What impact will NexJ have on the next crop of Canadian tech IPOs?

According to one research analyst yesterday, NexJ Systems (NXJ:TSX) “could begin to work in H2/13”, although the stock remains a “Hold” in the interim. At $3.85/share, with a market cap. of $77 million, the investor experience with the NexJ IPO may have a bearing on the handful of Canadian tech companies that are thinking about their own IPO roadshow in the coming weeks (see prior post “Two Tech IPOs moving to the launch pad” Feb. 24-13).

It hasn’t been quite two years since NexJ went out at $9.00/share, and, at the time, the media buzz was excellent (this from Matt Hartley):

NexJ’s cloud-based customer relationship management software (CRM) is used by organizations in the financial services, insurance and health care industries, including Morgan Stanley Smith Barney LLC, Wells Fargo Advisors LLC and ATB Financial Investor Services.

Between 2007 and 2010, NexJ’s revenue grew from $930,000 to $22.5-million, with compound annual growth of about 189%.

Underwriting the deal are GMP Securities L.P. and Canaccord Genuity Corp., and includes Raymond James Ltd., RBC Dominion Securities Inc., Scotia Capital Inc., TD Securities Inc. and NCP Northland Capital Partners Inc.

Founded in 2003 by chief executive William Tatham, NexJ was created by the founding management team of Janna Systems Inc., a Toronto-based technology company that was once listed on the Toronto Stock Exchange and which was eventually sold to rival Siebel System for $1.76-billion.

According to the NexJ prospectus, Janna’s sale to Siebel was the highest-value acquisition of a Canadian software company in history at the time the deal closed. Janna also specialized in CRM sales to the financial services industry, with a client roster that at one time featured Merrill Lynch, Morgan Stanley, Lehman Brothers and JP Morgan.

Last year, NexJ was ranked #4 on the Deloitte Technology Fast 50 list, which ranks the 50 fastest growing technology companies in Canada. The company boasts 289 employees, with most of them focused on research and development.

As I remember at the time, the NexJ IPO valuation certainly demanded that investors recognize that Janna was a big deal back in September 2000 when it was bought by Siebel. Thus the “Next Janna” name and all, suggesting more riches were sure to follow once more. Gartner called the US$972 million Janna/Siebel deal (not $1.76 billion as per the Post’s report) a “shrewd move by both vendors — but a mixed blessing for enterprises.” Janna’s trailing revenue was ~$20.3 million prior to the all-stock takeover, and even during the NASDAQ heday, a 49x revenue multiple on a take-out was something to behold — and earned the Janna founders understandably lofty status within the Canadian tech community.

When NexJ tapped the public markets more than 10 years later, the world had changed. But that didn’t prevent NexJ from getting a fabulous valuation of more than $140 million (EV of just over $115M), predicated upon $22.5 million of revenue for the FYE December 2010. Of that $22M in revenue, $9.3M came from licence sales, which were actually down 8% from the prior year. Best-in-class software firms, such as Salesforce.com (CRM:Q), trade at less than 10x run-rate revenue today, and they’re often based upon the commonplace and less-volatile subscription model that most enterprise customers have come to expect when buying software.

NexJ, like Janna before it, sells on a licence model basis, which makes for lumpier financial results and tougher end-of-quarter negotiations with large potential customers. Whether or not a 7x revenue IPO multiple was justified for NexJ is now irrelevant. The question for investors is: what’s to come? NexJ’s most recent quarter had revenue of $6.9 million and a loss of $4.2 million. According to CanaccordGenuity Research, if you back out the recent Bradstreet Data acquisition, NexJ’s organic revenue declined 33% in the quarter.

Having raised $43.5 million on its IPO, and sitting with a market cap of ~$77 million today, that “Janna Halo” has shrunk from $140 million to $35 million (ie., $77M market cap. today less the $43M raised via the IPO). Put another way, with $44 million of working capital ($46M in cash) as of the December fiscal year end, the business is being valued at 2x revenue on an EV basis.

That’s a far cry from the 6-7x number of 23 months ago.

That things haven’t come as fast for NexJ as they did for Janna shouldn’t surprise anyone. Things have changed across the board. Not only is it a different decade, the investment backdrop has changed dramatically from 2000. How software is sold is different, and investors are less tolerant of the “things aren’t going well so let’s fire the head of sales again” dodge.

I’ve wondered if this will affect high quality names like Halogen when they try their hand in the coming weeks. I hope not. There’s no question that investors can make real money on IPOs, as Constellation Software and Q9 demonstrate. With names such as Dalsa, Miranda and MKS no longer available, and COM DEV about to follow suit, the TSX needs fresh blood.

Of that there is no doubt.

Investors shouldn’t blame Halogen for the i-bankers losing the negotiating battle with NexJ two years ago. Look at each story individually, assess the macro and micro momentum, and think about what might be, not what once was.

MRM