Recent Software IPOs Have Actually Done Pretty Well

by: Jason Wood

Tom Taulli, of, penned an op-ed piece on Sandhill today that looks at recent software IPO activity as well as some of the potential deals in the offing. Taulli peppers his piece with some compelling data, which is certainly worth a direct read.

According to Tom's data, 14 "software" IPOs have occurred in the last 12 months (Note: All returns as of 9/15/2006):

* IHS Inc. (IHS) -- 93.8%
* Vocus (NASDAQ:VOCS) -- 66.7%
* Liquidity Services (NASDAQ:LQDT) -- 59.5%
* FortuNet (FNET) -- 44.2%
* DealerTrack (NASDAQ:TRAK) -- 34.0%
* InnerWorkings (NASDAQ:INWK) -- 32.2%
* Synchronoss Technologies (NASDAQ:SNCR) -- 23.6%
* Omniture (OMTR) -- 20.9%
* Ituran Location and Control (NASDAQ:ITRN) -- 16.9%
* LoopNet (NASDAQ:LOOP) -- 4.6%
* Corel (CREL) -- (28.8%)
* Taleo Corp (NASDAQ:TLEO) -- (29.5%)
* TRX Inc. (OTC:TRXI) -- (44.4%)
* (TRFC) -- (63.4%)

On an equally-weighted basis, these 14 stocks have returned a 16.4% return from their IPO price. Of the 14 new issues, ten 10 are trading above their offering price, with the biggest percentage gainer being IHS Inc. and the biggest decliner being

How do these returns compare to the broader market and comparable public software returns? Looking back to September 1, are some relevant index returns to compare these IPOs against:

* Software HOLDRs (NYSE:SWH) -- 6.0%
* Morgan Stanley High Tech Index (^MSH) -- 5.4%
* iShares Goldman Sachs Software Index (^IGV) -- 6.5%
* Nasdaq Composite (^IXIC) -- 4.1%
* Russell 2000 Index (^RUT) -- 9.1%

Compared to the market indices and most commonly recognized software indices, this basket of eclectic software IPOs has done quite well, despite a handful of major blowups.

Taulli goes on to mention four other companies that are potential IPO candidates in the near future, and offers some generalizations about what the "market" is looking for. Frankly, I think he misses the mark in terms of some of his "conclusions." For example, he says:

Revenue Hurdle: "An IPO candidate needs to be a rocket," said Gebaide. "The revenue should be at least $50 million and growing at high double-digit rates. There must also be a diverse installed base of customers. There cannot be dependence on one customer."

Yet, five of 14 IPOs had revenues below the $50mm mark, including Vocus and FortuNet, two of the best-performing. Several of these companies are also fairly reliant on several large customers. For example, Synchronoss generates nearly 70% of its revenues from one customer, Cingular. But in looking at the performance of the aggregate IPOs in the last year, one could argue that the market is hungry for more deals (I would contend that some of this performance relates to scarcity).

A couple of other thoughts:

  • It's odd that Taulli decided to exclude Commvault (NASDAQ:CVLT) and DivX (DIVX) from his list of upcoming software IPOs (despite being mentioned in an article about the DivX IPO). Both are due to come public in the next week. DivX, in particular, is expected to be a "hot" deal according to many sources. Commvault is being led by First Boston and due to come public this week.
  • SaaS darlings NetSuite and Rearden have been rumored as potential IPO candidates (although not this year it would seem); and one has to wonder if any of the open source apps vendors are going to try to break into the market (someone like SugarCRM perhaps?).
  • Note: At the time of this writing I, and/or funds I maintain discretionary control over, did not maintain a position (long or short) in any of the companies mentioned.

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