Updated from 2:21 p.m. ESTSAN FRANCISCO -- NetSuite raised $161.2 million in its initial public offering on Wednesday, giving the company a market cap of $1.55 billion. The San Mateo, Calif.-based company, which issued 6.2 million shares, priced them at $26 in a Dutch auction-style IPO, well above its recently adjusted price range. The stock will trade Thursday under the ticker ( N). The stock had been expected to go out at between $19 and $22, already well up from its original base of at least $12 per share, according to MorningNotes, an IPO information service. The small size of the offering, the narrow distribution channel and the celebrity of the company's chief investor added to the IPO's excitement, MorningNotes' publisher Ben Holmes wrote Monday. The celebrated investor is none other than Oracle ( ORCL - Get Report) CEO Larry Ellison, who with his family owns 66% of NetSuite following the IPO. His name gave the offering by this small, unprofitable company an extra measure of buzz, but also raised expectations. The question for potential shareholders is whether NetSuite can justify the high price. Founded in 1998, NetSuite, which has 5,400 clients, is the latest subscription-based on-demand software company to come public. Such software is sometimes referred to as cloud computing. NetSuite hosts business-management software over the Internet that helps subscribers handle back-office functions, such as accounting and payroll, as well as web commerce and customer relationship management (CRM).
On the CRM front, NetSuite goes up against Salesforce.com ( CRM - Get Report), a software-as-a-service (SaaS) company founded by another Oracle alumnus that came public in 2004, initially trading at $15. Salesforce closed Wednesday at $59.95, giving it a forward P/E of 230. Although its niche is CRM, the company partners with companies that provide on-demand business-management software, such as Intuit ( INTU - Get Report). Salesforce's subscriber base has grown 60% year over year, to reach one million "seats" recently. The company has also scored major client wins, signing several large customers in recent months. And on-demand email marketing provider Constant Contact ( CTCT) went public Oct. 3 at $16, raising $87 million. It saw a first day gain of nearly 73%, closing at $27.64, according to MorningNotes. Its stock now trades at $20. Like NetSuite, the company is not yet profitable. NetSuite is a company that Ellison helped start. He reportedly encouraged a former Oracle executive to start the company and has personally invested a significant sum of startup capital. "He obviously has a tremendous track record in software, making companies grow and working extremely well with debt," said Scott Sweet, managing director at IPO Boutique. Sweet estimated Tuesday that a large number of bids were from 20% to 30% above the high end of the company's range due to the auction process being used, rather than the traditional placement methods used by underwriters. He suggested the process overvalued the company.
Credit Suisse was the lead underwriter, with Dutch auction specialist W.R. Hambrecht participating. Hambrecht underwrote Google's ( GOOG - Get Report) Dutch auction in 2004. But Google retrenched at a lower offering price after its initial range was deemed too high. Brian Hamilton, CEO of Sageworks Inc., which partners with on-demand software vendors, said Tuesday, "On NetSuite, the positives are that they have a popular model around SaaS. But I don't like that they are still losing significant amounts of money. Also, they have a formidable competitor in Intuit." Sageworks uses data from on-demand software companies to provide financial information to clients. In back-office accounting software, "Intuit is the 10,000-pound gorilla. If Intuit decides to focus hard on the middle market, it would pose significant problems for competitors like NetSuite," Hamilton said. Intuit's QuickBooks software, offered as packages and on-demand, serves 282,000 mid-market business customers, the market NetSuite is targeting, according to Angus Thomson, general manager for Intuit's mid-market group. He estimates there are 600,000 firms in that market domestically. Intuit's strategy is to offer back-office software in a hybrid model, because businesses are reluctant to place all their critical operations software on vendor servers. "We've found customers have ... concerns about having their entire business up in the cloud and being able to conduct business if their connection goes away," Thomson said.
Moreover, Thomson questions whether NetSuite is successfully growing its client base, noting the company has said for two to three years that it has approximately 6,000 customers. "They are growing the total number of users
seats they have, because they are growing within the firms they have contracted with as clients. However, 44% of NetSuite's new revenue in 2007 comes from new clients, according to the company. Revenue was $76.8 million for the first three quarters, up 63% from $47 million for the same period of 2006. Hamilton said NetSuite will be faced with stiff competition. "Salesforce.com had a real, very focused, strong niche. I don't see that being the case with NetSuite," he said. "I wish these companies were a little more profitable before they went public." NetSuite is not yet profitable because on-demand software requires higher initial sales and marketing expenses to generate growth than does traditional software, said Mike Fitzgerald, founding partner with Commonwealth Capital Ventures, which took Constant Contact public. Because of the recurring revenue of on-demand software, such companies are "very stable and know what their expenses are," Fitzgerald said. NetSuite is well-positioned in the market and will appeal to growth investors, he added. "I do think their offering will go pretty well," Hamilton noted. "The market is very receptive to this SaaS model. That's a high-energy field."