Back in December when I profiled NetSuite, I pondered whether the company would pursue an IPO or become the latest in a ever-growing line of software acquisitions.
Well, to no one's surprise NetSuite now appears set to pursue an IPO later this year. Earlier this week, NetSuite executives acknowledged the company's plan to come public, citing the success of SaaS vendors salesforce.com (CRM) and RightNow (RNOW) since listing their shares.
"We're hoping to see something in the ballpark of what Salesforce got in terms of valuation," said NetSuite CEO Zach Nelson.
"Those are the two most similar companies in terms of the way we offer product in the market," said NetSuite CFO Jim McGeever. Their high stock valuations "certainly put a company like us in a high demand. Every single bank on the planet has probably called here."
Given the dearth of attractive software IPOs, there's little question that NetSuite will be a sought after issue and get banked by the top bulge bracket banks. But is it reasonable to expect investors to pony up a valuation similar to what CRM received?
Points to consider relative to NetSuite versus salesforce.com (at the time of its IPO):
- Comparative financials -- When salesforce.com filed is S-1 in June 2004, the company's was coming off a $96 million revenue year (88% growth) and was marginally profitable (3.9% operating margins). According to public statements made by NetSuite (we won't have concrete numbers until they file a registration statement), the company generated $40mm in 2005 and are on pace to double that in 2006, reaching profitability by year end. While NetSuite's growth profile is exciting, the company will be held against the CURRENT state of other SaaS vendors and, by that token, NetSuite is a smaller company with a less mature operating model. Verdict: Negative for NetSuite
- SaaS is no longer a "show me" concept among public investors -- When CRM came public, software-as-a-service (SaaS) was a largely unproven concept among public investors. Now, thanks in no small part to what Marc Benioff and his company have accomplished, SaaS is THE buzzworthy software model. If anything, the currently public SaaS vendors are being afforded a scarcity premium. Verdict: Positive for NetSuite
- The "Ellison" Factor -- Larry Ellison is a shareholder in salesforce.com, but has been quoted as saying he hopes his investment gets written down to zero. But that remains a far cry from his position as NetSuite's co-founder and majority shareholder. The bottom line is Ellison owns more than 50% of NetSuite and, if he maintain his majority position at IPO, the Street will discount NetSuite because of the captive nature of the company. Verdict: Negative for NetSuite
- SMB versus Enterprise Focus -- salesforce.com was largely viewed as a departmental SFA offering at the time of its IPO, but the customer base had a healthy dose of larger companies in hand. According to the S-1, CRM had 9,800 customers, 147,000 subscribers and 30% of its customers were companies with more than $500mm annual revenues. NetSuite is a more downmarket solution...competing on the low end against Intuit Quickbooks and Act!/Goldmine...while on the high end competing 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. Typically, investors don't assign comparable multiples for lower end solutions because the marginal contribution per sale cycle is smaller (you have to close a lot more deals to scale the business). Verdict: Negative for NetSuite
- Breadth of functionality -- salesforce.com has grand designs to become the hub for all types of functionality via AppExchange, but at the time of its IPO, it was squarely a CRM vendor with offerings in sales force automation (SFA), marketing automation, and call center. NetSuite, while playing downmarket, offers a broader range of ERP-esque functionality that spans CRM, ERP and financials/accounting. Verdict: Positive for NetSuite
We'll all know a lot more when NetSuite actually files its registration statement. Clearly, if they are on pace to double revenues and reach profitability, the company seems well positioned to have a successful IPO particularly given the rabid appetite for SaaS plays. However, expecting NetSuite to be afforded a valuation similar to that of salesforce.com may be a tad aggressive. Meanwhile, I still contend NetSuite could get scooped up by Oracle before it ever sees the light of the public markets.
- Phil Wainewright also blogs about the proposed IPO
- Private Company Spotlight: NetSuite
- Nostradamus or Nostra-dummy, You Decide
- Private Company Spotlight: Rearden Commerce
- CRM OnDemand: Evaluating the Takeout Premium
Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained a long equity position in ORCL but did not maintain a position [long or short] in CRM or RNOW.