Netezza Corporation: One of the Better IPOs in Recent Times

Netezza Corporation (NZ) is one of the better offering in the recent times on account of two things: one company has got great growth potential, second the funds raised from this offering will be utilized by the company against other recent offerings, which just gives exit route to existing owners of the company.

Netezza Corporation is offering 9,000,000 share in price range of $9.00 and $11.00 per share. The company is a leading provider of data warehouse appliances (servers) and related service. But unlike traditional data warehouse systems, Netezza data warehouse appliance are specifically designed for analysis of terabytes of data, that is, it not only provides appliances for data storage but it provides a complete, compact and easy to install solution by which its customers can store, access, analyze and sort their data in a faster, cost effective and easier way. In this business, company competes with biggies like IBM (IBM), EMC (EMC), Hewlett-Packard (HPQ), Sun Microsystems (SUNW) etc.

The company intended to use the part of the net proceeds from this offering to repaying debt of nearly $9 million and remaining proceeds for working capital and other general corporate purposes, including the development of new products, sales and marketing activities and may also consider a acquisition.

Financials

The company's financial year ends on January 31. In fiscal ended January 31, 2006, the company earned revenue of 53.80 million, gross profit of 31.4 million and operating loss of 14.3 million.

In fiscal ended January 31, 2007, the company earned revenue of 79.62 million, gross profit of 47.52 million and operating loss of 8.25 million.

In Quarter ended April 30, 2006, the company earned revenue of 12.00 million, gross profit of 7.10 million and operating loss of 4.34 million.

In Quarter ended April 30, 2007, the company earned revenue of 25.34 million, gross profit of 15.30 million and operating loss of 1.60 million.

The company reports its business revenue under two segments products and services with nearly 80% revenue generated from products and rest from related services

The company generates nearly 80% of its revenue from North America.

Company/Business Outlook

The data warehouse business is growing at rapid pace and is expected to extend its pace in future. Netezza will benefit from this growing demand and also will benefit from the replacement of traditional data warehouse appliances.

Although Netezza's gross margins are as high as 60% still at operating level, its a loss making company, mainly due to high sales and marketing expenses, but the benefit of these expenses is clearly reflected in its ever rising revenues which have been growing at above 40% per year in last two years. High spending on Sales and marketing help company to not only grew its revenue but also enable it to build up a highly impressive clientele for itself which includes Amazon.com (AMZ), AOL (TWX), The American Red Cross, CNET Networks (CNET), Neiman Marcus Group, Orange UK and many more. This clientele itself is an indication that the company's size is not a constraint in wining big clients. A significant part of company's business come from repeat orders which reflects quality of its products and services.

The most impressive thing about the company's financials is that with its rise in revenue, the company cut its operating losses from 26% in FY2006 to 10% in FY2007 and further to 6% in 1st quarter of FY2008. At this pace with operating margins intact, Netezza can be a profit making company by end of current fiscal.

Valuation/Offer value ($ in million)

(The company may not be able to perform this well; chances of company performing this well is three out of five)

Assuming that company shows (without considering any acquisition):

1. 60% percent rise in revenue year on year in FY 2008 and FY 2009 from $80 in FY 2007 to $127 in FY 2008 and to further $204 in FY 2009.

2. Gross margins remain intact at about 60% (every % decline in gross margins will effect operating margin to that extent).

3. Operating profit margins at 7% and 17% in FY 2008 and FY 2009 respectively

This leaves the company with operating profit of $ 8.9 and $35 in FY 2008 and 2009 respectively and after detecting interest cost of nearly $.1 and $.1 and income tax at 35%, this leaves company with net profit of $5.77 and $22.75, that is EPS of $ 0.10 and $ 0.41 for FY 08 and FY 09 respectively.

This means that even if the company performs exceptionally well (without considering any acquisition), at an offer price of $10, the company's share is available at one year forward PE of nearly 100 and two year forward PE of nearly 25 (in best case scenario)

We rate this IPO 3 on scale of "1 to 5" (5 for best)

Negatives

· Company's loss making history.

· The presence of very big, highly capable competitors like EMC, IBM etc.

· Offer price is on higher side.

· The company’s small size.

· Gross margins are high and can decline.

Positives

· High growth rate of company as well as industry.

· Any acquisition will accelerate this growth rate further.

· Very healthy balance sheet.

· Possible breakeven in near future.

· High gross margins.

· Concentration on single specialist business segment.

· Funds raised from this offering will give company more financial strength to develop and market its products worldwide and to compete with other big players more effectively.

Disclosure: none

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