Back in the late 1990s companies filed for IPOs even though they had modest revenues and were losing money. Due to the tulip mentality of the time investors suspended disbelief and bought in anyway, giving way to the crash of 2001. A couple of years after that bankers were telling me that in order to have an IPO you would need “at least a couple of years of solid trading profits”, quarterly revenues of at least $25 million and preferably more, as well as strong growth. Those heady days of the late 1990s were a freak occurrence, like the South Sea Bubble. Certainly technology IPOs dried up almost entirely.

With the recent gloom on Wall Street I was therefore surprised to see Initiate Systems filing for an IPO. They are growing quite rapidly but not only have never made a cent of profit, but their losses appear to be, if anything, widening slightly at about a third of their revenues. Throw in an admitted financial misstatement and does this start to feel to you like the late 1990s again? No doubt Initiate is expertly and expensively advised, but this will certainly be one to watch, as if the IPO goes ahead and well then it will change perceptions of exit strategies for high tech companies.

The ink is barely dry on the agreement selling Business Objects to SAP, but today a long-rumoured takeover was announced: IBM snapping up Cognos for USD 5 billion, a modest premium to its stock market valuation, at 3.5 times revenues (8 times maintenance revenues). As I wrote well over a year ago, this acquisition makes better sense than most. In particular, IBM has no proprietary application stack to defend (unlike Oracle or SAP) and so in buying Cognos it does not make things difficult for its sales force by casting doubt on application independence, in the way that the Business Objects purchase by SAP does.

I suspect there was a defensive element here too. Oracle purchased Hyperion and hence Brio, but given their acquisitive nature in recent years it was by no means clear that a another big BI purchase was out of the question. Hence IBM may have swooped quickly partly to keep Cognos out of Oracle’s hands. IBM has a superb sales channel, and so the deal is likely to be a good one for Cognos sales (and hence Cognos customers). Cognos and IBM have worked together for years, so there are no obvious technical concenrs, and the main concern will be whether Cognos staff will fit into IBM’s notorious bureaucracy.

This leaves few independent major BI vendors. SAS is privately held (most of the shares are held by one man) and so until Jim Goodnight says good night to his career, ownership of SAS is going nowhere. The same is probably true of Microstrategy, who although notionally public have a peculiar share structure making a takeover difficult. Actuate is perhaps the largest one left. However there is plenty of room out there, as shown by the vibrant performance of Qliktech.

Purisma has been acquired by Dun & Bradstreet, the business information company that provide, amongst other things, assessment of credit risk of companies and company statistics. On the face of it this is a somewhat peculiar acquisition, since D&B is not a pure provider of enterprise software solutions in the way that, say Oracle, is. However D&B did have its own data quality offering (clearly data quality is a big issue for an information supplier) and Pursima’s customer hub technology is certainly complementary to this data quality offering. It seems possible that D&B has bought Purisma primarily for its own internal purposes, and at this point it is unclear whether Purisma will even continue to be sold as a product in its current form. Rather ironically, Purisma had a product offering allowing integration of D&B into its CDI application. I guess that will come in handy now.

Purisma does not publish public financial data, so it is tricky to tell whether how good or bad the price paid of USD 48 million for the company was. I believe that Purisma had less than 50 employees and I would speculate that its revenues were in the USD 15-20M range. In general it is known that stand-alone CDI and PIM players have been struggling somewhat in the market. This is part due to a gradual dawning on customers that master data management is a broader topic than just “customer” or “product”, a long term theme of this blog. When customers ask “ah, but what about other kinds of master data” (asset, location, employee etc) then specialist CDI and PIM vendors do not have good answers, however good their offerings in their particular domains are. Even IBM has done an about turn on this topic recently, laying out a roadmap for a single MDM Server that will eventually bring together its menagerie of acquired technologies into a platform that will handle multiple master data domains consistently. For this reason I suspect that D&B did not pay over the odds for Purisma.

D&B has had phases in the past of buying software companies, and then moving away from this business e.g. those with long memories will recall the 4GL Nomad, which it sold off after some years. The press release that is tucked away on the Purisma web site today is not giving anything away. If press releases played poker, this one would be a tough player. Purisma customers need to seek guidance from D&B about its future intentions, and consider their alternatives.

Business Objects Q3 results were rather soft, showing license revenue (USD 139M) just 2% up year over year. There were eight deals over USD 1 million, broadly similar to recent quarters. The business line called “information discovery and delivery” i.e. the classic reporting tools, did least well, while enterprise performance management was somewhat healthier.

