Internet Brands IPO May Mark Return to Normalcy
Kevin Kelleher
11/26/07 - 05:56 AM EST
It's getting quiet out there. The IPO market isn't
what it was even a couple of months ago.
Just ask
Internet
Brands. The El Segundo,
Calif.,-based operator of small, consumer-focused Web
sites managed to go public this month, unlike a
growing crowd of other companies being forced to pull
or postpone their IPOs.
But its entry into the public markets came
with a cost. Instead of going forth with its initial
plans to sell 9.57 million shares between $10 and $12
a share, Internet Brands settled for selling 6 million
shares at $8 each.
Instead of raising as much as
$115 million, the company took in $48 million, or
about 42 cents for every dollar it had hoped to raise.
The market seems to agree with that revised
valuation. Internet Brands closed its first day of
trading at $8, unchanged from the offer price --
despite trading volume of 1 million shares, which was
more than 10 times the average daily volume since
then.
The stock closed Friday at -- you guessed it -- $8.
This is a far cry from the trend of
first-day
pops from earlier this year. And it may be a sign
that the IPO market has, for now at least, returned to
the cold-eyed sobriety it displayed earlier this
decade.
But what does it tell us about Internet Brands?
And what should investors be thinking about as they
appraise this latest entrant into the Internet sector?
Internet Brands is Barry Diller's
IAC/InterActiveCorp writ
small -- a collection of online brands specializing in
specific needs and services. But while Diller is
making plans to break up IAC into a group of more
focused and distinct brands, Internet Brands is intent
on keeping its family together under the roof of a
single public company.
Unlike a lot of Internet portals and giants, the
sites operated by Internet Brands aren't a stew of
far-flung properties, but focused on e-commerce,
classifieds and online communities. And most are
grouped in targeted topics: automobiles, travel and
homeownership. Some of the sites include
CarsDirect.com, MustangForums.com, BBOnline.com,
WikiTravel.org and DoitYourself.com.
Few of these sites are likely to show up on a Top
100 sites list by themselves. But as a group they have
provided Internet Brands with steady and impressive
growth.
Between 2004 and 2006, the company's revenue grew
to $84.8 million from $61.1 million, while its profit expanded to $38.8 million from $2.9 million.
Normally, this kind of financial performance would
cause an IPO to be greeted with open arms, but as is
often the case, there's a catch -- and it came this year.
For the first nine
months of 2007, revenue totaled $65 million, down 0.3%
from the same period in 2006, largely because of a
slowdown in advertising by automobile clients. "The
automotive industry has generally been in a downward
cycle beginning in the second half of 2006," the
company said in its prospectus.
That's too bad, because another one of Internet
Brands' key areas, homebuying and homeownership, is
going through its own slowdown. Consumers just aren't
rushing to sites like Loans.com and Mortgage101.com.
And that's not likely to change for a while.
Amid the slower revenue, Internet Brands hasn't
kept costs down. Costs of revenue grew to 29% of total
revenue in the nine months through Sept. 30, up from
25% a year ago. And general and administrative costs
(led by stock-based compensation) jumped to 34.5% of
revenue from 25.5%. Both of those results contributed to the swing to a loss of 14 cents a share in the nine-month period,
against a 33-cent-a-share profit a year earlier.
Investors in the IPO seemed to like the steady
track record that Internet Brands has built up over the
years. But there are some unsettling trends showing up
in 2007. So it's understandable that the company went
public but received the cold welcome that it did.
That's not great news for Internet Brands.
But if it means that Wall Street is starting to be
judicious again about valuing IPOs in general, that's
good news all around.
