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NetSuite IPO Wows Investors, Even At Twice The Initial Price

BY J. BONASIA
INVESTOR'S BUSINESS DAILY
Posted 12/20/2007

Investors snapped up shares of Web-based business software provider NetSuite Thursday, sending the stock up 37% to 35.50 in a major vote of confidence for the emerging business model.

NetSuite raised $151.9 million through an initial public offering on the New York Stock Exchange, selling 6.2 million shares directly to investors in a format known as a Dutch auction.

Analysts call Thursday's debut even more impressive considering that the underwriters had set an initial price range of $13 to $16 per share. Amid unexpected demand, they raised the figure twice to $26 per share in the days leading up to the offering.

"It's one of the big winners of the year," said Francis Gaskins, president of research firm IPOdesktop.com.

Two former managers at database giant Oracle (ORCL) — NetSuite CEO Zach Nelson and Chief Technology Officer Evan Goldberg — founded the company in 1998 on the hunch that more businesses would move away from installing and maintaining their own software to an "on-demand" model in which software vendors deliver applications as an online service.

NetSuite delivers Web-based software that manages back-office functions such as corporate finances, human resources and sales.

Despite its fast sales growth, NetSuite has yet to turn a profit, though losses have fallen steadily. It lost $20.6 million in the first nine months of 2007, vs. a loss of $27.6 million for the same period last year. It lost $35.7 million in 2006.

One of the biggest beneficiaries in Thursday's run-up was Oracle founder Larry Ellison, who helped nurture the company and still owns a controlling stake.

To prevent any conflicts of interest due to Ellison's dual allegiances, the billionaire has put his NetSuite shares in a limited liability corporation. Such a "lock-box" trust account prevents Ellison from taking any direct actions as a shareholder — until the board considers selling the company.

On Thursday, Nelson and Goldberg celebrated the stock's launch along with Chief Financial Officer Jim McGeever and the rest of NetSuite's management team.

Nelson rang the opening bell at the New York Stock Exchange, the building draped in NetSuite banners. Company shares now trade on the NYSE under the ticker symbol N.

"We're just very excited to finally be a public company," McGeever told IBD. "It has been a long journey, and this is one more milestone along a much larger path."

Fans of the Dutch auction format say it helps to level the playing field between small investors and large institutions. Credit Suisse and WR Hambrecht & Co underwrote the deal.

NetSuite launched around the same time as Salesforce.com, (CRM) another pioneer in on-demand software, or software-as-a-service.

The trend is transforming the industry, says Jeff Kaplan, managing director of Thinkstrategies, a software consultancy based in Wellesley, Mass.

Investors like it because recurring subscription fees provide a clearer view of future earnings, Kaplan says.

"What we're seeing is a fundamental change in the way in which software is now being delivered as a service," he said. "This is because companies have become frustrated with the cost and complexity of traditional software."

Oracle, SAP, (SAP) Microsoft (MSFT) and other large business software makers have become more active in software-as-a-service over the past year. Another direct competitor to NetSuite is Intuit, (INTU) which sells Quickbooks accounting software to small businesses.

In addition, PeopleSoft founder Dave Duffield launched Workday in March 2005, shortly after he sold his old company to Oracle in January of that year. Workday is a private firm and yet another rival to NetSuite in the on-demand market for small and midsize clients.