@gordonbowman

Facebook's IPO Filing: Here Are The Numbers That Stood Out To Me

(image credit: readwriteweb.com)

In the year of Internet IPOs, the big juggernaut of them all, Facebook, finally filed for its IPO this week. The best place for a wide variety of analysis was Techmeme. 

I had some time to go through their S-1 this morning though and here are the numbers that stood out to me:

• 2011 Net Income was $1B on $3.7B in revenues
• 57% of Facebook’s monthly users worldwide use the service daily
• 70% of Facebook’s growth last year came from outside the U.S., Canada, and Europe
• Facebook recorded $4.39 in revenue and $1.18 in profit per user last year
• Zynga accounts for 12% of Facebook's revenue (Related: Zynga's IPO Filing: Analyzing the S-1)
• Pandora is mentioned twice, Twitter twice, Microsoft five times, Google fourteen, and Zynga twenty four. MySpace isn't mentioned at all.
• 3,200 employees as Dec 2011
• Facebook is currently available in more than 70 different languages
• Over $3.9B in cash on hand. And they will raise $5B more.
• 845MM monthly active uniques
• 425MM monthly active uniques on mobile 
• The worldwide online advertising market is projected to increase from $68 billion to $120 billion from 2010 to 2015
• The global mobile advertising market was $1.5 billion in 2010 and is expected to grow at a 64% compound annual rate to $17.6 billion in 2015

I've reviewed the IPO filings from all of the big Internet companies over the past year (see: LinkedIn, Zynga, Groupon, Yelp, Millenial Media) and Facebook is unsurprisingly the most impressive of the bunch. 

As somone who lives in the advertising world, I have seen firsthand the growth in Facebook advertising over the past few years. What once accounted for a small part of a client's ad buy is now a must-have along with search. From a marketer's perspective, you just can't beat the reach, targeting and cost efficiency that Facebook provides. 

Facebook is a true networks effects business. The market opportunity is enormous. And they have executed fabulously. For these reasons, I agree with Bill Gurley that Facebook clearly belongs in the highly coveted 10x revenue club. 

Also: Why I'm Buying LinkedIn

Millenial Media's IPO Filing: 5 big takeaways

I’ve gone through much of Millenial's IPO filing. Here are some key points:

1. Revenue is growing rapidly and its loss is shrinking, but Millenial is not yet profitable.  The company is now doing about $100M of annual revenue, generating $70M in revenue in the first nine months of 2011, from just $6.2M in 2008. While not yet profitable, their net loss improved from $5.4M to $417,000 during the same period.  
2. Millenial is the #2 player in the huge mobile advertising market and its growth is taking away from Apple. The mobile advertising market is forecasted to double this year to $3.3 billion and be a $20.6 billion market by 2015, according to Gartner. And while Google/AdMob is the leader in the market, with nearly a quarter of the market share, Millenial ranks No. 2, with nearly 17% of share. Millenial's growth is also coming at the expense of Apple/iAds, who comes in at No. 3 with 15%. 
3. The mobile app market is just exploding. Gartner forecasts that the total number of downloads from mobile application stores worldwide will increase from 17.7 billion in 2011 to 108.8 billion in 2015. That's a compound annual growth rate of 57%.
4. Millenial is BIG and growing pretty fast. In December 2011, Millennial reached 200 million unique users. They also processed a whopping 40 billion ad impressionsin December too. In terms of apps, more than 28,000 have Millennial integrated across more than 7,000 different mobile device types and models. 
5. The executives at Millennial are all in their late 30's and 40's. I point this out only to highlight that much of Millennial's success so far is because of seasoned executives, not fresh-faced hackers out of college that we so love to glamorize here in Silicon Valley. Speaking of which, chalk up another big win for non Silicon Valley or New York startups -- Millenial is based in Baltimore. 

Bottom Line: Millennial is growing fast and going after an enormous market opportunity. If they can continue executing well, they will be an important, independent player for years to come.

Also: Zynga's IPO Filing: Analyzing the S-1

The Groupon, Angie's List and Yelp IPOs Proved One Thing: Local Is Really, Really Hard

That's the one thought I'm left with after reading through the S-1's of Groupon, Angie's List, and Yelp.

