NetSuite lights fuse for Xmas IPO

NetSuite CEO Zach Nelson and other company execs have set off on an investor roadshow today to sell the merits of the company's forthcoming listing on the New York Stock Exchange. The timing of the tour suggests NetSuite hopes to offer its stock in the week before Christmas, perhaps intending to catch the traditional holiday bounce in stock prices as the year-end approaches.

A revised S-1 filing to the SEC yesterday set an expected price range for the first time, indicating that NetSuite hopes to raise around $80-100 million. However the final price won't be known until the outcome of an investor auction, similar to the process used for Google's IPO three years ago, but which has only rarely been seen since.

The filing also released third-quarter financials, which have shown a remarkable slowdown in NetSuite's spending since the previous quarter. Core costs and operating expenses are down across-the-board, despite a 10 percent increase in sales, resulting in a net loss of less than $2 million for the quarter, compared to almost $10 million in the previous quarter.

The spending freeze has wrested NetSuite's cost of revenues (what it spends on hosting and professional services) back down to the 30% level it was achieving in the first quarter, while sales and marketing is down from almost two-thirds of revenues at the start of the year to 50% now. That, by the way, is in line with what Salesforce.com spends on sales and marketing, and is the figure I predicted NetSuite would be targeting when I first analyzed its financials back in July.

So although NetSuite hasn't recorded the "barnstorming" sales performance I'd expected in its final pre-IPO financials, it has done enough to show potential investors that profitability is within its reach — certainly far more than Successfactors, which despite its astonishing burn rate still had a remarkably successful IPO last month. NetSuite's sales figures aren't so bad either; the latest quarter brings its trailing twelve months revenues to $97 million, with year-on-year growth running above the 60% mark.

Whatever happens on the day, NetSuite has already negotiated one substantial compensation for the long and winding journey to its IPO, in the form of the coveted single-character 'N' stock symbol. This is sure to infuriate Marc Benioff, CEO of larger rival Salesforce.com, especially since neither 'F' nor 'S' are available for his own company to adopt.

NetSuite also has cause to be thankful that the lengthy IPO preparation process has given it time to identify what it describes in the S-1A filing as "a material weakness in our internal controls relating to the need for additional finance and accounting personnel with skill sets necessary to operate as a public company." As a result, it has restated aspects of its financials for 2005, 2006 and the first quarter of 2007. NetSuite does not have the option, unlike others, of blaming the software for its failings, since it runs on its own product.