Plumtree Hopes Its Long-Awaited IPO Bears Fruit - TheStreet

Now may not seem like the most opportune time for a software IPO, considering how battered the sector has become since companies announced a slew of disappointing earnings in the past month or so.

But things may not look quite so bad when you compare the current market to September 2000, when investor worries about slowing economic growth helped push the

Nasdaq Composite

down 12.7%.

That must be what executives at Plumtree Software (proposed symbol PLUM:Nasdaq) are thinking. The San Francisco-based firm recently filed updated documents with the

Securities and Exchange Commission

to go public, a move it has been heading toward since its first filing with the SEC Sept. 18, 2000. Company spokeswoman Laura Nusbaum referred questions to the company's SEC filings, citing a quiet period.

The company has filed to offer 5 million shares to raise between $36 million and $41.5 million for working capital as well as acquisitions. But rather than serving as a harbinger of a new era for software sector IPOs, Plumtree's experience will likely reflect merely the state of its own business. Still, there may be some market factors operating in Plumtree's favor.

Taking Some Off the Top

On May 10, Plumtree, which makes corporate portal software, lowered its initial share price to between $7 and $9 from between $13 and $15. The 43% reduction means the company's valuation will drop to 2.9 times 2001 sales from five times 2001 sales. "There was no way the stock could have stood up to the original valuation model," said David Menlow, president of IPOFinancial.com.

With the lower share price, combined with the improvement in the company's financial picture, Menlow said his firm upgraded its opening expectations for the stock. He is forecasting a 20% rise on the first trade, which should happen sometime in the next few weeks.

Indeed, Plumtree's financials have made considerable gains. Revenue has soared in three years, to $81.5 million in 2001 from only $181,000 in 1998. The company's net loss peaked at $21.7 million in 2000 and fell to $7.8 million in 2001.

A Rarity: Profits

In the first quarter of 2002, Plumtree delivered something that has eluded other software companies in recent tough quarters -- profits. The company reported first-quarter net income of $157,000 on $23.2 million in revenue. Revenue rose 23.8% year over year in the first quarter.

Citing those financials, one source at a hedge fund in New York was surprisingly upbeat about Plumtree's prospects. "I think it's going to be a reasonably good deal," said the hedge fund source, who asked to remain anonymous. "If Goldman called up and said they would give us 150,000 shares, we'd take it."

Then he added this caveat: "I don't know exactly how long I would hold it."

Menlow is even more upbeat. "The company has been growing very virally," he said. He also noted that the company may end up turning a profit this year, which he said would be "quite a turnaround" from its losses in 2000.

Plumtree's roster of investors may be another strength. "I think the fact that

Intel

has 5.4% of this company

before the offering is going to cause others to look at what this company really does," Menlow said. Another notable investor: Sequoia Capital, which has invested in such firms as

PayPal

(PYPL) - Get Report

, Google and

Yahoo

(YHOO)

.

Despite Plumtree's strong financials and heavy-hitting backers, there may be a few factors working against the company, including competition. Corporate portals are hardly the newest thing on the block, although Plumtree relies on an architecture based on Web services -- the latest software buzzword referring to a system that allows different programs to work together in specific ways.

In its S-1 filing, Plumtree acknowledges that established vendors such as

PeopleSoft

(PSFT)

,

SAP

(SAP) - Get Report

and

Siebel Systems

(SEBL)

already have created Web-enabled applications, sometimes labeled "portal applications."

Other major players such as

BEA Systems

(BEAS)

,

IBM

(IBM) - Get Report

and

Microsoft

(MSFT) - Get Report

offer portal-building infrastructure, which Plumtree describes as a "build-your-own alternative" to its product. But these titans could have a built-in advantage because they may already sell other products to potential Plumtree customers, Plumtree acknowledges. And more and more these days, IT executives are saying they are trying to cut down the number of vendors they buy from.

An IPO-Unfriendly Environment

And of course, the software sector has been battered particularly hard recently.

Lawson Software

(LWSN)

, whose December offering was the most recent software IPO, has watched its shares lose 59% of their value. Another quasi-software IPO, that of network security firm

Netscreen

(NSCN)

, which also sells hardware and is another Sequoia company, hasn't fared much better. Netscreen rose 48% on its first trading day Dec. 12, but has lost half of that value.

And Lawson may have actually been lucky to get in when it did. Ian Morton, a software analyst with J.P. Morgan H&Q, who has a long-term buy rating on Lawson, noted that the company went public when a little bit of optimism was shining down on the market. The sector enjoyed a big move upward in January, after unusually strong fourth-quarter earnings, boosted in part by spending delays because of the Sept. 11 terrorist attacks. (Morton's firm was an underwriter in the Lawson IPO and also is one of the underwriters in the Plumtree IPO.)

After Lawson went public, though, the software market fell apart, and Lawson shares went with it. Overall, the Goldman Sachs software index has declined 26.2% since the beginning of the year.

Still, Menlow says the environment for a software IPO like Plumtree's is certainly better than when the company first filed its papers in 2000. Then "we were discussing the possibilities of being in a recession," he said. "Now we are trying to pinpoint how we are getting out of it."

But that doesn't mean Plumtree's upcoming performance is likely to serve as a signal of things to come for tech stocks. "This is not going to herald a new dawn for high-tech stocks, just because this one performs well," Menlow predicted. "It's an individual company being evaluated on its own merits."