Tech IPOs are not bubbling overAaron Pressman
Blame VMWare’s super-hot initial public offering — or don’t — but there’s growing chatter that the quality of technology companies lining up to sell shares for the first time is suddenly deteriorating. It’s not true. Sure, there’s the occasional dog in the filings but most are for solidly growing companies operating in smart niches.
Research by University of Florida professor and all-around IPO guru Jay Ritter shows that companies with at least $50 million in revenue for the 12 months before an IPO far outperform those with under $50 million over their first three years of trading. The sweet spot, in fact, is between $50 million and $500 million. He’s found that companies backed by venture capital firms beat those without such backing over the same period. And those are exactly the kinds of companies in the IPO queue.
Take a gander at what’s in the hopper. Over at IPOHome.com, I counted 11 tech IPO filings so far this month. All but a few look pretty solid. 3PAR, a data storage provider for big businesses, had a net loss of $18 million on revenue of about $75 million for the 12 months through June 30, 2007. Not only is the company above Ritter’s threshold, but the loss is mostly due to research and development costs, not a bad attribute at a fast-growing tech firm. EqualLogic, another storage firm, had almost $80 million of revenue for the 12 months ended March 31 with a loss of $1 million. It looks to be profitable soon. Semiconductor play Allegro Microsystems is well above the bar with $321 million of revenue and $21 million of net income for the 12 months through the end of March. And you have homeland security tech play ICx Technologies, built through numerous acquisitions, which isn’t exactly my cup of tea. ICx has 12-month trailing revenue of almost $100 million though a massive loss of $113 million thanks to a huge accounting write-down for goodwill.
Of course, there are also some dot-coms that have raised eye-brows but again they’re above Ritter’s test and show solid growth. Classmates Media, which runs the social networking web site classmates.com, had revenue of $157 million for the 12 months ended March 31 and has never shown a profit but it’s close. The company’s net loss shrank from $8 million in 2005 to $2 million last year. In the first quarter, the loss was down to $250,000 from three times that level last year. Creditcards.com, which I touched on in my domain names story back in June, has trailing 12-month revenue of $55 million and income of $11 million through the end of June. And American Public Education, an online college education service, almost makes the Ritter cut-off with $45 million of revenue and net income of almost $3 million for the year through March 31.
You do have data center manager DuPont Fabros Technology with only $17 million of revenue and no profit. Revenue at Synacor, a provider of backend support to internet portal sites, almost doubled last year to $26 million. But first quarter revenue increased at about half that rate and the net loss almost tripled to $1 million. And I don’t know what to say about online real estate service Iggys House, seeking to raise $15 million for a company with almost no revenue! My least favorite is probably e-commerce and online search engine Acoona, which has growing revenue but equally growing operating and net income losses.
These few uglies aren’t any different than the other occasional mutts that have cropped up over the past few years as the tech IPO market has experienced its renaissance. Anyone remember Vonage? So go back to your desks, settle down, focus and catch up on all those prospectuses you haven’t read yet.