Software IPOs to spring up soon
Salesforce.com, RightNow lead list of likely new offerings
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 12:01 AM ET March 31, 2004
SAN FRANCISCO (CBS.MW) - Regardless of what Google does, April may be one of the hottest IPO months in years as Salesforce.com prepares for a $1 billion offering and close cousin RightNow Technologies prepares to file its paperwork any day.
Salesforce, RightNow to put spring in IPO market
After several tough years for initial public offerings, young companies with new ideas are once again ready to challenge the status quo and the profit margins of established competitors in the hard-luck software industry, where Oracle's (ORCL: news, chart, profile) hostile bid for PeopleSoft and hopes for a dividend raise at Microsoft (MSFT: news, chart, profile) pass as investment ideas.
"There's pent-up demand by institutions and other investors for IPO shares, and the supply is just now coming in to meet that demand, says Ed Bierdeman, analyst with Moors & Cabot in San Francisco "There are quality companies that have been waiting in the wings."
The two biggest of that small bunch of names are Salesforce.com and RightNow, two of the largest independent sellers of "on-demand" software. They each offer business customers pay-as-you-go online software subscriptions that are appealing to small and mid-size firms, and may eventually steal away large accounts from some of the industry giants.
For years, software makers have been paying lip service to the idea of selling business software as a subscription, and the buzzword used to market it -- on demand. Still, most of them derive an increasing portion of sales from locking in customers to long-term maintenance and support agreements. Over time, those contracts dwarf the amount customers pay for initial software licenses.
Customers who are locked into those long-term contracts must also purchase and maintain all the servers, routers, switches and storage gear needed to run large applications -- expenses that Salesforce.com and RightNow hope to help software buyers avoid by offering the software on a hosted Internet-based service.
"We have uncovered a need," says Greg Gianforte, Right Now's chief executive. "The infrastructure component of deploying software can be 80 percent to 90 percent of the total ownership cost. We and Salesforce.com have been pioneers in eliminating those costs."
New companies are arguably in a unique spot to market software as a service, as their code has been built from the ground-up to work online, and they're willing to let customer walk if they're unhappy -- a unique marketing pitch.
Market research firm International Data Corp. says sales of traditional customer-relationship-management software, or CRM software, will boost sales between 7 and 8.5 percent over the next three to five years. In comparison, on-demand software, like the CRM brands sold by Salesforce.com and RightNow, will grow 44 percent over the next four to five years.
With many analysts behind it, Salesforce.com, which filed to go public in December, is expected to go ahead with its stock offering as early as next month. The company is known for software that automates corporate sales forces by tracking sales leads and interactions with customers, competing with a similar on-demand offering from Siebel Systems (SEBL: news, chart, profile) and IBM (IBM: news, chart, profile).
Jane Hynes, Salesforce.com spokeswoman, would not comment on when the company plans to go public, or if and when the company plans a "road show" for investors.
But analysts say the company could file its final registration statement with the Securities and Exchange Commission in days, setting stock prices for its offering ahead of the usually slow summer trading session.
Salesforce.com is expected to fetch from $10 to $15 a share, generating somewhere between $900 million and $1.35 billion -- more than five times the estimated $160 million analysts say the company had in annual revenue for its fiscal year, ended Jan. 2004. In comparison, stocks of large software companies are commanding about 4.5 times their annual sales, on average.
Shortly after its final filing, Salesforce.com executives including CEO Marc Benioff, will kick off a whirlwind investor road show in both Europe and the U.S. to market the company's stock to prospective buyers.
The timing of the offering could come just ahead of a high-profile release of Salesforce.com's next product version, which is currently scheduled for April 12, says Peter Coleman, analyst with Schwab SoundView Capital Markets.
"This is going to be part of a much broader event -- Marc and his team are marketing animals, and I would not be surprised to see them get the product release out somewhat in concert with the IPO."
In recent days Salesforce.com made one of its last critical hires, luring Joelle Fitzgerald, formerly an investor relations director at software titan Oracle. It's hard to imagine the company would lure her away before there was any investor-relations work that needed to be done.
Right now
While Salesforce.com prepares its offering, analyst sources say RightNow is in the process of preparing an "S1" statement to go public. The filing could come any day now, sources said. The move comes four years after the company initially filed with the SEC, then withdrew its plans to become a public company.
Other than Salesforce.com, it's the company that's closest to being ready to go public in the business software group. It posted sales of about $36 million, and is recording double-digit sales growth -- unlike most others in the software industry. The company has posted 20 consecutive quarters of revenue growth, and seven straight quarters of cash flow from operations.
CEO Gianforte said he is "unable to comment in any regard" as to if and when the company will file for a public offering.
RightNow also offers on-demand software that is used in customer service centers to store data that's used both by the service and marketing departments. RightNow competes to an extent with Salesforce.com, but its roots are in call centers, and Salesforce.com's roots are in automating sales forces.
A lot of large software companies have blamed sales woes on the economy, market conditions, war, past overindulgence on the part of customers -- you name it.
But RightNow's Gianforte, blames it on what he calls "parasitic" sales techniques used by most companies that lock in software customers -- methods he says Salesforce.com and RightNow do not and will not use.
"We have extremely happy customers who get business value without the headaches of big software, and without spending so much," he says.
If the companies manage to keep customer satisfaction levels high, both Salesforce.com and RightNow could be two of the most successful IPOs of 2004, and possibly long-term stocks to own. |