Let's dig into the numbers. Here's a look at the losses and revenues for each:

• Groupon 
  • FY 2010: a loss of $456M on revenues of $713M. 
  • Q1 2011: a loss of $146M on $644M in revenue.  
• Angie's List
  • FY 2010: a loss of $27.2M on revenues of $59.0M. 
  • First six months of 2011: a loss of $25.8M on $38.6M in revenue. 
• Yelp
  • FY 2010: a loss of $9.51M on revenues of $47.7M. 
  • First nine months of 2011: a loss of $7.6M on $58.4M in revenue. 

And what's the main driver of these losses? 

• Groupon
  • $208M spent on marketing in the first quarter of 2011 and another $178M on sales people and the rest.
• Angie's List
  • $48M spent on marketing (of which $35 million was on TV ads) and $22M on sales.
• Yelp
  • $38.5M, or nearly two-thirds of its revenue, spent on sales and marketing.

So a very large contributing factor to the losses for each of these companies comes down to marketing and sales. The marketing side of this is pure customer acquisition (read: advertising). And the sales side is simply feet on the street. Or warm bodies hitting the phones.

As Rocky Agrawal noted in his analysis of Yelp, there is very stiff competition in the small business advertising market so earning and keeping their business is difficult and expensive. 

Of course, there is a good reason why these companies are putting so many bodies behind the phones: the local advertising market is massive. So massive in fact that when I tried to find a number for the size of the local advertising market I came across a range from $14 Billion all the way up to $130 Billion. Companies realize that "to the winner go the spoils" so they're dedicating lots of resources to local in order to get out ahead of the competition. 

Indeed, local advertising is such a big market that my own company Pandora is aggresively going after it as well. Although it's a slightly different market in that we're going after local radio dollars specifically -- an area where I think we're well primed to gain market share in.

There are of course many strengths in all of the above businesses. The rate that each of them has grown revenues is no easy feat and should be applauded. I am personally a huge fan of Yelp the product. It's by far the most comprehensive source of reviews out there and the best place to go when I want to find a new restaurant. I am no longer a Groupon subscriber because the emails got to be too much but I've been impressed by their efforts with personalization. And I've bought deals through Groupon Now a couple of times too and been happy with the experience. Marc Andreessen nailed it when talking about Groupon recently in his predictions for 2012:

I've always felt that the criticism of Groupon has been unwarranted. People have really underappreciated what Groupon has done, which is they've created a way for small businesses that aren't online to spend money online and be able to dial up customers on demand. That's a really big deal. 

But investors have to look for the strengths AND the weaknesses of a company. One weakness (if big enough) is enough to cripple even the best company despite its many strengths.

The question, that we've asked before, is can these companies get their marketing and sales costs down even in the long term? I'm of the opinion that a more automated solution is the answer. I know it might be sacrilege for a salesperson to say so, but if a local advertiser wants to book $1,000 worth of ads, should they have to go through a sales rep in order to do so? At some point it is just not scalable.

More importantly, the question gets put back startups: is there a better way to do things in local?

Also: Two Opposing Views on Groupon

Two Opposing Views on Groupon

Given all the news, I have been thinking a lot about Groupon's business model. When they initially released their their S-1 back in June it generated a lot of dicsussion on the long-term viability of their business model. I would say that most of the comments were negative, with one even going so far as calling Groupon a “Ponzi Scheme.”

However, I was most struck by two opposing views/analyses.

The first was from David Heinemeier Hansson who said to pass on this deal. Hansson argued that it is costing Groupon $1.43 to make $1.00 with no signs of getting any cheaper:

" ... They’re currently losing a staggering $117M per quarter, despite revenues of $644M, they’ll be burning through that cash almost as soon as it hits their account.

... The S-1 tells us the reality is far from that ideal. Groupon had to spend $208M on marketing in the first quarter and another $178M on sales people and the rest. Surprise, surprise — it’s costly to buy enough ads to reach the volume of consumers needed to produce such staggering revenue numbers. Likewise, hiring an army of 7,000-and-counting employees to cold-call every small business owner in the world costs a pretty penny, too.

