After years of rumor, the on-demand CRM vendor files papers to become a public company; analysts agree it's the right time, more or less.
Posted Jul 2, 2007
NetSuite, one of the leaders in on-demand CRM, ERP, and e-commerce, announced today it had taken the first step toward an initial public offering of its common stock. The number of shares to be offered and the price range for the offering have not yet been determined, but in filing a registration statement on Form S-1 with the U.S. Securities and Exchange Commission, the company disclosed the intention to raise $75 million for itself during the initial sale.
While NetSuite's S-1 does not specify a date for the offering, the paperwork does indicate other aspects of the sale. Credit Suisse Securities (USA) will act as sole book-running manager for the offering. In addition, WR Hambrecht + Co. will act as co-manager of the offering. (The company itself declined to comment today, citing SEC regulations regarding public disclosures before an IPO.) In December 2006, during earlier speculation about NetSuite's prospects on the open market, the company was reportedly seeking a $1 billion valuation, but recent published reports have pegged the estimate at closer to $750 million.
The company's filing reveals that it intends to use the proceeds of the sale for capital expenditures, working capital, potential acquisitions, and to repay the line of credit it has with Tako Ventures, its controlling stockholder. (Oracle Corp. CEO Larry Ellison, an early NetSuite investor, currently holds a controlling 74% interest in the company through Tako Ventures. As of March 31, 2007, the amount outstanding on the line of credit was $7.5 million.)
A NetSuite public offering has been an open secret around the industry for years, but the switch from rumor to reality comes at a triply unusual moment. Many companies in the CRM space--FrontRange, Indus, Knova, and Onyx among them--have been taken private in the past year. The announcement comes two days before a major U.S. holiday. And the company last week announced a major new product release and version renumbering.
Timing is not a problem as far as analysts are concerned. "As far as I'm concerned, the announcement is long overdue," says Paul Greenberg, author of CRM at the Speed of Light: Essential Customer Strategies for the 21st Century and president of CRM strategic services firm The 56 Group. "NetSuite's functionality is deep and solid, and I don't think the length of the rumor before now will have any negative effect."
"Well, two days before the big summer holiday isn't exactly the best timing, but it is just an S-1 filing," notes Denis Pombriant, managing principal of Beagle Research. "The filing now means that they can go out in September just after the other holiday of the summer--hopefully once everyone is back to work and paying attention."
The potential size of the offering is likewise not a surprise to those familiar with the industry. "Given the respect they [NetSuite] have garnered and the strength of their customer base, a billion dollars is certainly reasonable, if in fact that's what the offering turns out to be," Greenberg says. "Salesforce.com had the same issuance on $40 million revenue," he adds. (In its filing, NetSuite revealed that its revenue "has grown from $17.7 million in 2004 to $67.2 million in 2006." The company also revealed that it had sustained a net loss of $23.4 million for 2006, and that it had not been profitable on a quarterly or annual basis since its formation in 1998.)
NetSuite has been around since 1998 (when it was known as NetLedger), delivering on-demand enterprise software and building the market. "This is good news for the on-demand and CRM industry for several reasons," Pombriant says. "First, it's another company that successfully grew up to the point that it goes public--that shows maturity and depth for the industry. Also, it is a positive moment for the idea of utility computing." He notes that on-demand computing isn't just a new market but also a paradigm change for computing in general, and having another successful company out there is important validation.
Finally, Pombriant says, some people may wonder if the market can sustain another on-demand public company. "I think the answer is that there is plenty of room out there; the market is not filled up. In fact, I think the major vendors...do a pretty good job of staying out of each other's way. In particular, NetSuite's orientation toward the SMB space along with its integrated ERP and e-commerce functionality give it a unique corner."
In addition to revealing the size of NetSuite's customer base--as of March 31, 2007, the company claimed 5,300 active customers--the company's S-1 document shows a continuing improvement in profit margins over the last three years, from 54% to 66%, as well as a growing reliance on overseas sales: In the calendar years 2004, 2005, and 2006, the percentage of the company's revenue generated outside of North America was 4 percent, 11 percent, and 14 percent, respectively. In the first three months of 2007, that share increased again, to 17 percent.
Meanwhile, among the standard S-1 section listing risk factors, NetSuite revealed that it relies on "a single data center to deliver [its] services." As the company went on to note, "We host our services and serve all of our customers from a single third-party data center facility located in California. ... We do not currently operate or maintain a backup data center for any of our services or for any of our customers' data, which increases our vulnerability to interruptions or delays in our service."
Additional reporting by Joshua Weinberger.
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