In Search of...DW Appliance Profitability

Netezza last week helped shine a light on the still-murky financials of the DW appliance segment when it announced its intention to go public.

To listen to some critics tell it, data warehousing appliance vendors have enjoyed a prolonged honeymoon.

Because so many DW appliance specialists are privately held companies, skeptics allege, they don’t have to publicly disclose their financial information. As a result, they aren’t held to the same standards of transparency as are publicly traded firms. Some critics prefer an even stronger form of this argument, charging that the bulk of DW appliance vendors are unprofitable.

Call it FUD, if you will, but DW appliance pioneer Netezza Inc. last week helped shine a light on the still-murky financials of the DW appliance segment when it filed its Form S-1 with the Securities and Exchange Commission (SEC). The S-1 is a prerequisite to Netezza’s planned initial public offering (IPO), which the DW appliance pioneer says will raise about $100 million.

Quite aside from Netezza’s IPO, the S-1 also provides a tantalizing glimpse into the company’s—and, for those of a speculative bent, the DW appliance segment’s—profitability. In this respect, it confirms at least some of the criticisms of DW appliance critics.

One such skeptic—Ed White, director of product marketing with Netezza rival Teradata (a division of NCR)—alleges that DW appliance vendors are able to undercut their competition, price-wise, in part because they don’t have a responsibility to stockholders. “I think the media and the press and the analysts have given appliances an extended honeymoon. For example, how many of them are even profitable? What kinds of sales do they have?" White asks. "Is their strategy ever to become profitable and maintain an ongoing business—or is it to be acquired? If they were public companies they wouldn’t be getting a free ride, because they’d be reporting [their financials]."

Veteran industry watcher Mike Schiff, a principal with data warehousing consultancy MAS Strategies—and a certified financial advisor—says Netezza’s S-1 helps confirm, to a degree, such criticisms.

For the record, Schiff rejects much of White’s argument as competitive FUD-mongering: privately held companies such as Netezza do, after all, have a responsibility to their venture capital (VC) backers, he notes. And while a privately held firm can well serve its VC masters by getting itself acquired, chronic unprofitability isn’t quite the Rx for acquisition success that it was several years ago.

More to the point, Schiff says, it’s misleading to write off the appliance segment as an unprofitable market space. The start-up costs associated with effectively birthing a market—as Netezza, the DW appliance pioneer, arguably did—are considerable, and it’s only within the last two years that DW appliance hype has started to kick in. In other words, Schiff says, there’s little doubt that Netezza and other appliance vendors have profit-making potential.

What Netezza’s S-1 does disclose, however, is that nearly five years after the debut of the first Netezza Performance Server (NPS) system, the DW appliance is still an unprofitable venture for them. To wit: Netezza lost nearly $14 million last year, its fiscal 2007; what’s more, it lost $20 million in its 2006 fiscal year (FY), $7 million in FY 2005, almost $14 million in FY 2004, and $17.5 million in FY 2003. As of January 31st 2007, Netezza had $5 million in cash on hand and an accumulated deficit of nearly $81 million.

On the other hand, Schiff notes, Netezza’s revenues have been growing by leaps and bounds: the DW appliance stalwart posted $13.6 million in total revenues in its FY 2003; $36 million in FY 2005; almost $54 million in FY 2006; and—in its fiscal year 2007—nearly $80 million. Equally impressive has been the growth of Netezza’s services revenue, which—in FY 2003—accounted for just 4.4 percent of its bottom line; in FY 2007, revenue from services accounted for almost 19 percent of Netezza’s total take.

Schiff, for his part, says Netezza’s IPO could provide a springboard to profit-making. “Yeah, their losses are out there to be seen, but so is their growth, which if you look at it [on a year-over-year basis] is really quite impressive,” he indicates, citing Netezza’s double-digit services growth as still another encouraging trend. “They’re going to be raising a nice cushion of money. And that will help them, too. One hidden benefit is that as they talk to Wall Street, as they do their road show for Wall Street analysts, this could actually help them get the story out to clarify what a DW is.”

A DW appliance is one technology solution that sells itself, Schiff says—and if Netezza were smart it would make its pitch to Wall Street analysts in terms they’ll immediately understand: “It’s not meant to be a sales call for the company’s products, but it could turn into one. If they were clever, they would use all sorts of analogies about how it could be relevant [for the work that analysts do].”

The Incredible Expanding Appliance Market Segment

Netezza’s S-1 reveals other nuggets, too. First of all, the company indicates, no single customer accounts for more than 10 percent of its overall revenues. That’s a far cry from a company that—four years ago—was hard-pressed to cite more than a handful of customers. What’s more, Netezza customers tend to come back to the well: as of January of this year, Netezza says, two-thirds of its customers had purchased more than one NPS appliance.

Netezza has also aggressively partnered with other BI vendors to help grow its revenues, too. The company has long-standing partnerships with Business Objects SA, Cognos Inc., SPSS Inc., and others, and—earlier this month—notched a new bundling agreement with Business Objects. (

That accord—which includes both hardware (Netezza’s small-profile DW appliance) and software (Business Objects’ Crystal Decisions)—will take Netezza into the proverbially tough-to-crack mid-market.

Netezza is in a quiet period and couldn’t be reached for comment, but—to listen to its appliance competitors tell it—the days of the DW appliance Bildungsmarket are effectively over. Even if the first few years of appliance marketing did have elements of sturm and drang to them, the appliance has effectively arrived, appliance proponents argue. “If you look at where we’re at [in the DW appliance market], when I was doing Netezza, it was all about being faster, better, cheaper. I don’t think there’s any question this helped establish it” in the minds of customers, says Foster Hinshaw, former Netezza CTO and CEO of DW appliance start-up Dataupia Corp. “Now you’ve taken care of the extreme performance problem for the guys who do discovery analytics. What do you do about the rest of us just doing standard data warehousing? Everything from real-time BI, to normal BI to archiving at a commodity price. That’s the next generation [of appliances], and that’s a potentially huge opportunity.”

The ramp up to revenue—much less profitability—has generally been a slow one for Netezza and its appliance competitors. It wasn’t until nearly a year after Netezza rival DATAllegro Corp. unveiled its first appliance systems that it was able to publicly cite a single customer reference, for example. Nowadays, DATAllegro chief Stuart Frost privately cites a number of prominent customers, but is still limited with respect to customers that he can publicly identify. (Revenue management specialist Teoco Corp., along with retailing giant Sears, are two of DATAllegro’s reference customers. Frost cites several others on background, but can’t publicly acknowledge them, however.) The salient point, Frost argues, is that the appliance has arrived and that—concomitant with that arrival—DATAllegro is adding more and more customers to its rolodex.

Now that it’s transitioning to a more-or-less commodity DW model (, Frost claims, DATAllegro can lower its prices, streamline its installation and manageability experience, and—he claims—address new and different customer requirements. “It’s not really a question anymore [about the viability of the appliance model], because customers just accept it. The challenge now is to show [customers] who maybe weren’t the early adopters, who maybe didn’t have the kinds of pain [points] that they [the early adopters] had, how [the appliance] can help them,” he concludes. “There are so many companies out there who can benefit from this [appliance approach], the potential seems unlimited.”