However overall this is rather feeble growth (by contrast Informatica had a fine quarter, so the excuses offered by management about weak markets seem pretty lame). Perhaps there have been too many acquisitions to digest, and of course now the swallower has itself been gulped up by the much bigger fish of SAP. The price tag SAP paid look like a fairly high premium to the underlying Business of Business Objects, as reflected in its share price dip on announcement, but these results suggest that Business Objects shareholders at least can be very satisfied indeed with the price they got.

The quarterly results of Business Objects reflect the generally fairly robust health of the business intelligence sector, displayed by several other vendors in recent months. Revenues in Q2 2007 were USD 350 million, and profits were up 26% on last year. License revenue, always a key measure for a software company, was up 19% (ignoring currency variations) which is a strong positive sign. On the downside, the large deals appear to drying up, with just six deals over USD 1 million, half that of the same quarter last year. On the other hand there were 154 deals between USD 200k and USD 1 million, which is up 36%. This suggests that customers are phasing things more gradually, and also points to the tendency towards saturation of the BI tools market that I have written of previously. There are likley to be fewer and fewer giant deals to go around, as most companies that want to make an enterprise purchase have already done so.

With USD 1 billion in cash lying around Business Objects also has plenty of ammunition for further acquisitions should it decide to do so. This has been a smart strategy in my view, with acquisitions such as Cartesis having diversified Business Objects from the pure BI tools market, which seems to me to be one with limited growth potential and vulnerable to price pressure form Microsoft. Going “up market” is the way to go here.

Informatica announced an excellent set of quarterly results, demonstrating continuing rude health. Revenue of $94M was a spanking 17% up on the same time last year. License revenue was up 15% at $41M, so the improvement was more than just good services revenue. Eight deals over $1 million compared to nine last time, but deals over $300k were massively up with 35 compared to just 9 a year ago. There was also a major OEM deal, with SAP now going to OEM Informatica, a rare exception to their usual not invented here attitude. This is a good move for both parties.

The results were broad-based, with Informatica’s international operations doing particularly well. These results are a sign of continuing broad based good conditions n the broader BI market. When ETL prospers, data warehouses and BI tools are not far behind.

The forthcoming Netezza IPO will be closely watched by those interested in the health of the technology space, and the business intelligence market in particular. Netezza has been a great success story in the data warehouse market. From being founded in 2000 its revenues have risen dramatically. Its fiscal year ends in January. Revenues have climbed from $13M in 2004 to around $30M in 2005 to £54M in 2006, to $79.6M in fiscal year ending January 2007. Its revenues in the quarter ending April 2007 were $25M. Hardly any BI vendors can claim this kind of growth rate (other than Qliktech), especially at this scale. Its customer base is nicely spread amongst industries and is not restricted to the obvious retail, telco and retail banking. So, is this the next great software (actually partly hardware in this case) success story?

Before you get too excited, there are some things to ponder. Note that in 2006 Netezza lost $8M despite that steepling revenue rise. In the latest quarter it still lost $1.6M. This is interesting, since conventional wisdom has it that you can only IPO these days with a few quarters of solid profits, yet Netezza has yet to make a dime. Certainly, it would be fair to assume that if it can keep growing at this rate, profit will surely come (at least its losses are shrinking) but the past has showed that profits can be elusive in fast growing software companies. Also, the data warehouse market is certainly healthy, advancing at 9% or so according to IDC projections, but this is well below Netezza’s growth rate. More particularly, Netezza only attacks one slice of the data warehouse market, the high data volume one. If you have a small data warehouse then you don’t need Netezza, so only certain industries will really be happy hunting grounds for appliances like Netezza. This can be seen in the Teradata story, which is Netezza’s true competitor. Teradata has stalled at around $1 billion or so of revenue, growing just 6% last year (of course most of us wish we had this kind of problem). Certainly Netezza can attack Teradata’s installed base, but enterprise buyers are notoriously conservative, and will have to be dragged kicking and screaming to shift platforms once operational. So this to me suggests that there is a ceiling to the appliance market. If true, this means that you cannot just draw an extrapolation of Netezza’s current superb revenue growth. I have not seen this written about elsewhere, so perhaps it is just a figment of my imagination, and Netezza will prove me wrong. However you can look to Teradata to see that even it has entirely failed to enter certain industires, typically business to business industries where data is complex rather than high in volume. Fo example there is scarely a Teradata installation in the oil industry, which fits this category of complex but mostly low volume data (except for certain upstream data).

So, bearing this in mind, what would be a valuation? Well, solid companies like Datamirror are changing hands for 3x revenue or so, though these are companies with merely steady growth rather than the turbo-charged growth demonstrated by Netezza. So suppose we skip the pesky profitability question, accept this is a premium company and went for five times revenues? This would lead to a valuation of $400M on trailing revenues, maybe $500M on this year’s likely revenues. Yet the offer price of the shares implies a market cap of $621M, virtually eight time trailing revenues, and six times likely forward revenues.

