, the company signed an agreement to acquire Austin, Texas-based Permeo Technologies for approximately $60 million. Permeo operated as an endpoint security vendor, providing technology for protecting computer endpoints such as desktops and laptops, which NeSmith intended to use to serve customers who were looking for ways to secure computers used by remote and mobile workers. In September, the company acquired the NetCache business unit belonging to its neighbor, Network Appliance. NetCache offered a line of web delivery products and security appliances. With these new assets, NeSmith pressed forward with his plans to make Blue Coat a leader in improving and securing the flow of network traffic, confident that the company's new strategy would bring success in the years ahead.

Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

Blue Coat Systems Canada, Inc.; Blue Coat Systems Ltd. (UK); CacheFlow Australia Pty. Ltd.; Blue Coat Systems International, Inc.; Blue Coat Systems Hong Kong Ltd.; CacheFlow Netherlands B.V.; Blue Coat Systems K.K. (Japan); Entera Corporation; Blue Coat Systems Latvia, SIA; Blue Coat Systems, Belgium B.V.B.A.; Riga Corporation; Cerberian, Inc.

PRINCIPAL COMPETITORS

Novell, Inc.; Network Appliance, Inc.; Cisco Systems, Inc.

FURTHER READING

Baker, Sharon M., "Cacheflow Lands $5 Million to Build Internet Hardware," Puget Sound Business Journal, November 29, 1996, p. 4.

"Blue Coat Buys Anti-Virus Appliance Maker," eWeek, October 29, 2003.

"Blue Coat Completes NetCache Buy," Europe Intelligence Wire, September 11, 2006.

"Blue Coat Gets VC Money, Makes Acquisitions and Divestments," eWeek, June 23, 2006.

"CacheFlow Becomes BlueCoat, Focuses on Web Security," InternetWeek, August 21, 2002.

"CacheFlow Named Caching Appliance Market Leader for 2000," Canadian Corporate News, July 17, 2001.

Hannon, Brian, "CacheFlow Slims Down," PC Week, May 4, 1998, p. 44.

Hoover, Ken, "Whatever Became of All Those Great IPOs?" Investor's Business Daily, October 23, 2000, p. B1.

Kelly, Sean, "CEO Keeps an Eye on the Caching Ball," Communications News, July 2001, p. 16.

Krapf, Eric, "Blue Coat: Cache Flow's New Name, New Focus," Business Communications Review, September 2002, p. 62.

Loizos, Constance, "VCs Get Dragged into Insider Trading Probe of BlueCoat," Private Equity Week, April 18, 2005, p. 1.

Mims, Bob, "Technology Firm Buys Draper, Utah, Firm to Boost Web Security Line," Salt Lake Tribune, July 20, 2004.

Savage, Marcia, "Blue Coat Eyes Small Biz," Computer Reseller News, March 10, 2003, p. 12.

"What Lies Behind the Blue Coat," eWeek, January 24, 2003.

Yirrell, Sara, "Blue Coat Nets Permeo Deal," Computer Reseller News, January 9, 2006, p. 6.

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