... Groupon has a great tagline in “the fastest growing company in history,” but don’t underestimate how incredibly risky an investment it still is. There’s a very real chance Groupon will never figure out how to tune the revenue machine enough to produce even a penny of profit. They’re asking the public to value them at an alleged $25 billion (or 1/12th of AAPL, a company that generated $6 billion in real profits last quarter) on a hope, a prayer, a song, and a dance about fantasy metrics.

Buyer beware."

(via shortlogic.tumblr.com)

On the other side, there was Steve Cheney who argued that Groupon is worth $25 Billion. Cheney proposed that Groupon will be the centerpiece for the future of daily deals, a real-time bidding system for remnant inventory at places around you:

" ... And that’s the exact issue in question that people are puking over. Those reading the S1 believe this merchant to customer link is very weak, because Groupon left out key metrics for effective customer acquisition cost and merchant churn. 

That would be a sensible conclusion IF today’s email-based daily deal world were to remain static…  if that were the case all this would be extremely worrisome. But things are changing. We’re entering the next phase for daily deals, something Groupon has been public about: real time bidding on remnant inventory at places around you. 

... So the real end-goal for daily deal sites is in assembling a marketplace and exchange that has enough inventory and users to support these types of new online to offline behaviors at massive scale. And if Groupon doesn’t figure it out, someone else will. There is way more money to be made in offline commerce than there is in online commerce. Everyone knows that by now.

... The reality is we’re in inning 2 or 3 of deals and local commerce. We’re moving away from these static one-time deals toward a marketplace for your attention in the physical world. And someone is going to make a lot of money off of it." 

(via stevecheney.posterous.com)

Both have very good points. Time will tell who is more prescient here. One thing is clear, in going from founding to IPO in under three years, Groupon is the fastest growing company we have seen in a long time. But with all this growth comes lots of losses too:

(via businessinsider.com)

Summary. Is Groupon's business model sustainable? Time will tell. Certainly competitors are coming from all angles: LivingSocial is right on their heels and coming on strong, Google is pushing hard into other markets and national deals, and many are focused on certain niches (Lot18 for wine, CoupTessa for women, etc.). Combine all of these and you only get higher customer acquisition costs and tighter margins. The key will be if these customers become loyal repeat customers or not.

I am with Vinicius Vacanti on his great Yipit follow-up post that it is far too soon to tell.

We should however take a moment to reflect on what they have accomplished in such a short period of time. As Henry Blodget reflected, it is nothing short of remarkable and America does need more companies like Groupon.

I love reading S-1s by the way. You can talk all you want, but the GAAP numbers don't lie. Everything is laid out for all to see. 

Know of any other interesting analyses? Feel free to email any I might be missing. Just shoot me a note or comment below.

Also: In This Market, What's An Intelligent Investor To Do?

Zynga's IPO Filing: Analyzing the S-1

In the year of Internet IPOs, social gaming juggernaut Zynga finally filed for its IPO today. So we finally get to get a good look at its financials. And they are strong ... to quite strong. 

Here's a quick snapshot:

• Total 2010 Revenues: $597mm
• First Quarter 2011 Revenues: $235mm 
• Cash and Cash Equivalents: $996mm
• Operating cash flow: $103mm

Revenues have grown at an incredible pace, up 392% last year alone. Nearly 95% of the company's revenue comes from selling virtual goods, which has increased 127% between Q1 2010 and Q1 2011. The profit margins on these virtual goods is good at 28% but not as high as some were forcasting (~40-50%). Turns out that there is still a lot of R&D, sales and overhead costs that go into making highly addicting, successful games. 

All this adds up to good things for the most important numbers for investors, profits: 

• Total 2010 Net Income: $90mm
• First Quarter 2011 Net Income: $12mm

They also have a TON of cash stockpiled up, to the tune of almost $1 billion. As Dustin Curtis noted, if Zynga's revenue dropped to zero right now and their costs remained constant, the company would not go bankrupt until June, 2012. In short, they have enough cash on hand that they don't really need to go public right now. I think they are absolutely right to take advantage of the hot IPO market though. 

