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Q&A: NetPerceptions&#039 Steve Larsen

Since going public in late April, the stock of NetPerceptions Inc. (Nasdaq: NETP) has tumbled 50 percent, but the company says it isn't worried. And why should it be? As executives point out, shares remain above their IPO price, and the company continues to grow.

NetPerceptions -- whose software is used to tailor web storefronts for individuals -- saw year-over-year growth of 140 percent in the first quarter, and as long as it maintains that kind of pace, the company probably won't be worrying anytime soon.

ZDII recently sat down with Steve Larsen, NetPerceptions' vice-president of business development. Excerpts from the interview follow:

ZDII: What kind of competition are you seeing?

Larsen: It's the classic of the biggest competitor being the projects that are already on the plate and fighting for development share to try to get the products alive. NetPerceptions has seen most of the competitors in the space, that were purely about personalizing the Web experience, go away. Firefly was acquired by Microsoft, LikeMinds was acquired by Andromedia. So we're probably the only remaining pure play, if you will, in that space.

ZDII: Why do you think that is?

Larsen: I think it was the speed at which the market evolved, and we did get very large penetration early. I mean, we have about 10 times the customers that anyone else has. That had a lot to do with us evolving as pretty much dominating this space and getting the traction with the key accounts and also expanding the marketplace. There's a lot of factors in there that led to our taking the position that we have.

ZDII: Are you worried about future competition popping up? How much of a head start do you think you have?

Larsen:That's a good question. That's what you always worry about. A company is really based on its abilty to understand the market and deliver sort of a unique proposition to that market.

Now for us, it's based around technology. I think we have a good year to 18-month lead over anybody who was to come into this space and sort of create an engine like we have. You know, hire a bunch of computer science Ph.Ds, attack the problem, build something in a clean room that does what we do -- you could probably replicate that in 12 to 18 months. Whether we'd stay still during that time period is another question.

ZDII: Some of the big e-tailers -- I think Amazon.com comes to mind -- have created their own personalization system in-house. Are you worried about that sort of internal

Larsen: Amazon.com was our first customer...

ZDII: Was it? I didn't know that.

Larsen: ...so a lot of what we developed with Amazon, and a lot of what is in our products, came from the demands that Amazon had.

Sometimes a company will develop something in-house that is quote-unquote, just about as a good. In those cases, our value add is, is what we're charging going to provide incremental over and above what you're getting. In other words, if we cost X number of dollars, can we get you X number of dollars profit? In most cases, we're pretty confident when we go into those situations.

ZDII: What kind of value have you been able to provide some of these in-house projects?

Larsen: The value add that NetPerceptions provides fundamentally goes into three different areas.

The first one is increasing the browser-buyer ratio; in other words, when people come to a site today, maybe 2, 3 percent of the surfers actually convert to buyers. Our customers can see anywhere from 1 percent to 1 1/2, even a two percent increase in the conversion ratio by using our technology.

The second thing that people see is the increase in the size of the shopping basket; in other words, the size of the orders that are more targeted up-sell and cross-sell. And in that area, I think that we try to set customer expectations that, within a six month period of time, that we should increase the size of that shopping basket by maybe 14 to 20 percent. Meaning a $30 shopping basket goes to $34, $35.

The third thing and probably the most important thing is probably this idea of stickiness. Can we through providing more personalized and individualized experience get more people to come back and get them to come back frequently. And there I think that the numbers of our longest customers, our oldest customers, are about double what the average is for most sites that are out of here, as far as the ratio of how much of your business comes from repeat traffic versus new customers. There, they're looking at 30 to 35 percent of most sales on a website, a commercial website are coming from repeat customers, the balance coming from new. If you look at Amazon or Cdnow, 55, 60 percent of their customers are coming from repeat customers.

ZDII: Let's talk a little bit about financials. First Call says you're going to lose 62 cents this year, 36 cents next year. How comfortable are you with what analysts are saying, and when are you going to be consistently profitable?

Larsen: I don't know if we've gone on record to forecast when we expect a consistent profit rate yet.

ZDII: Are you comfortable with what analysts are saying now?

Larsen: I'm comfortable with what the analysts saying now.

ZDII: Always have to ask it that way, thank you SEC. Now in your last quarterly report you posted revenue just shy of $2 million. What kind of annual run rates are you looking at going forward?

Larsen: I think those are also (covered) in the (SEC) reports. (laughs)

ZDII: Hey, some companies tell us. It depends.

Larsen: Nice try. (laughs)

ZDII: Your stock price has fallen by half since your IPO. Is that something that you worry about or not?

Larsen: Actually, I'm real comfortable about where the stock price from the standpoint of today. We're above our offering price by a good amount, 20 to 25 percent consistently, and as the market has been beaten, some of the Internet stocks have taken a tumble and kind of dashed around a bit.We seem to be more in the category of the infrastructure players that have tended to be more stable. And I like that, because obviously, you don't like to see these wide swings back and forth.

ZDII: There are mixed signals as to whether the IPO market is slowing down or not. How do you see the IPO market at this point?

Larsen: I think there's always an opportunity for good, solid companies that are able to show that they point to a very good market opportunity, can demonstrate they have the ability to dominate or be the number one player in that space, have a good management team in place, have a good track record of growth, are delivering against a business plan that's been accepted by their investors and the marketplace. For those companies I think there's still a very strong market for an IPO.

I think a lot of people have tried to rush to get in early, and I think some of those companies may have more problems.

ZDII: How do you tell who's rushing and who should be going public?

Larsen: Do you have those things in place? Is your team all in place? Do you have either a technology or a process that has a legitimate barrier of entry. Can you point to a marketplace that's significantly large. Can you show that you can deliver against a business plan consistently for six to eight quarters and meeting the numbers that you said that you were going to do. Those are the kinds of things that say, "Yes, this company's ready to go public."

ZDII: As far growth goes, are you looking mainly at what they call "organic" growth, or are you looking to acquire pieces here and there?

Larsen: We're going to grow geographically, and we're going to grow in the product area, as well as in the markets that we serve. We have just scratched the surface in entering into the call center marketplace, we will be announcing later this year products that will take us into the corporate intranet space, as well as into, we want to develop products that will take us more into the retailing bricks and mortar space.

I guess that's organic. (laughs)

ZDII: So you expect mainly to just build on the business that you have now?

Larsen: The market's a very fluid one now. There are companies that will become available and we will look at those as the opportunities arise. But right now, we're not on the acquisition warpath, if that's what you're wondering about.

ZDII: If you were to be acquired -- is that something you would consider for the right price?

Larsen: I think any legitimate reaosnable business offer would be something that we'd have to take in front of investors and the board. I don't think we would say "Yes" or "No" categorically to anything.>