Private Company Spotlight: NetSuite

There is currently a scarcity premium being afforded the public software-as-a-service vendors, in my opinion [more on that subject soon]. With the enteprise software market maturing, the investment community has been rabid for a) growth and b) innovative "story" stocks. As a result, my fellow investors have run amok bidding up Salesforce.com [CRM], RightNow Technologies [RNOW], Ultimate Software [ULTI] and Concur Technologies [CNQR].

Regardless of what you may think of the aforementioned companies [or stocks], there is another significant player in the SaaS space firmly intertwined competitively with the public SaaS darlings...NetSuite.

NetSuite [formerly NetLedger] was founded in 1998 by Evan Goldberg and Larry Ellison. Goldberg, then an Oracle executive, wanted to create a hosted accounting solution for use by small businesses. Ellison, then an evangelist of the ASP model, funded the company. While most ASPs failed miserably, NetSuite powered through several fits and starts and has emerged as one of the more mature hosted applications vendors.

In 2002, Zach Nelson was brought on board as CEO and under his watch the company has undergone a meaningful maturation. Nelson was a driving force at McAfee prior to joining NetSuite [and like Goldberg, a former Oracle executive]. Under Nelson's watch, NetSuite has grown into a $40 million revenue company [5x since 2002 according to Prudential Securities], with a product suite that spans accounting, e-commerce enablement & CRM.

 Identifying NetSuite's niche...

On a recent conference call, CFO Jim McGeever said..."We are to SAP what salesforce.com is to Siebel"

...ummmmmm, not quite Jim.

When your largest backoffice reference account is 600 seats [McGeever's declaration, not mine], you are not competing in the same pond as SAP. More accurately, NetSuite competes on the low end against Intuit Quickbooks and Act!/Goldmine...while on the high end they compete against the likes of Microsoft Dynamics [formerly Navision/Great Plains], Epicor and Lawson. In other words, small- to mid-sized enterprises that are looking to move beyond point products into a loosely integrated solution set.

But anti-SAP rhetoric aside, NetSuite does differentiate itself from its public SaaS counterparts in two meaningful ways:

1. Integration: NetSuite offers an integrated suite of basic ERP, CRM, web-commerce and analytics and pushes integration and "one stop shopping" versus the more vertically focused offerings of salesforce [SFA], RightNow [Customer support], Ultimate [payroll/HR] and Concur [expense management].
2. Content with SMB Market: NetSuite's sweet spot is with small enterprises [1 to 500 employees typically], whereas salesforce and RightNow have successfully targeted much larger enterprises [and it's their intent to continue to push up market]

IPO or Acquisition?

With SaaS a hot-button issue, many expect NetSuite to come public in 2006. As a private company, I'm not privy to NetSuite's complete financials, but the company has publicly disclosed that it's on target for approximately $40mm in 2005 revenues, with a backlog significantly larger [due to the subscription-pricing model]. Furthermore the company has endorsed a 100% growth trajectory for 2006 [i.e., $80mm]. Hot space + superb growth = possible IPO.

HOWEVER, NetSuite isn't your typical pre-IPO company...

• Larry Ellison [CEO of Oracle] is the majority shareholder of NetSuite
• Oracle is, and will continue to be, a serial acquirer of complimentary software companies
• SaaS [On-Demand] is a focal point of Oracle marketing at this point [i.e., the future integration of Siebel OnDemand with Oracle OnDemand]
• Economically, acquiring a pre-IPO company makes more sense for ORCL shareholders than letting the public markets potentially mis-price NetSuite post IPO

I have no Earthly idea whether NetSuite will go public, remain private as a stand-alone, or be swallowed up by Oracle. But I do know that SAP and Microsoft are clarifying their SaaS strategies, and that NetSuite's public competitors have a financial arsenal at their disposal a privately-funded vendor simply doesn't.

NetSuite is clearly a company to watch if you're involved in enterprise applications investing, consulting or analysis.

Note: At the time of this writing, I and/or funds I maintain discretionary control over maintained long equity positions in the companies mentioned but did not maintain a short position in any mentioned security.

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Comments

[Diego]

So what is your final recommendations regarding NetSuites IPO?

BTW, the REv for 2005 was 70M. Looking for 140M in 2006 . Year of the IPO.

Thanks