NetSuite Files For IPO, Reveals History of Losses

After years of hinting that it will soon join archrival Salesforce.com in the ranks of publicly traded software-as-a-service (SaaS) vendors, NetSuite Monday filed for an IPO intended to raise up to $75 million. The registration statement offers the first detailed look at NetSuite's finances, shining light on its history of losses and on the deep hold Oracle CEO Larry Ellison retains on NetSuite.

NetSuite, based in San Mateo, Calif., reported revenue of $67.2 million for 2006, an 85 percent increase on the $36.4 million it took in a year earlier. Its net loss in 2006 was $23.4 million. Founded in 1998, NetSuite has operated at a loss since its inception.

As of March 31, the end of its first fiscal quarter of 2007, NetSuite had 5,300 active customers. It did not disclose how many end-user subscribers it currently supports.

NetSuite partner Joe Giegerich, a principal with NetSuite specialist Horizon Associates Group in Marlton, N.J., said the filing held some surprises.

"Revenues were higher than I expected and the amount of international expansion and customer base was larger than I expected," Giegerich said. International sales accounted for $9.6 million for NetSuite last year, 14 percent of the company's total revenue.

NetSuite's ongoing losses were also unexpected. NetSuite has for years implied in the press that it is profitable or very close to it, and partners were getting the same message, Giegerich said. The continuing red ink surprised him, but didn't concern him. "The trend is good," he noted. In its most recent quarter, NetSuite reported a loss of $3.7 million on revenue of $23.2 million.

The vast majority of NetSuite's shares are owned by Ellison, who financed the company's creation in late 1998 to develop on-demand ERP and CRM services. The ties between NetSuite and Oracle run deep: Ellison and his private investment group, Tako Ventures, currently control 74 percent of the company, and NetSuite's two top executives, CEO Zach Nelson and CTO/Chairman Evan Goldberg, spent time in Oracle's executive ranks.

The ownership overlap between NetSuite and Oracle could cause conflict-of-interest issues between the potential rivals. Like the rest of the ERP field, Oracle would like to deepen its footprint in the small- and midsize business market in which NetSuite specializes. It also now owns Siebel CRM OnDemand, a NetSuite competitor.

Reflections of the close, unusual relationship between Oracle and NetSuite are scattered throughout its IPO filing. For example, NetSuite agreed last year to donate software valued at $542,000 to Ellison's Oracle Racing in return for promotional consideration, and has paid Oracle $2.5 million the past two years for Oracle software and services. Additionally, NetSuite's filing records a series of loans and repayments between the company and its top executives. Last month, Goldberg paid down the $2 million loan balance he had outstanding from NetSuite -- but on the same day, he took out a loan for the same amount from Octopus Holdings, one of Ellison's financing entities.

Then again, Ellison has rarely been fazed by potentially conflicting interests. At the same time he funded NetSuite, Ellison also contributed funding to Salesforce.com, in which he remained a shareholder all through its ascendancy. "I'm an investor in Salesforce. I want to see my investment go to zero," Ellison quipped at OracleWorld two years ago.

NetSuite plans to carry out its IPO through an auction, akin to the process Google used for its public offering. Managed by Credit Suisse and WR Hambrecht, NetSuite's IPO will be one of the most anticipated and closely watched software IPOs since Salesforce.com's 2004 debut, which raised $110 million and left the company with a valuation of more than $1 billion.

Unlike NetSuite, Salesforce.com was profitable at the time it filed to go public, albeit by a thin margin. It has remained in the black every year since, although its move last year to include stock-based compensation expenses in its income calculations significantly dragged down its reported profitability. In its last fiscal year, ended Jan. 31, Salesforce.com reported net income of $481,000 on revenue of $497.1 million.

NetSuite's IPO filing did not delve deeply into its channel relationships, which have grown tense at times as the vendor cracked down on terms for claiming its generous margins. Recently, partners have said their relations with the vendor have been smooth, and that they don't expect fallout from NetSuite's IPO plans.