NetSuite IPO Hopes To Heat Up Market

Most technology companies do not dare to go public in late December, when the market for initial public offerings is usually as chilly as the weather. But the season isn't deterring NetSuite Inc., which is banking on investor interest in "on-demand" software to move forward with its IPO even as market conditions remain choppy. The San Mateo, Calif., company, which disclosed details of its proposed offering Wednesday, said in a regulatory filing that it will raise as much as $114 million, selling up to 7.13 million shares for $13 to $16. That range would put NetSuite's market capitalization at $773 million to $952 million.

NetSuite provides Internet-based software that helps small and midsize businesses manage their customer relationships and enterprise resource planning needs. Demand for such "software- as-a-service" technology is expanding rapidly as companies seek ways to cut the cost and administrative headaches associated with conventional "hosted" software. The company is set to begin its IPO road show for investors on Thursday, which means the company could go public as early as the week before Christmas. "Usually by mid-December the markets go into a lull," said Tom Taulli, founder of DealProfiles.com, an online service that tracks the IPO and M&A markets. "But if the deal is there and you think you can get it done, you get it done."

Calendar aside, the IPO pace has slowed in recent weeks because of unsteady market conditions. One of the last companies to go public this year was another on-demand software firm, SuccessFactors Inc. The San Mateo maker of online work force management software posted a 32% gain in its Nov. 20 debut, although its shares have been flat since. Like SuccessFactors, NetSuite is not profitable. The company, of which Larry Ellison owns a majority, lost $20.6 million on revenue of $76.8 million for the first nine months of 2007, compared with a $27.6 million loss on sales of $47 million for the year-ago period.

Unlike with traditional software, in which companies buy a license, on-demand software customers typically pay a minimal up-front cost, or none at all, effectively leasing the applications according to their usage. According to research firm IDC, on-demand software generates sales of $3.7 billion in 2006. Revenues are projected to rise 32% annually through 2011 to $14.8 billion.

A major factor driving investor interest in on-demand software companies has been the success of customer relationship management software provider Salesforce.com Inc. Shares in the San Francisco company have risen 500%, from $11 after its 2004 IPO, to roughly $56.

"NetSuite's not a Salesforce.com, but it's a pretty good No. 2 in this category," Taulli said. "They're addressing a very big market opportunity--ERP for the small to midsize business market. This is a market that takes time to get traction in."

Two other on-demand software companies have recently gone public, with varying results. Watertown, Mass.-based Athenahealth Inc., which provides software-as-a-service technology for physicians, soared 97% in its debut in September and has since added to those gains. SoundBite Communications Inc., a Bedford, Mass., provider of on-demand voice-messaging services, has seen little movement in its share price since going public in November.

NetSuite was founded in 1998 by current chairman Evan Goldberg and Ellison, chief executive of Redwood Shores, Calif.-based Oracle Corp., who provided the financial backing for the company. He has a 60% equity interest in NetSuite as of Sept. 30, according to its regulatory filings. After the IPO, his stake will drop to roughly 54%.

NetSuite plans to apply to list on the New York Stock Exchange under the symbol 'N.' The company said it plans to use proceeds of the offering for debt repayment, working capital and general corporate purposes.

Credit Suisse Group and WR Hambrecht + Co. are underwriting the offering. Jeffrey Saper and Richard Kline of Wilson Sonsini Goodrich & Rosati PC are issuers' counsel, and William Hinman of Simpson Thacher & Bartlett LLP is underwriters' counsel.