Can Demandware Demand IPO Returns?

| About: Demandware, Inc. (DWRE)
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Demandware (NYSE:DWRE), which provides on-demand software to help businesses design and maintain e-commerce sites, announced terms for its IPO. The Burlington, MA-based company plans to raise $74 million by offering 5.5 million shares at a price range of $12.50 to $14.50. At the midpoint of the proposed range, Demandware would command a market value of $425 million. Demandware, which was founded in 2004, plans to list on the NYSE under the symbol DWRE. Goldman Sachs (NYSE:GS) and Deutsche Bank Securities (NYSE:DB) are the lead underwriters on the deal. Demandware is one of three deals on the IPO calendar for this week.

Demandware sells its on-demand software on a subscription model, with an average three-year contract, and shares in the revenue processed on the platform. As of December 31, 2011, 101 customers were operating 361 sites, which include websites, mobile apps and other digital storefronts. Prominent customers include Columbia Sportswear (NASDAQ:COLM), Procter & Gamble (NYSE:PG), L'Oreal, Panasonic (PC) and Callaway Golf (NYSE:ELY).

Sales increased 54% to $57 million in 2011, as the number of customers increased 46%. The gross margin increased 5% to 65% and reached 72% in the fourth quarter. Operating income swung negative, however, and the company posted a net loss of $1 million for the year. The apparel industry provided half the total revenue and general merchandiser accounted for another 21%.

Venture capital firms North Bridge Venture Partners and General Catalyst Partners are not selling on the offering and will each have a 26% post-IPO stake. North Bridge Venture Partners was recently involved in the IPO of Proto Labs (NYSE:PRLB), which is trading up 96% since its February 23rd offering. Founder and Chairman Stephan Schambach will own approximately 16% of shares after the offering.

Enterprise focused on-demand software companies have had been on a remarkable run in the past few months. The last four to complete IPOs are all trading at least 30% above their offer prices and, despite pricing pressure for other recent IPOs, not one has priced below the midpoint. Jive Software (NASDAQ:JIVE) leads the pack with a 99% return, followed by Guidewire (NYSE:GWRE) at 73%, Brightcove (NASDAQ:BCOV) at 46% and Bazaarvoice (NASDAQ:BV) at 31%.