With Broad Markets Climbing, Can IPOs Be Far Behind?

At present, there are several IT companies looking to make their debut, including a VAR (DigitalNet), a networking hardware company (NetGear), and an applications software company (AccPac). I recently caught up with AccPac CEO David Hood to discuss where his company is going, the competitive challenges it faces and what his chances are for pulling off an IPO in an environment where several companies, including Spectra Systems and R2 Technology, have filed to go public only to have second thoughts and retreat from their plans. A spokeswoman for R2 Technology, which has recorded profits of late, says her company is not convinced that the market is ready for new issues. Hood, of course, thinks otherwise.

"We're in a better position today vs. what we've ever been in before," he says. The markets are in a better position, too -- perhaps the best they have been in more than a year. The NASDAQ, for example, is up almost 400 points since March, though Friday the 13th lived up to its billing as a bad trading day.

That said, Hood has plenty of reasons for his brimming confidence. For starters, he believes his company is among the fastest growing software companies in the industry. It's also profitable and has almost zero debt. Furthermore, his company has successfully recruited key new allies to its fold. AccPac just completed a 12-city tour during which it signed up 115 new partners in just two weeks. A lot of partners came to it from the Microsoft camp after years of work with both Great Plains and Navision products.

So why go all out? Why subject himself and his fellow employees to the demands and vagaries of Wall Street? Simple: Given that it competes with Microsoft's formidable marketing muscle, AccPac could use the exposure that public traded companies generally receive, and it could use a war chest to reward employees and make acquisitions if time and conditions warrant such action. (It already bought eWare, which greatly strengthened its hand in CRM software.)

Some background on the company: AccPac is actually a majority-owned division of Computer Associates, the software conglomerate based in Islandia, N.Y. After the IPO, CA is likely to have a sizable stake in AccPac, though exactly how much remains to be determined.

Founded more than 20 years ago, AccPac today offers what is says are end-to-end "business management applications for small and midsize businesses." The crux of what it offers are accounting applications, plus solutions for human resource management, warehouse management, customer resource management (CRM) and e-commerce. The company's legacy is for delivering cheap (all right, low-cost) solutions that are easy to implement and manage. It's heavily dependent on a partner network that numbers more than 7,500 companies and individuals and increasingly sees an opportunity to expand its AccPac Online service, which provide solutions to customers online for a subscription fee.

In fiscal 2002 ended March 31, 2002, AccPac reported sales of $78.3 million, down from the year-earlier period when the company reported record sales of $85.9 million. For the year, the company lost $10.6 million, compared to a loss of $11.2 million in fiscal 2001. More recently, however, conditions have improved at the company. Between March 31, 2002, and December 31, 2002, sales increased $7.1 million to $62.6 million over the year earlier period. Furthermore, the company returned to profitability during that time. (Sales and earnings for the three months ended March 31, 2003, have not yet been made available.)

Because the company counts on partners for the overwhelming majority of its revenue, it recognizes that it has to provide plenty of opportunity and margin for allies if it expects to meet its own goals. That's why Hood, personally, has taken an interest in partner development. As previously mentioned, the company counts in its partner database approximately 7,500 companies, 3,000 of which actively market its solutions to SMB customers. Half of its SMB-focused partners are consultants and accounting experts as much as they are computing experts. The balance actively resell licenses and touch hardware on a more frequent basis. AccPac's premier partners, which comprise roughly 10 percent of its partner base, account for half of the company's indirect revenue.

Though his partner base is much smaller than that of Microsoft's, Hood believes AccPac is just as competitive when it comes to selling advanced applications, such as CRM solutions. To wit, he notes that when Microsoft rolled out its CRM solutions, it did so with as many as 1,000 partners on board. But, he wonders, how many have actually sold a single copy of Microsoft's CRM software? Not many, he is willing to bet. In contrast, he believes many of the VARs in his partner base have the desire and capacity to sell and implement CRM solutions. (His accounting consultants may be another story.)

To ensure his VARs' success, AccPac is ramping up the amount of training and support it provides to CRM-oriented solution providers. Whether it will be enough to topple the industry titans is anyone's guess.

Meantime, it will be interesting to see if AccPac can successfully pull off its IPO plans. It has some positive momentum behind it and high-profile companies helping it out in SoundView Technology Group; Adams, Harkness & Hill; and RBC Capital Markets. The past losses racked up by the company may limit its appeal, though the recent sales growth could offset that.

Regardless of how much money AccPac raises if and when it finally goes out, the IPO could turn out to be somewhat of a milestone event for the IT sector. That's because others may choose to follow the company out. Who knows? Maybe you'll soon be reading enough S1s that you'll come to the conclusion that you need to update the prescription on your old reading glasses.

Wouldn't that be a mixed blessing.