Special Report: 'Ellison's NetSuite' readies for IPO

By Stuart Lauchlan, news and analysis editor

First the good news: NetSuite has finally filed for its much delayed IPO. Now the not so good news: the number of times that various media and Wall Street outlets chose to refer to the SaaS firm as "Larry Ellison’s NetSuite" or Ellison’s "other company".

It has to be said, from a purely factual perspective, they have a point. The company, which hopes to raise $75 million based on its registration filing fee, is currently controlled by Tako Ventures, a wholly owned subsidiary of Lawrence Investments that is in turn owned by Larry Ellison, Oracle founder and chief executive.

According to the IPO documents filed with the Securities and Exchange Commission, Ellison, his affiliates and various Ellison family members own a 74 percent stake in the company. That basically means that the Ellison ‘axis’ will retain control of the company post-IPO, which may in turn dampen down investor enthusiasm for the floatation.

For example, with Ellison retaining a controlling interest, he could overrule a future buyout of the company, even if NetSuite's management and other investors deemed it appropriate. There are also corporate govenance implications: a controlling interest of 50 percent or more makes NetSuite exempt from having to adhere to certain standards imposed by Nasdaq and the New York Stock Exchange. (It should be noted that in the filing NetSuite indicated that it plans to waive those rights.)

The filing notes: “Entities and individuals affiliated with Lawrence J. Ellison control our company, which may limit your ability to influence or control corporate actions. This concentration of ownership may also reduce the market price of our common stock… Mr. Ellison and entities with which he is affiliated will be able to exercise control over most matters requiring approval by our stockholders.”

There’s also the little matter of potential conflict of interest and competitive pressures. The filing notes: “Mr. Ellison is also the chief executive officer and a director of Oracle Corporation… Mr. Ellison’s interests and investment objectives may differ from our other stockholders. Mr. Ellison’s controlling interest in us could discourage potential acquirors or result in a delay or prevention of a change in control of our company or other significant corporate transactions, even if a transaction of that sort would be beneficial to our other stockholders or in our best interest.”

So what else do we know? Well, we now have a clearer picture of NetSuite’s finances. Last year, the company generated $67.2 million in revenue, up 84.6 percent from the previous year. In the latest quarter ended March 31, the company raised $23.2 million in revenue, up 71.8 percent.

A history of losses

But the company has suffered a history of losses, running into the red to the tune of $23.4 million last year. In the March quarter, it sustained a net loss of $3.7 million. NetSuite has accumulated a deficit of $193 million, as of the March quarter, according to the filing.

It notes: “While our revenue has grown in recent periods, this growth may not be sustainable and we may not achieve sufficient revenue to achieve or maintain profitability. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown factors. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur significant losses for the foreseeable future.”

NetSuite plans to use the proceeds from its IPO to create working capital, but also to repay the outstanding balance on its $20 million secured line of credit with Ellison's Tako Ventures. As of March, NetSuite owed Tako $7.5 million on the line of credit.

Ellison co-founded NetSuite in 1998 with former Oracle vice president Evan Goldberg. Goldberg, now NetSuite's chairman and chief technology owner, owns an 8.1 percent stake in the company. Last month he repaid a $2,028,537 million debt to Octopus Holdings, a limited partnership controlled by Ellison.

He has since bankrolled the growth of the firm, although this is seen by some as a mixed blessing. "If this is such a great company and Larry Ellison really believes in this company's future, the common sense answer would be for Larry Ellison to buy it while it is still cheap," noted Trip Chowdhry, managing director of equity research for Global Equities Research. "Larry Ellison is not doing that."

In terms of competitive analysis, according to NetSuite: “We face competition from both traditional software vendors and SaaS providers. Our principal competitors include Epicor Software Corporation, Intuit Inc., Microsoft Corporation, SAP, The Sage Group plc and salesforce.com, inc.”

It admits: “Many of our actual and potential competitors enjoy substantial competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and services and larger marketing budgets, as well as substantially greater financial, technical and other resources. In addition, many of our competitors have established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants, system integrators and resellers. If we are not able to compete effectively, our operating results will be harmed.”

Since its 2004 IPO, Salesforce.com's annual revenue has soared from $96 million to just under $500 million in its last fiscal year ending in January. It also has reported more than $36 million in profits since going public, helping to nearly quadruple its shares from the IPO price of $11.

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