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Thursday, September 07, 2006

IPO Terms for Shutterfly IPO: Still Questionable, and Then Some

Shutterfly has shown its proposed IPO terms this morning, and the amount that is indicated is slightly less than the $92 million it listed on June 29 in its "up to $92 million" to be raised. If you used 5.8 million shares at the high-end of the $15.00 range, you would get a total of $87 million. It is one of the leading online photo service that lets consumers share, store, edit and print digital photos. The California-based company plans backed by Netscape founder Jim Clark plans to offer 5.8 million shares at a range of $13.00 to $15.00 per share.

The deal has now a proposed market cap for the company of about $390 million and will trade under the ticker "SFLY." J.P.Morgan is the lead underwriter and Piper Jaffray and Jefferies are set to co-manage the deal. What is interesting is that Goldman Sachs is no where to be seen, even though they were on an amended S-1 filing last month and on the June 29 original S-1 filing. That cannot be a coincidence, and this may raise a flag. There could have been some conflict of interest for the reason behind it, but that would be overly optimistic thinking.

Goldman Sachs is still listed as a 375 share owner of the company, but that is far too small for a "conflict" to keep them from participating as that is very far under 1% of the company and they could have forfeited the shares. Jim Clark and entities affiliated with him own 7.1+ million shares, which is listed as 40.3% of the company. There is also a significant number of preferred class shares that will convert subject to a $12.00 price and $25.0 million raised.

We now have the financial results for the year up to June 30, 2006 and that was not available as of June 29.

The company claims $19.4+ million in total liabilities (down from $27.1 million at the end of 2005), with $14.8 million of that being regular short-term obligations and normal costs. Its cash and equivalents were $23.9+ million and just over $5 million more in other current assets, but its cash and equivalents carried at the end of 2005 was listed as a much higher $39.153 million. It valued its plant and equipment at $22.5 million, which is almost $1.8 million higher than at the end of 2005. it also lists a deferred tax asset at $24.5 million, which is also up almost $1.9 million from the end of 2005.

The only good news here is that the company is still showing revenue growth. For 2005 we noted that the company posted a $28.9 million in net income, but $24 million of that was from a tax benefit and another $442,000 was from an accounting change. For the first half of 2006 the company stillhas a net loss, although while we said earlier "the only good news..." it does need to be offered in fairness that the company depends heavily on the last quarter for revenues and income like so many other retail-related plays. For the first 6-months of the year the company posted revenues of $36.5 million (up from $27.2 million the first half of 2005). Unfortunately its operating expenses and investments outpaced the revenue growth. It posted a net loss allocated to shareholders of -$3.658 million for the first half of 2006, compared toa first half loss of -$1.29 million in 2005.

It really appears as though any IPO player here is going to be banking on a solid end of the year. Its top-line growth is so far being offset by an increase in spending and there are some questionable thoughts with Goldman Sachs all of a sudden not appearing in the deal.

From June 29, 2006 on the site HERE:

Shuddering After Reading Shutterfly's IPO Prospectus

Shutterfly, one of the leading online photo services, has filed to come public via an IPO. This was one of the first online photo sites, and one of its backers is Jim Clark, co-founder of Netscape. It has filed to raise up to $92M from stock sales, although we'll have to wait to see how many shares actually get sold and at what price.

According to the prospectus Goldman Sachs, JPMorgan, Piper Jaffray, and Jefferies are underwriting the offering. The company was evaluating its alternatives just yesterday, and now we know what avenue they have chosen to reach their "liquidity event."

The prospectus says that 17.820 Million shares were outstanding as of March 31, 2006; but that exlcudes 3.198 million shares issuable upon options with exercise prices of $4.41, 1.755 million shares from the 1999 stock option plan, 1.358 million shares exercisable for the 2006 option plan, 0.116 million and 0.0408 million other shares.

For 2005, the company posted revenues of $83.9M and net income of $28.9M, but this was inflated from a tax benefit. Its first quarter 2006 revenues were $16.88M (compared to Q1 2005 of $13.15M) with quarterly net income of -$1.668M (compared to -$683K for Q1 2005). That loss would have been wider had it not been for a tax benefit from income taxes, and that was not available in prior quarters. A tax provision was also directly responsible for $24.06M of the company's $28.9M net income in 2005.

Why is it losing more money? Quite simply it is because costs are up in all major areas and the revenue gains are not off-setting these. Also, it is in the same barrel now with all other tech companies as it has to expense these stock options. The company is highly dependent on seasonality, with 49% of 2005 net revenues coming in the fourth quarter.

The company also expects to need much larger capacity that has not yet been built to meet 2007 demands and has estimated $30 million to $35 million for capital expenditures in the second half of 2006 and first part of 2007. It also has dozens of competitors to the tune of Hewlett Packard, Eastman Kodak, Wal-Mart, Target, Yahoo!, AOL, CNET, Google, Walgreens and a couple dozen others in the US alone.

After looking through the prospectus, it starts to feel like the entire document is a risk factor. The RISK FACTORS section goes from page 8 through page 26. Companies have to list their perceived risks, but this went on and on. The growth rates for the company are slowing at th etime it has said it needs to rapidly increase cap-ex costs. It didn't list "Seeing the dead" or "Being visited by the Price of Darkness" as risks, but it felt like it was going to. This also listed an unspecified number of shares that would be available for additional sales as "immediately after this offering," "45 days after the offering," "90 days after the offering," and "180 days afterthe offering;" which is faster than the traditional 180 lock-up period of many IPO's. It is also bring a $28.5 Million deficit in total stockholders' equity, although this is often true of many Internet and IT-related IPO's.

Maybe this is the sort of IPO the street wants, and maybe it isn't. Unfortunately, it reads in the prospectus as though you are buying into a nearly artificial income and into a RISK FACTOR more than an operating company with legitimate profits. Hopefully they won't lose our pictures after they read this.

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