An IPO Written In NEON

While public offerings from high-profile Internet companies such as
iVillage and GeoCities tend to draw the most public attention, the bulk
of the Internet IPO action comes in the form of lesser-known companies
providing unglamorous, but critical, products and services.

One such company is NEON Systems, which plans Thursday to offer 2.7 million
shares of common stock at $15 each. The lead underwriter is Donaldson,
Lufkin & Jenrette. The company will trade under the ticker symbol NESY,
the symbol NEON already having been taken by New Era of Networks.

Based in Sugar Land, Texas, NEON Systems sells middleware that allows
Internet-based and client/server applications to access data on “legacy”
computers — a euphemism for old mainframe systems a company can’t bear
to part with.

Large companies hang onto these legacy systems not out of loyalty or
fondness, but because they’ve spent a lot of money on this database or
that mainframe, and to replace them would cost more than many IT
managers have in their budget. So there’s a lot of pressure on IT
professionals to protect their previous investments, not to mention
their current jobs.

The resulting need for less-costly interim solutions has sparked a huge
market for middleware products. A recent International Data Corp. report
estimates the global revenue from middleware sales will grow from $1.7
billion in 1997 to at least
$7 billion by the 2002.

That’s the space that NEON Systems plays in, and the company counts
among its customers many members of the Fortune 500, including American
Express, Exxon, Merrill Lynch and Texaco.

NEON Systems’ revenues have grown steadily since its inception: $2.3
million in 1996, $7 million in 1997, and $12 million in ’98. More
impressively, the company has posted profits (albeit modest) for the
past two years: $800,000 in ’97 and $1.2 million last year.

Add it all up — large playing field, growing revenues, profitability —
and NEON Systems seems like a pretty good bet.

But class isn’t dismissed yet. There are stormclouds on the horizon that
threaten NEON Systems’ long-term success. They are:

  • Intense competition. Oddly enough, other companies read those market
    reports by IDC and similar research firms. Two of them are notorious
    playground bullies — IBM and Oracle. Since these two industry leaders
    made many of the legacy systems still used by large corporations, they
    will win a ton of business by default. That could leave NEON Systems
    fighting for table scraps with other smaller vendors such as BEA Systems
    and IONA Technologies.

  • Legacy doesn’t mean forever. Sooner or later mainframes will
    disappear. Indeed, the
    $7 billion in worldwide revenues forecast for 2002 could be the
    highwater mark for the middleware market. And that’s only three years
    from now.

NEON Systems isn’t in a bad place right now, making it a potentially
reasonable short-term investment. However, unless the company can adapt
to rapidly changing market realities, its long-term prospects are
questionable.

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