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Forces On Wall Street: NetGravity Launches IPO Plans

Given the push and pull of Internet stocks based on the stock market's 'Prosaic meets Viagra' muse it will be an exercise in the laws of physics to see NetGravity's planned initial public offer.

The Web ad/marketing software maker wants to sell 3 million shares at $10 through a team of underwriters led by BancAmerica Robertson Stephens. Will its IPO defy gravity as many Internet stock offers lately do?

First, a look at NetGravity's revenue. The company reported $6.4 million in 1997 and $2 million first-quarter 1998. Nothing to write Newton about just yet. But keep the pen handy.

We forecast it may post $10 million revenue this year, implying a 17x revenue multiple on IPO market capitalization. Subtract working capital and add debt and the multiple is 14x. Compare that to the average Internet software stock's 8x. One-to-one Web ad and marketing software maker Broadvision (NASDAQ:BVSN) trades at about 9x.

NetGravity's IPO Snapshot

Pro forma IPO valuation estimates  
Offering 3.00
Greenshoe 0.45
Total offer with greenshoe 3.45
Target IPO price per share $ 10.00
IPO gross proceeds w/ greenshoe $ 34.50
Shares out pro forma 13.26
Plus options 4.15
Fully-diluted shares (FDS) 17.41
IPO market cap $ 174.08
Plus long-term debt $ 1.87
Less working capital $ 28.68
Less option inflow $ 3.16
= IPO enterprise value $ 144.11
1997 $ 6.36
Three months ending 3/31/98 $ 2.00
Estimated 1998 revenue $ 10.00
1997 $ (6.87)
Three months ending 3/31/98 $ (2.83)
Revenue multiples  
IPO market cap/1997 revenue 27
Enterprise value/1997 revenue 23
IPO market cap/est. 1998 revenue 17
Enterprise value/est. 1998 revenue 14
all figures in millions except  
multiples and share prices  
© 1998 Mecklermedia. www.internet.com  

The key in our view is the fast-growing advertising and marketing potential on the Web which we think is largely untapped given its huge window opening moving forward.

Internet Stock Report estimates Web ad and direct marketing could surpass $16 billion by 2000, which seems large compared to today's Internet ad or marketing numbers but still is only a fraction of the overall $200 billion-plus ad and direct sales/marketing industry--an industry with "Internet" written all over its future.

Despite small revenues for 1997 and even 1998 given that backdrop, we think looking at NetGravity's customers gives us a clue as to where it may be headed and who's on board already--more than 225 in the U.S., Europe and Asia. Names? DirectTV, E*TRADE, Ingram Micro, Sallie Mae, Ticketmaster, Bloomberg, British Telecom, Infoseek, @Home, and CNN.

We expect 1999 and 2000 to really turn on the switch for ads and marketing in a personalized and targeted fashion, something NetGravity is focused on.

Revenue currently splits between software licenses (38.7%), upgrades (20.1%) and consulting services (41.2%) in 1Q98. As time goes on, consulting services may be a bigger portion of the pie as Web sites seek tailored efforts.

Pre-IPO investors include Vector Capital (Ziff Brothers Investments, now you know where some of the cash went from the sale of Ziff-Davis), which owns 26% pro forma; London Pacific Life & Annuity Company (10.4%); CEO John W. Danner (10.4%). All directors and executive officers as a group control 52.1% after IPO.

Gravity or not, perhaps the biggest factor potentially giving rise to the offer is the valuation relative to the overall industry growth potential. IPO capitalization of $174 million doesn't seem that big a leap in our view.