This is scarcely a bargain then, though it is a multiple that will bring joy to the faces of other BI vendors, assuming that the IPO goes well. Of course such things are generally carefully judged, and no doubt the silver tongued investment bankers have gauged that they can sell shares at this price. However for me there seems a nagging doubt, based mainly on what I perceive to be this (in my view) effective cap on the market size that appliances can tackle, and to a lesser extent that lack of proven ability to generate profits. The markets will decide.

The performance of Netezza shares will be a very interesting indicator of the capital market’s view on BI vendors, and will show whether enterprise technology is coming in from the cold winter that started in 2001. Anyway, many congratulations to Netezza, who have succeeded in carving out a real success story in the furrow that for so long was owned by Teradata.

Postscript. On the first day of trading, no one seems troubled about any long term concerns.

I have been digging a little deeper into the Data Mirror purchase by IBM that I wrote about yesterday.

It’s a good deal for IBM, and not only because the price was quite fair. With its Ascential acquisition IBM positioned itself directly against Informatica, yet Ascential’s technology did not have the serious real-time replication that is important for the future of ETL, and this is what Data Mirror does have. DataMirror gives IBM a working product with heterogeneous data source support in real time, giving IBM an important piece in the puzzle to achieve their vision for real-time operational BI and event-awareness.

A bigger question is whether IBM fully understands what it has bought and whether it will properly exploit it. Data Mirror’s strengths were modest pricing, low-impact installation, neutrality of sources it supports and performance doing this (via its log-scraping abilities and speed of applying changes). IBM must keep their eye on the development ball to ensure these aspects of the DataMirror technology are continued if it is to really exploit its purchase. For example, on the last point, the partnerships DataMirror has with Teradata and Netezza and Oracle should be continued, despite the obviously temptation to snub rivals Oracle and Teradata.

Any acquisition creates uncertainty amongst staff, and IBM needs to move beyond motherhood reassurance to show staff that it understands the DataMirror technology and business and wants to see it thrive and grow. It needs to explain how the DataMirror technology fits within a broader vision for real-time integration in combination with traditional batch oriented ETL, business intelligence and enterprise service bus (not just MQSeries) integration or else the critical technical and visionary people will dust off their resumes and start looking elsewhere.

I gather that IBM has already announced an internal town hall meeting next week, at which it needs to convince key technical staff that they have a bright future within the IBM family. I also hear that no hiring freeze has been imposed, which implies they are making the decision of growing the business, which should reassure people. IBM is an experienced company which will recognise that the true IP of a company is not in libraries of code but in the heads of a limited number of individuals, and no doubt will recognise the need to retain and motivate critical staff. It used to be poor at this (think about the brilliant technology it acquired when it bought Metaphor many years ago, but bungled the follow-up) but has got smarter in recent years e.g. I hear from DWL people that they have been treated well.

Hopefully IBM’s more recent and happier acquisition experiences will be the case here.

on Monday IBM announced it would buy DataMirror, a Canadian software company. Data Mirror made its living by selling software that detects change in data sources and then managing replication. It differed from other ETL technology in being designed from the ground up to work in real-time rather than batch, which made it well suited to some customer situations, and the software was modestly priced. The technology was also used by some customers for backup and business continuity reasons. It had a large customer base (well over 2,000).

For IBM the acquisition adds some solid technology to its data warehouse offering and its “on demand” strategy, in this case replacing Powerpoint promises with something that actually works. Datamirror was publicly traded on the Toronto stock exchange. It did $46.5 million in revenue last year and was hoping for $55 million in fiscal year 2008, so this was a company that was delivering solid though unspectacular growth, though its share price had doubled in the last twelve months. IBM’s price of $162 million is over three times trailing revenues and so is a healthy valuation for the company, and a small premium to its stock market valuation of last week.

SAP scored an own goal this week when it admitted to hacking into an Oracle website and stealing code. This is pretty bizarre behaviour in plenty of ways, but I like the way that their PR guys, desperate to find some way of spinning this, described the theft of software as “inappropriate downloads”, making it sound as if this act was in a similar category to a rogue employee downloading a favourite music track to his laptop.

I am always impressed (and sometimes amused) by the software industry’s creative marketing ability, but usually this happens when a software product’s features are exaggerated a tad, and I feel this is taking PR spin to a new level. What next? Using the same logic, defendants in murder trials should perhaps get their defence lawyers to rename them trials of “inappropriate demise”?