Tech company IPOs are getting major attention, and much of it is negative. Although LinkedIn, Pandora and Demand Media did well, much of that was investor thirst for IPOs. Financial reporters and critics were often less than kind: Demand got into the market before a spam backlash hurt it; LinkedIn was lucky to stage its IPO before Facebook or Groupon; Pandora could be toast because of high music acquisition costs.
There’s often controversy in pre-IPO numbers, and that’s especially true in high tech. Communicating effectively to help drive good share value will only get harder.
For example, in its S1 filing, Demand Media focused on a metric it called adjusted OIBDA: Operating income before depreciation, amortization, stock-based compensation and certain non-cash purchase accounting adjustments, as well as the financial impact of gains or losses on certain asset sales or dispositions.
Plain old profit the way accountants define it wasn’t to be found, although CEO Richard Rosenblatt repeatedly described Demand as profitable. Then it transpired that the heavy losses could have been even worse if Demand hadn’t amortized its content costs over a five-year period, an accounting treatment different from that of most publishing companies.
LinkedIn reported adjusted EBITDA, but it also had an actual profit in 2010 and in the first quarter of 2011. And yet the company sounded a little odd for saying that most of its users didn’t use the site on even a monthly basis. Luckily for LinkedIn, not many picked up on that little fact, which made claims of 100 mn users sound hollow.
Tough communications can even come into play when the press paints something as more negative than it objectively is. The Wall Street Journal claimed Pandora’s payments for the right to stream music would put the company into the poorhouse, especially as rates rose over the next few years. More users would mean more music played, which would mean increased costs. But look at this table comparing Pandora’s cost of music as a percentage of revenue over time:
Even though royalty rates were already increasing over the last few years, royalties as a percentage of revenue kept dropping. Royalty calculations weren’t simply a matter of linear growth while the number of users increased, as the pundits assumed, or else the percentage of revenue wouldn’t have shrunk. No one seems to have picked up on this – including the IR team, or it doubtless could have challenged the assumptions. It was still a difficult business model, but context would have made it look better.
The challenges haven’t stopped. Groupon, for example, continues to lose buckets of money, with operating expenses growing more than twice as fast as revenue. In other words, the company loses more money as it scales up, not less. And the early investors have already taken out $1 bn.
The tech IPOs have largely benefited from a low-float strategy, with a thin supply of stock driving demand. But that won’t necessarily work in the long run. Eventually, some tech IR person will have to start offering satisfactory explanations when the questions arise.
[Article by Erik Sherman, IR magazine]
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