IPO Invasion of the On-Demand Operators

On-demand software -- delivered via the Web, rather than being installed on individual computers -- has enjoyed a buzz-filled week so far. Business Objects (NYSE: BOBJ  ) and SAP (NYSE: SAP  ) have launched new offerings, and the gigantic annual conference from Salesforce.com (NYSE: CRM  ) is fast approaching. Meanwhile, these firms' momentum is about to spread into the IPO market, providing investors more opportunities to participate in this latest tech boom.

According to data from IPOHome.com, six on-demand software companies are prepping for public offerings:

Company

Background

Ticker

2006 Revenue Growth Rate

SEC Filing

Varolii

Interactive customer communications solutions

(Nasdaq: VRLI  )

71%

Filing

Netsuite

Enterprise resource planning (ERP) services for small and medium-sized businesses

(Nasdaq: NETS  )

85%

Filing

athenahealth

Management services for physician practices.

(Nasdaq: ATHN  )

41%

Filing

Convio

Management of nonprofit organizations

(Nasdaq: CNVO  )

62%

Filing

MedAssets

Improves the operating margins and cash flow for hospitals and health systems

(Nasdaq: MDAS  )

80%

Filing

SuccessFactors

Performance and talent management

(NYSE: SFX  )

150%

Filing

Interestingly enough, all of these companies are losing money (on a GAAP basis, anyway). But that's not necessarily a bad thing. After all, these companies are growing at breakneck speed, each trying to capture its respective category. Now is certainly not the time to grab profits.

If you read through the IPO filings, you'll also notice some key themes. Compared to traditional software, on-demand platforms tend to have lower up-front costs, easier installation, and less ongoing maintenance. They also require a smaller investment in hardware and data centers.

According to an IDC study, the global market for on-demand enterprise software was about $4 billion in 2006, and it's expected to grow to $14.5 billion in 2011. That should leave abundant room for a variety of dominant companies in the space. Which IPOs should Fools keep an eye on? I'd focus on those that target large markets and have achieved critical mass in revenue -- say, a $50 million run rate.

Under those criteria, NetSuite would fit the bill. The company provides enterprise resource planning software, which helps firms with duties like payroll and HR -- core functions that usually require complex technologies. NetSuite has been building its offerings since the late 1990s, amassing more than 5,300 customers along the way. Intriguingly, the company's majority shareholder is Larry Ellison, co-founder and CEO of mighty Oracle (Nasdaq: ORCL  ) .

In addition, I think Fools should keep an eye on athenahealth, which helps physicians' offices improve reimbursements. Its IPO is expected to hit the markets this week, and if it goes well, it should pave the way for its fellow offerings. If Wall Street's behaving like it usually does, that should also mean we'll see more such IPOs on the way.

Further Foolishness, because you demanded it:


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