INTERNET &TECHNOLOGY

Happy Days Here Again For Technology Company IPOs

BY J. BONASIA

INVESTOR'S BUSINESS DAILY

Posted 8/14/2007

The stock market has been in turmoil of late, but the IPO window for software companies is open wider than it has been since the bubble year of 2000.

With VMWare's big initial public offering, six software companies already have gone public this year, and analysts expect that number to perhaps double by year's end.

Last year, seven software companies went public, says the National Venture Capital Association/Thomson Financial. From 2001 through 2005, no more than five — and as few as three — software companies made their IPOs.

In addition, a number of tech services companies have gone public this year. The IPO trend is nothing like in 2000, when Thomson counted 50 software IPOs. But the bursting of the tech bubble made investors wary, forcing software makers to develop much more stable business plans before selling stock to the public, says Mark Heesen, president of the NVCA.

"Now we're seeing some solid companies going public, with real revenues and an ability to withstand the regular interruptions in business cycles that happen so often on Wall Street," Heesen said.

VMWare raised nearly $1 billion in its IPO, another sign of recovery in tech offerings, says Paul Bard, an analyst with research firm Renaissance Capital, which runs the Web site IPOhome.com.

"We've started to see a recovery in 2006," Bard said. "And now with all the problems around subprime lending, investors see the tech sector as more attractive" than some others.

"We expect to see 10 or more software IPOs this year," Bard said.

A total of 148 IPOs, tech and otherwise, were priced in the U.S. as of Aug. 10, up from 103 in the year-earlier span, according to IPOhome.com.

Some investors say VMWare is the most anticipated tech IPO in two or three years. (See story, A1.) It's a unit of EMC (EMC) that's focused on virtualization. This is a type of software that maximizes the spare computing power of corporate servers.

Last week, VMWare underwriters raised the expected IPO's price range to $27 to $29 per share from $23 to $25, and the stock was priced right at the top of that range, $29. The stock trades under the ticker of VMW. EMC owns 87% of the company.

The software companies that have gone public recently, or plan to, cover a number of arenas:

• NetSuite and SuccessFactors are two other firms with highly touted software IPOs in the pipeline. Both are part of a new breed of on-demand software vendors, which include Salesforce.com. (CRM) These companies host their applications on their own servers and deliver software to customers over the Web.

"We definitely see a trend for more on-demand software services," Bard said. "Their subscription model gives investors a more predictable revenue stream."

NetSuite sells on-demand services that help midsize companies manage their operations, human resources and sales. Larry Ellison, the head of Oracle, (ORCL) is a NetSuite co-founder and majority owner. Analysts say Ellison's investment might create a conflict of interest at some point, as Oracle provides on-demand software, too.

SuccessFactors makes on-demand software to manage work forces. The company filed to go public in July and expects to raise $125 million. Yet some investors are a bit wary. In its registration filing with the Securities and Exchange Commission, the company pointed out "material weakness" in its financial controls because it didn't employ enough qualified accountants, a situation the company planned to rectify.

• DemandTec, (DMAN) another newly minted stock in the on-demand software space, went public on Thursday, and has slipped a bit. DemandTec software lets retailers optimize their product pricing.

• Double-Take Software, (DBTK) a data security firm, went public last December. Since then, the stock has risen more than 50% to 17.06.

• BladeLogic (BLOG) makes software to automate data center functions. The stock is up 31% to 22.30 since going public on July 24.

• Data warehousing software firm Netezza (NZ) also went public in July. It has gained 17% in value to now trade near 14 per share.

• Sourcefire (FIRE) has disappointed investors who bought the stock at the IPO price of 15 per share in March. It now trades at 9.25.

Such a weak performance has plagued some newly public software stocks, so investors should be diligent in doing their research, says Francis Gaskins, president of IPOdesktop.com.

"There's a lot of interest in software companies that can add value by demonstrating revenue growth," he said. "But a lot of them don't deliver in the (stock) market because investor expectations have run so high."

• Project management software firm Deltek filed for its IPO in May, but the stock has not yet been priced.

• Omniture (OMTR) and Synchronoss Technologies (SNCR) were two of the top-performing software IPOs from last year. Omniture makes Web analytics software, used to gauge the performance of corporate Web sites and online stores. The stock's value has more than tripled to 26 per share since its debut in June 2006.

Communications firms use software from Synchronoss to manage orders and activate mobile phones. Synchronoss shares have jumped nearly 400% since the IPO last summer, from 8 to 30.40 per share. The company's been boosted by its deal to activate the popular new iPhones from Apple. (AAPL)

In parallel to software IPOs, a number of tech services firms have gone public lately as well. WNS, (WNS) ExlService Holdings (EXLS) and Virtusa (VRTU) all offer services for BPO, or business process outsourcing. BPO can include such services as staffing call centers, processing insurance claims or refunding airline tickets.

WNS is part of the new wave of offshore outsourcing firms from India that have grown quickly due to their low-cost, high-quality services. Infosys Technologies (INFY) and Wipro (WIT) are two sector leaders with stocks that trade in the U.S.

"The industry for offshore BPO is very competitive and growing rapidly," said WNS Chief Executive Neeraj Bhargava. "Going public helped to establish our brand name in the market with our customers."

Genpact, (G) a former unit of General Electric, (GE) is a BPO firm that went public on Aug. 2. Another BPO firm, Zenta, has filed to go public later this year.