Certainly there are risks. Zynga is quick to acknowledge the importance of Facebook to its business model, saying that it generates "substantially all of our revenue and players through the Facebook platform." Indeed, Facebook is mentioned over 204 times through Zynga's S-1. 

Here are some other numbers that stood out to me:

• 62 million - Daily Active Users
• 236 million - Monthly Active Users
• 38,000 - virtual item are created every second
• 2 billion - minutes a day spent on Zynga games

My favorite part of the S-1 though was when Zynga founder and CEO Mark Pincus leads the prospectus off with a personal letter, which I think is a great touch:

At Zynga, we feel a personal connection to our games through our friends and family. I love that my brother in-law, who has five kids and no free time, religiously plays our game Words with Friends.... My kids decided a few months ago that peek-a-boo was their favorite game. While it's unlikely we can improve upon this classic, I look forward to playing Zynga games with them very soon. When they enter high school there's no doubt that they'll search on Google, they'll share with their friends on Facebook and they'll probably do a lot of shopping on Amazon. And I'm planning for Zynga to be there when they want to play.

via sec.gov

By the way, have I mentioned that I really love S-1s? You can talk all you want, but the GAAP numbers don't lie. Everything is laid out for all to see. Know of any other interesting analyses of their S-1? Feel free to email any I might be missing. Just shoot me a note or comment below.

Also: The Groupon, Angie's List and Yelp IPOs Proved One Thing: Local Is Really, Really Hard

Why I'm Buying LinkedIn

I've written before about how this is the year the Internet IPO returns.

Well today LinkedIn is going public. And it will be a doozie. In fact, at $45 per share they have priced at the top of their price range.

This values the company at $4.25 billion. However, even with the lofty valuation and the real risks, I plan on buying LinkedIn (LNKD) stock today and over the next couple of weeks as the stock fluctuates. Here are the main reasons:

1. It is a True Network Effect Business - LinkedIn becomes more valuable the bigger it gets. Not only to the members themselves but more imporantly, to recruiters. The larger the talent pool is, the more valuable LinkedIn is for finding potential job candidates.

2. The Market Opportunity is Enormous - LinkedIn is in one of the largest and untapped markets. The worldwide talent acquisition market is estimated to be at $85B. And the hiring solutions market is estimated to be at $27B. Compare this to LinkedIn's ~$100mm revenues from "Hiring Solutions", and you see their market penetration is very small. So there is a lot of room for LinkedIn to grow. 

Moreover, as the chart from SAI below shows, hirings solutions is LinkedIn's fastest growing business (see point #1 as to why). 

3. It is Becoming a True Platform - LinkedIn is slowly becoming a true platform. Just as Facebook and Twitter have done, LinkedIn is creating a platform that allows their data to be accessed by 3rd parties via APIs. As the company has matured, so has their APIs. This should open up all sorts of possibilities to other developers and solidifies LinkedIn as the Internet's "professional graph."

Platform companies are very rare. As LinkedIn becomes more ubiquitous around the Web, the platform will start to manifest itself in the financials eventually.

4. Valuation is More Reasonable at a Second Glance - As this anonymous institutional money manager explains, LinkedIn's valuation is much more reasonable when viewed in light of these platform / network effect / hyper growth companies (hint: see OpenTable):

To account for the rapid growth, we need to look out a few years and see where earnings can be to derive a target for the stock in a few years. It seems that the industry expects the company to generate over $950m in revenues, EBITDA margins near 25%, and EPS of > $1 of EPS in 2014. However, I think these estimates may prove conservative, as a company typically gives guidance to its bankers that it feels is readily achievable (so it is more likely to beat Street estimates). 

