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More 'Net IPOs on the way
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May 8, 1998: 12:27 p.m. ET
NetGravity and Software.net toss their hats into the public offering ring
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SAN FRANCISCO (The Red Herring) - Why does everyone -- especially high-tech companies -- want to be the next someone else?
NetGravity, which makes software to serve online ad banners, is being compared to IPO superstar DoubleClick (DCLK), while online software retailer Software.net is being compared to Egghead.com (EGGS). Both companies hope to be the next IPO hit.
Does NetGravity have legs?
There's something to be said for being in the right place at the right time -- or at least that's what NetGravity would have you think.
Without a doubt, being in the online advertising space in an Internet bull market does have its merits, and NetGravity benefits from comparisons to DoubleClick, which had a monster public offering back in February.
"Because DoubleClick had such a successful IPO, it will make NetGravity's IPO easier," says Ryan Jacob, research director for the IPO Value Monitor. But piggybacking successful IPOs doesn't negate the fact that NetGravity still needs a viable business model. Francis Gaskins of Gaskins & Co. IPO Desktop questions whether NetGravity's IPO "isn't just a bailout for a failed business plan."
NetGravity's business is selling its online advertising management software to merchants, ad agencies, content publishers, and advertising networks, while also providing consulting, training, and technical support services related to the use of its core products. However, according to Gaskins's review of the prospectus, NetGravity's software sales have been flat for four to five quarters. In fact, if anything has done well, it's been the company's consulting revenues, which have doubled over the same period of time -- but consulting expenses have increased 140 to 150 percent. "How can you be a software company if your software sales have been flat for five quarters? I don't get it," says Gaskins.
NetGravity, which had promised a new product out in April but as of yet has failed to deliver, may not have enough substance to give investors true long-term confidence in its IPO. "I think they're a company without a direction," concludes Gaskins. "It achieved part of its business plan, but what are it going to do for an encore?" A few more months and investors will be able to judge for themselves. We expect NetGravity to price sometime in June.
Software's a different tune
NetGravity may or may not be the next DoubleClick -- so can Software.net get away with comparing its business to hot online music retailers like CDNow and N2K? (We won't deign to mention K-Tel.) Again, Jacob says yes and Gaskins says no.
"Software.net has the potential of being a leader in this space and there are clear comparisons to Egghead.com, and also to some of the online companies that sell CDs," says Jacob. "They're really not that much different."
Gaskins would beg to differ: "Some people would say Software.net looks suspiciously like the record business, but there is no customer loyalty in software; it's all about price."
Egghead.com developed significant brand recognition through its background as a real-world software retailer, but Software.net has not yet built much of a brand. Similarly, while supporters of the company might point to the online retailer's agreements with AOL and Excite as significant to its future success -- Jacob says the agreements "make Software.net very attractive" -- they might also work against the company's ability to grow.
"I think AOL took these guys to the cleaners," says Gaskins. "AOL is due $21 million over three years (from Software.net); it gets a percentage of every transaction; and if (Software.net's) site generates a certain level of traffic, then AOL gets a percentage of that too." With just $16 million in revenues for 1997, and having only generated about $6 million in revenues for the March quarter, Gaskins might have a point that the numbers don't add up.
Gaskin further notes that Software.net derived 43 percent of its March revenues from a large government contract. "If they didn't have this contract, they probably wouldn't even have an IPO," he concludes.
Au contraire, mon frère
"Both IPOs will, I think, be very well received," claims Jacob. Given the market's willingness to buy anything Internet-related, he may still be right. And with these two companies, investors may only see what they want to see.
NetGravity Inc.
1997 sales: $6.4 million
1997 income: $(6.9) million
Filing date: April 24, 1998
Offering amount: $38.0
Proposed symbol: NETG
Proposed exchange: Nasdaq
Underwriters: BancAmerica Robertson Stephens; NationsBanc Montgomery Securities; First Albany Corporation
Software.net
1997 sales: $16.8 million
1997 income: $(5.4) million
Filing date: April 27, 1998
Offering amount: $51.8
Proposed symbol: SDOT
Proposed exchange: Nasdaq
Underwriters: Deutsche Morgan Grenfell; Donaldson Lufkin Jenrette; Merrill Lynch.; C.E. Unterberg Towbin 
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