Deltek (NASDAQ: PROJ) filed an IPO with the SEC on May 8. Thatâ€™s May 8, 2007, not May 8, 1997. Iâ€™m reading the S-1 quickly, and it takes me back to the heyday of ERP when Baan, J.D. Edwards and so forth were debuting their IT offerings.
I am reading so quickly that perhaps I am missing something. I see no mention of open source software or SOA. Deltek says, â€œOur software products depend upon operating platforms and software developed by third parties such as Microsoft, Oracle, Cognos, Actuate, BEA Systems and Sun Microsystems.â€
There’s no diversion from the facts to tout the benefits of the SaaS licensing model. Deltek says SaaS is â€œa model with which we have little experience.â€
There is not even a tip of the hat to the concept of professional services automation (PSA), from which Deltek sprung.
Instead, this company took a tack in its SEC filing that I admire: no buzzwords. Deltek says:
- It makes integrated enterprise application software that automates the services rather than the product supply chain (my terminology, not theirs).
- It sells the software to users for a fee in return for a perpetual right to use license and charges an annual fee thereafter to maintain the software at the user’s premises.
- It says it also consults with those users in the product’s implementation and will also run related training classes for the user’s staff.
- And it says, â€œOur business model depends, in part, on the success of our efforts to increase sales to our existing customers,â€ and that it â€œgenerated less than 5% of our total license revenue in 2006 from international markets.â€
What the PSA players of the late 1990s found, and what I saw in research at the time, is that â€œproject-focused organizationsâ€ tend to automate by the project (â€œdefined, discrete, customer-specific engagements or activitiesâ€ per the Deltek S-1) because they can pass the cost on to the client. I doubt if that mentality has changed much. In professional-service providersâ€™ IT spending, clients take precedence over the automation needs of their own enterprise â€” for the same reason; retailers spend more of their IT budget on point-of-sale software than backroom applications.
Deltekâ€™s timing is especially unfortunate because the competition is very different today than in 1997. Even back then Edwards received almost as much of its revenue from the services industry (and government) as from manufacturers. And other hot names from that era â€” such as PeopleSoft and Lawson Software (LWSN) â€” received more than half their revenue from the services supply chain right from the start. Today:
- The remnants of Edwards and PeopleSoft are a big part of No. 2 ERP supplier Oracleâ€™s (ORCL) services industries story.
- Although Baan is a part of No. 3 ERP player Infor, which is manufacturing centric (the home of Marcam and Mapics for example), even Infor has its NxTrend construction applications, Infinium hospitality software, and GEAC products for banks and insurers.
- No. 7 ERP player Lawson lost its dominant services industry personality gene through its acquisition of Intentia but Lawson is still is a major factor in the services supply chain.
- Even lacking any particular industry-specific strength, No. 4 ERP player Microsoft does well in the services supply chain.
- And No. 1 ERP supplier, SAP (SAP) offers ERP products aimed at more than 25 specific industries, more than 20 of which are services supply chain centric.
Almost all remaining remnants of that era have been reborn as IT portfolio management software suppliers aiming their functionality at the IT staff rather than other professional services workers.
The big names mentioned above have big positions in â€œgovernment contracting, aerospace and defense, information technology services, consulting, (and) discrete project manufacturing,â€ which Deltek identifies as its second through fifth most important industries. I have not yet ranked Deltek in my 2006 market-ranking research but a quick guess is that its reported $160M in software revenue might get it into the Top 25. (All the mergers and acquisitions in the saturated enterprise applications space helps a lot of independent companies move up the leader board.) Deltekâ€™s almost doubling of software revenue in 2006 was impressive albeit helped along by the 2005 acquisition of Wind2 and the 2006 acquisition of Welcom and CSSI.
I have not yet figured a backcast 2005-2006 growth rate for Deltek, but Wind2 alone increased Deltekâ€™s user count by almost 50%. There is another Baan-like ring to the S-1. Deltek says, â€œâ€¦ you will not have the same protections afforded to shareholders of other companies that are subject to all of The NASDAQ Global Market corporate governance requirements as long as the New Mountain Funds own a majority of our outstanding common stock.â€ New Mountain acquired a 75% share of Deltek in 2005.
Thanks for the walk down memory lane, Deltek. Your offering and governance structure make your IPO a bet on the rapid share-price appreciation we used to see in the late 1990s. But that coming-out ball was over long ago.Â Â
– Dennis Byron
UPDATE: Over at Seekingalpha, Rob Pflieger pointed out:
"Uhm, had you read the S-1 a little closer you would see that it did go public in 1997 and then went private in 2002. "We changed our name to Deltek Systems, Inc. in August 1984. In 1985, we introduced our first product, System I. In 1997, we completed an initial public offering of our common stock, and in May 2002, we became a privately held company through a going private transaction. In April 2005, we completed a recapitalization in which the New Mountain Funds acquired their interest in our company."
"I owned shares in the company back then. The company has a near monopoly among any project based supplier to the US gov’t. Any service provider needs to do their billing in a very specific manner which bears little resemblance to private companies which creates a profitble little niche for Deltek. The market is too small for mainstream PSA guys that you mentioned to go after. Sounds like it may be trying to break out of that niche by going mainstream which is obviously a far more crowded market."
Correcting my comment/joke about the IPO market in 1997 vs 2007 was a good catch but does not change my opinion. PSA is a bad bet to start with, the competitive set has changed since PSA’s hey day, ERP has become commoditized in the last 10 years, all the big guys are all over government contracting (and all the other important industries noted by Deltek), and the governance structure penalizes investors unless they are just looking for a quick in and out. If it is a quick in and out bet, I don’t see the kind of bounce of the old days of ERP (maybe Deltek itself experienced it).