ForeScout in IPO Filing: ‘We Rely on Channel Partners’

Network security provider ForeScout Technologies cited massive influence of its partners in its initial public offering (IPO) filing on Monday.

The San Jose, California-based company filed paperwork with the U.S. Securities and Exchange Commission in order to become a public company. The documents, which give potential investors extensive background on ForeScout’s operations and liabilities, showed that crucial nature of the company’s partner program, which launched in February. The company wrote in its IPO that it has 600 channel partners, which include systems integrators, VARs and distributors. The partners accounted for 90 percent, 80 percent and 86 percent of the company’s revenue in the last three years, respectively. They landed 90 percent of the revenue for the first half of this year.

“We rely on third-party channel partners to sell our products, maintenance and professional services. If our partners fail to perform, or if we fail to manage and retain such partners, our ability to sell our products, maintenance, and professional services would be limited, and if we fail to optimize our channel partner model going forward, our results of operations would be harmed,” the company wrote.

ForeScout says it offers support to channel partners through its direct sales and marketing resources but ultimately relies on the partners to make sales and manage end-user relationships. The company also says that recruiting and training new partners is crucial to expanding into new markets.

ForeScout listed the information about partners in a series of risk factors the SEC requires it to list for investors. The company warned that the complexity of its products may take significant investment from it or its partners to sell.

“It is possible that our channel partners will be unable or unwilling to dedicate appropriate resources to support those sales. Furthermore, most of our channel partners do not have minimum purchase or resale requirements and may terminate our agreements with only a short notice period or otherwise cease selling our products at any time,” the filing said. “If we are unable to develop and maintain effective sales incentive programs for our third-party channel partners, we may not be able to incentivize these partners to sell our products to end-customers and, in particular, to large organizations.”

CloudTech1’s Rick Beckers

ForeScout has found a niche in Internet of Things (IoT) security. Rick Beckers, president and CEO of CloudTech1, says the sales and implementation of IoT solutions requires partners.

“The IoT space is not mature enough for the large carriers, manufacturers, or integrators to have turnkey solutions that can be purchased as a bundle. It will be a consultative sell for some time except for a very few simple things like fleet management and a few other canned offerings,” Beckers told Channel Partners. “Commercial Internet of Things solutions require a lot of moving parts and data. Each one [requires] a substantial skill set to get it right. Like complex telecom solutions — partners are going to have to lean on the experience of others to help them source, architect, and for pre- and post-sales efforts. The payoff is worth it though.”

According to the filing, ForeScout’s gross profit went from $49.2 million in 2014 and $92.8 million in 2015 to $118.6 million in 2016. ForeScout has upped its investment in maintenance and professional services. The company’s product cost increased by 203 percent from 2014 to 2016, while its costs for maintenance and professional services increased by 236 percent. Product revenue exceeded professional services every year until now. The former tallied $44.7 million in the first half of 2017, while the latter scored $45.9 million.