Market Overview

Demandware Goes Public Today


The latest IPO is Demandware, a provider will begin trading Thursday under its New York Stock Exhange ticker of DWRE. Late afternoon on Wednesday, the company set the offer price for the 5.5 million shares to be tendered publicly at $16 apiece.

This price was above the range of $12.50-14.50 that had been expected. It values the Demandware's market capitalization at $88 million.

Demandware is a provider of software-as-a-service (SAAS) e-commerce solutions. Stephan Schambach, formerly the CEO of Intershop, founded the company in 2004. The company's e-commerce platforms enable its clients to provide a seamless brand experience to their own consumers across all digital touch points, according to its amended S-1 form. In layman terms, Demandware helps retailers for whom online sales are not their core competence to sell their products through online and mobile advertising and points of sale. As is routinely the case with Internet startups, Demandware's growth has had the requisite gallop in the last few years.—an obvious criterion for going public.

The company's customer base, according to Form S-1, grew at a compound annual rate of 78.3%, from 10 at the end of 2007 to 101 at the end of 2011. The number of sites operated by these clients on the company's platforms grew to an even brisker 108.8 percent CAGR, from 19 to 361 within the same timeframe. Utilization rate per customer has picked up, a good sign, although at least part of it is due to the increased number of e-commerce channel available

Revenues on those accounts have seen a similar uptick. For 2009, 2010 and 2011, the company generated respective revenues of $21.4 million, $36.7 million and $56.5 million. That translates to year-over year growth of 71.5 and 54 percent for 2010 and 2011.

Profits also represent the expected zigzag between red and black (in this case, mostly red). The company lost $10.4 million in 2009, barely turned a profit at $0.3 million in 2010, and returned to loss at $1.4 million in 2011.

The trend here is par for the course. While the bottom line is not the most material variable at this early stage in the company's life, it points to expenses that are growing at a higher rate than revenues. The tapering of revenue growth may point premature growing pains, were it not for the limited time frame.

The difference between top and bottom (expenses) increased 14.5% in 2010 and 59% in 2011, suggesting that the sales force has not been as aggressive in growth as the expenses of servicing accounts. No case for serious concern exists yet, however, as the numbers may simply be a reflection of the expense buildup due to nascent technologies, whose cost often tapers off significantly when scaling up.

Investors may reasonably look beyond imperfect income statements for the same of getting their hands on the red-hot e-commerce and SAAS, both of which are fast expanding. Each has clocked CAGR of over 17 percent from 2005 to 2010 and looks to grow even faster by 2015 as service shifts from offline to online at faster paces. Form S-1 says e-commerce should go from $316.5 billion in 2010 to $653 billion in 2015. Over the same period SAAS solutions market is expexted to swell from $10 billion to $22.7 billion, whereas cloud-enabled e-commerce will go from $4.3 billion to $11.3 billion, a CAGR of 21.3 percent.

While the company is reasonably expected to share these pies with an ever-increasing number of competitors, the only significant competitor to date is privately-held Venda, which has been in the business longer and has more customers globally. Venda is apparently such a serious competitor to Demandware, that the latter had to amend its S-1 filing to reflect this, having failed to address it properly the first time around.

The IPO is managed and underwritten by Goldman Sachs (NYSE: GS), Deutsche Bank (NYSE: DB), William Blair, Canaccord Genuity, First Analysis Securities and Oppenheimer (NYSE: OPY).

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