The software IPO market showed renewed signs of life in 1H07, as six newly listed software companies raised an aggregate $739 million (page down to see figure below).
































While the Street is demanding consistent earnings growth from established public software companies, investors are less discerning when it comes to new entrants. Although five of the six companies were unprofitable, only Veraz Networks failed to post a first day closing share price higher than its offering price. Anxiously seeking the next Google or Salesforce, investors focused squarely (some would argue solely) on revenue growth. The median next-fiscal-year (NFY) revenue growth estimate of the six newly public companies is a very impressive 43.8%. Time will tell. But with the word out, other unprofitable software companies are lining up to go public. Of the eleven software IPOs that filed S1s in 1H07, only five are profitable (see figure).






Several noteworthy software IPO trends are emerging in 2007. First, SaaS companies are coming to market in greater numbers. Although Salary.com was the only SaaS IPO in the first half, companies poised for public listing in 2H07 include SaaS providers athenahealth, Constant Contact, HireRight and NetSuite.

Second, several public companies previously taken private by Leveraged buyout firms are now poised for reentry. While only two such private equity owned companies are currently in the IPO pipeline (Deltek, a New Mountain Capital portfolio company, and SS&C, a Carlyle Group company), we expect as many as a half-dozen more to file S1s in the next twelve months, as private equity firms look to cash in, provide returns to patient limited partners, and allay debt repayment concerns that could stymie future buyouts.

The largest software IPO on deck for 2H07 is EMC's spinout of VMware, which will likely be a blockbuster. EMC is planning to sell approximately 10% of VMware for close to $800 million dollars. Analysts are projecting VMware to grow by 60% in CY07. While VMware is unquestionably the biggest IPO in the pipeline, Netsuite, a Larry Ellison backed company, is the most hyped. If listed, Netsuite will be the first publicly traded SaaS ERP company and a competitor to Oracle. Ellison is listed as owning 74% of Netsuite's common stock.


For a complete review of second quarter 2007 software financial activity, including recaps on public market performance, vendor performance and M&A trends, visit www.softwareequity.com and click on "Research" to download the complete version of the "Software Industry Equity Report - Q2 2007".


Ken Bender is managing director of Software Equity Group.