Initial Public Offerings

The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here:

After a remarkable 2Q11, the IPO market slowed dramatically in the early part of 3Q11 before grinding to a halt at the end of the quarter due to whiplashing market volatility.  All four companies that went public in 3Q11 – Zillow, Tangoe, Carbonite and Tudou Holdings – listed in the first two months of the quarter.  Collectively, the four IPOs raised over $375 million at an average of roughly $94 million per IPO, down significantly from the average of $344 million per IPO in the second quarter.  Two anxiously awaited IPOs – Groupon and Zynga – opted to delay their coming out parties. As of the close of the third quarter, 17 companies have gone public in 2011, a marked increase from the twelve that initially listed in the first three quarters of 2010.  Internet IPO volume has been particular strong, with 13 newly listed companies, compared to only one through three quarters of 2010.

By the close of Q3, 2011’s seventeen newly public software/SaaS/Internet companies had a median stock return of -27.3%.  Three of the four companies that listed in 3Q11 fared far worse, off 49.4% or more from their initial IPO price.  Only four of the 17 posted positive YTD stock returns: Zillow, HomeAway, LinkedIn and Ellie Mae.  The best performer was LinkedIn, returning 73.5% by the quarter’s close.  While the allure of investing in social networking was partially responsible, LinkedIn’s 102.4% revenue growth and 13% EBITDA margin was undoubtedly received by investors as proof positive of the company’s value proposition.  Interestingly, the five Chinese companies that IPO’d in 2011 had YTD stock returns at or below the median for the group.  Renren posted the worst result, down 63.6% from its initial IPO price.

In the current climate, IPO aspirants must demonstrate significant market traction, given investors’ demonstrated preference for revenue growth over profitability. The seventeen newly when they listed, well above the Q3 median of public software, SaaS and Internet companies. companies had median revenue growth of 63.9% Five of the newly listed companies achieved TTM revenue growth rates above 100%.  Yet even these outperformers fell victim to the market’s volatility, as only one (LinkedIn) of these overachievers generated a positive YTD stock return as of the close of the third quarter.

Ten software companies filed S-1’s in 3Q11, bringing the U.S. software IPO queue up to seventeen (Figure 22).  The IPO pipeline consists of a healthy group of software companies across the on-premise software, SaaS and Internet sectors.  Internet companies in the pipeline are much larger and growing considerably faster than their on-premise software company counterparts, with median TTM revenue of $127 million (vs. $66 million) and a median revenue growth rate of 201% (vs.32%), and only slightly less profitable when measured by median EBITDA margin (7.8% vs. 8.6%).  If the GDP begins to grow and investors regain their appetite for newly listed companies with strong revenue growth and growth potential, Internet IPOs should continue to outperform their software counterparts.

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