With the controversy around the listing of Guvera raging, it is useful to take a close look at what a successful company listing in the digital space looks like. First, a little about Guvera. The company in the six months to December 2015 generated $1.2m in customer receipts and paid $22m to suppliers, for a cash burn at the operating level of $18m. Operating loss is higher at $24m. The Guvera prospectus shows a company which has already raised $180m to date, including $70m last financial year. This figure is intriguing – most shareholders would have given up a long way before this, given that profit is still not forecast. Of the $40m to be raised (at the low end) almost $24m will go to paying off existing creditors and lenders, with $6.6m in transaction costs. Less than a quarter of the raising will be spent on the business going forward.
After the IPO it is projected that Guvera’s founders and directors will own well over 90% of the securities on issue and the company will have a valuation of $1.2 billion. It’s worth noting that Pandora, a single purpose music streaming company now valued at US$2.8b is really suffering, having fallen around 40% last October as the space heated up with the music services of the big guys (Amazon, Apple, Google etc) getting aggressive. The thinking here is that music is offered as a loss leader to bring in customers to the platforms, but then they get a multi-year revenue opportunity for other products. Pure music services don’t have the same breadth of revenue streams, and can get hurt in the cross-fire, hence the falling share prices.
What does a successful disruptive IPO look like? I will use Seek and Carsales as the model for this commentary. I hope I have some credibility here: I was the analyst who signed off on the valuation for the float of both these companies for Macquarie Bank (as it then was).
To do this, we need to look at the pre-float numbers; the 2004 accounts of Seek (it was taken public in April 2005) show the company already had revenue of $41m, with expenses of $26m for a profit of before tax and interest (no debt) of $14.5m. Importantly, revenue had grown 57% from the prior year number of $26m, while profit had almost tripled from the $5.8m pre-tax. The critical point here is visibility. I had been following the company closely since 2001, having had several briefings with the added luxury of being able to comparing it with the company which it was disrupting – John Fairfax.
Seek floated at $2.10/share for a total capitalisation on listing of $587m. The offer was heavily oversubscribed by institutional shareholders, many of which still hold the stock today. Investors are always nervous when the proceeds of an IPO are used to take out existing shareholders (or debtholders, as in the case of Guvera). But those insiders don’t always get it right. The Seek IPO raised $163m, of which a whopping $137m went to pay out existing shareholders, with only $25m raised for working capital and to fund growth. Shareholders who sold thought they had done well and they had. But they would have done better staying in – Seek is $15.75 today.
Carsales listed on 10 September 2009, raising $164m at $3.50 a share for a market capitalisation of $812m. Again, virtually all the proceeds went to pay out existing shareholders, and again, they should have stayed in since the stock price today is $12.70 (you would think these people would learn, given it was 4 years later!). Revenue was $96m the year before the listing, with EBITDA of $44m, which grew 25% the following year. In the 2017 year it is forecast to earn $186m.
For anyone thinking about the Guvera float, do your homework – try to find someone who really knows the business to provide some colour (no, not just the broker). So there you have it. Sometimes companies can be very successful without revenue or profits for a few years (Facebook, YouTube, Twitter, Snapchat etc) but ultimately they must monetise. IMHO (in my humble opinion) new economy listings really do need to have some old economy metrics, though the way they play out may be quite different. (VIEW LINK)
Great read Alex. Agree on your last point - I don't care how 'disruptive' a business is if it can't make a profit!
Excellent points Alex - well made. Visibility especially important. Always prefer seeing money left in the deal - Seek is a great case in point.