Hence, I think that the company can probably do over $1b in revenues in 2014, likely still growing >20% for $1.2b in revenues for 2015.  At a 27% margin (the company said long term margins should be > 30%), that would equate to ~$325m of EBITDA, EPS > $1.60 and FCF >$210m. Quality Software as a Service (SaaS) companies like Salesforce or Concur can trade anywhere from 5-7x forward sales. So with $1.2b in revenues in 2015, a 6x multiple would imply an Enterprise value of $7.2b in 2014 - adding in the cash and cash flow over that time and that would be a over an $8b equity value for >$80 a share 3 years from now.  That would imply over 125% return from the IPO if done at $35. Similarly, applying a 50x forward PE multiple (reasonable as EPS should still be growing 50%+ at that point) to the EPS of $1.60 in 2015 would imply a target >$80 a share.  Applying a similar free cash flow multiple would also support this level.  Lastly, the top SaaS names can warrant a forward EBITDA multiple of 20-30x.  Applying a 25x forward multiple would also derive a stock greater than $80 in 2014.

via businessinsider.com

5. The 3 Largest VCs are not selling any shares - It should be a telling sign that the 3 largest venture capital investors are NOT selling their shares. Very little management is selling either. These folks are very experienced investors who are in it for the long haul - and so am I.

Summary. LinkedIn is a unique platform company with strong leadership that is executing well in a very large market. While LinkedIn's stock may look expensive in the short term, I think it is a great long term investment. The valuation is certainly lofty but I think it is one that LinkedIn will easily grow into.  

On Pandora Filing to Go Public

Last Friday Pandora filed to go public. Or more technically, Pandora filed a Form S-1 with the SEC. There was a large amount of buzz around the news.

An S-1, according to Wikipedia:

"An S-1 contains the basic business and financial information on an issuer with respect to a specific securities offering. Investors may use the prospectus to consider the merits of an offering and make educated investment decisions. A prospectus is one of the main documents used by an investor to research a company prior to an initial public offering."

Essentially an S-1 gives investors all the information they need to evaluate an investment. This information includes:

• A detailed description of the business
• Risk factors
• Use of proceeds
• Capitalization
• Complete financial statements
• Executive team backgrounds and compensation
• Board of directors
• Current stockholders and investors
• etc.

Since I have written about recent Internet IPOs and Pandora multiple times in the past, I have gotten many questions from friends, family and collegues on Pandora's IPO. However, Pandora's publicly available S-1 answers these questions about the company better than I ever could. 

So there, our S-1 is available online here -- it tells you everything you might want to know. 

Note: Below is the full text version of the filing but use the SEC's official version for the most up to date information.

On Internet IPOs

This seems to be the year the Internet IPO returns.  

It is a very exciting time to be in the startup world. San Francisco is abuzz these days with talks of major 2011 IPOs from companies such as Groupon, LinkedIn, Demand Media, Skype, and others. The other big two, Facebook and Zynga, are almost surely to IPO in 2012. Everywhere I turn people are talking about who is going public and when.

On the news of recent high valuations via private financings, the broader press is signaling alarm bells, citing another "bubble." John Battelle wrote a great post pointing out that no, in fact, we haven't seen this movie before and that the companies now earning billion dollar valuations do, in fact, deserve them.

Among his better points:

"Each of the companies earning these valuations have revenues in the hundreds of millions or more, and operating profits in the tens of millions, if not more. Most also have operating histories of many years, and/or executives and boards who have extensive histories operating in the Internet economy."

Fred Wilson agrees:

"But it is very possible that some or all of these deals will be good buys even in the face of an overheated valuation environment. The public Internet names, most of which went public eight to ten years ago (or more), are mostly carrying full but not crazy valuations. If this new crop is priced off of those comps, then they could be worth buying and owning. And, as John points out in his post, if these companies contiue to grow rapidly and throw off ever larger amounts of cash, then they could easily be worth well north of what they are worth today."

It has been over ten years since the dot-com bubble and crash. The markets have largely been closed off since (first due to quality supply, then the recession) so now there is a very strong pent up demand. The companies seeking IPO this year are strong, quality companies to fulfill that demand. These companies are earning revenues in the hundred of millions and are generally the market leaders in their respective markets.

So, despite the many very serious problems with the IPO process, 2011 will mark the second coming of the Internet IPO. However, this time around, the companies are all very, very real.