Last week saw the successful flotation of Netstore, the UK's first "pure play" application services provider (ASP). It floated despite adverse market conditions and an aggressive valuation for a company which has yet to prove that its model will work. If it justifies its valuation it will play a leading role in changing the way IT services are delivered to small and medium sized businesses.
Netstore's business, since it was founded in 1996, has been in remote systems management and online data backup, generating an expected £1.3m of revenues in the year to end June. Going forward, it will concentrate on the delivery of messaging services via hosted Microsoft Exchange 2000 to companies with between 100 and 1,000 seats, before adding applications such as Office 2000 and certain Microsoft back office products.
Most SMEs introducing hosted messaging will enjoy significant cost reductions but will also benefit from increased collaboration opportunities. It's likely that messaging will represent the least point of resistance from IT directors who will be relieved to see a messy and thankless task outsourced to ASPs who will guarantee significantly enhanced uptimes for e-mail systems.
Netstore's valuation was based on rapid take up of ASP in general and Netstore's services in particular, with projected compound annual revenue growth of 178% over the three years to June 2004. Not an impossible target, but certainly an aggressive one. The company raised £37.5m by placing 26.7 million shares at 150p, and at the end of the first day of dealings it was up 2.5p at 152.5p. Prior to the placing the price was reduced significantly in response to the recent fall in technology share values.
On the positive side, Netstore has two important advantages over the other pure play ASPs that will come to market later this year. It has the vital first mover advantage and it has a relationship with Microsoft which it wants to develop. It is also signing up resellers to sell its ASP services, which is the right strategy at this stage.
However, the most lucrative ASPs will be those who make the transition into applications higher up the value chain, such as CRM, e-commerce and financials. When businesses decide to outsource these applications to an ASP they are committing themselves to this supplier more closely than they would if they simply agree to have their e-mail hosted. Netstore has no experience in this area, nor in the field of systems integration, although it does have plans to move into delivering hosted applications in the short-to-medium term. A lot will depend on how sure-footed it is in entering this market.
Ian Mitchell is an IT analyst with stockbroker Beeson Gregory. His opinions should not be construed as investment advice.