Positive Report Examines Netezza's IPO

Research 2.0 published a full research report to subscription clients on July 17th. The IPO will certainly come off as a successful one, on the order of a Limelight (LLNW) or Data Domain (DDUP). We are providing a full summary of the report here to increase awareness of investors to the fundamentals. Our fair value estimate of $23 is based on our long-term valuation methodology.

Selected highlights from the full report examining Netezza (NZ)’s IPO include:

Netezza is exploiting a clear opening in the data warehouse/analytics marketplace beneath the soft underbelly of very costly, slow to implement high end vendors like Teradata. Netezza should have enough advantage in this segment [time to deployment, price/performance, ability to integrate with existing environment] to sustain strong momentum for the next few years.

The Netezza data warehouse appliance combines key features [database, storage and server] into a solution specially designed to process complex queries against large datasets using both hardware acceleration and parallel processing. Besides being high performance, this approach is much simpler than the complex array of products required from a leading vendor [Teradata, Oracle (ORCL) or IBM (IBM)].

Revenues have been growing about 50% YoY for the past two years and operating losses have been shrinking despite a steep ramp in operating costs. For the quarter ended April of 2007, the company posted an acceleration of their YoY growth rate to over 100%. We’d expect management to temper expectations where possible. Our preliminary model has a 57% overall revenue growth estimate for this fiscal year.

Although industry insiders describe the Netezza solution as “not really rocket science” they admit that it offers substantial performance improvements [on the order of 5 to 10 fold] for query performance at a fraction of the price of what traditional approaches cost. Combined with more rapid implementation, the Netezza solution is a clear and easy choice for many large organizations.

The risks we are most concerned with are IBM on the competitive front and the ability of the company to scale operations beyond the $100M revenue level.

Investors should focus on the S-1, which was filed with the SEC in order to understand this offering.