Pando

The US IPO markets are so dismal that Deezer looks interesting

By Kevin Kelleher , written on September 24, 2015

From The IPOs Desk

The sluggish IPO market this year is looking more like the drought afflicting California: Just when you start to adjust to the new reality, things get even drier.

Last year, 55 technology companies listed IPOs on US exchanges to raise an aggregate $32 billion, according to Renaissance Capital. In the first half of 2015, only 14 IPOs braved the market, raising a total of $2.6 billion. 

That sparked a lot of talk about how private tech companies are shunning the burdens of trading in the public markets in favor of so-called private IPOs, massive private rounds that include many of the big investors who in previous cycles participated in big tech IPOs. But as we approach the end of the third quarter, only one tech company has gone public, bringing the total to 15. That means tech IPOs so far this year make up only 11 percent of the total, the lowest ratio since 2008.

And the tech companies that have gone public this year aren't faring so well. After enjoying an average 22-percent pop on their first days of trading – an increasingly ineffective, feel-good ritual on Wall Street – many have since fallen back. According to Renaissance, the average total return of those 15 IPOs is a mere 0.7 percent.

That seems to be the fate of most of the tech IPOs of the past few years. Twitter is the most notable case: After nearly two years in the markets, its stock is only 80 cents above its $26 offering price. One has to wonder whether Twitter would have faced the turnover in its upper ranks if it had managed to remain private for another two years.

And it's not just Twitter. Box is still 9 percent below its $14 a share offering price, despite having recently beaten earnings and increased its guidance for the full year. Lending Club, the pride of the P2P-loan sector, is down 12 percent from its $15 offering price. Zulily went public at $22 a share in November 2013 and agreed to be bought by Liberty Interactive last month for $18.75.

While there are exceptions – Hortonworks, New Relic and GoPro are trading between 36 percent and 71 percent above their respective IPO prices – the rule seems to be that tech IPOs quickly become cheaper than the price investors paid in their debuts. The clearest example is Alibaba, down 12% below its $68 offering price.

The pipeline doesn't look much better for the rest of the year. Of the 122 companies on file for US IPOs this month, according to Renaissance, only six are tech companies. And they are a mixed bag. There is Pure Storage, a maker of enterprise-storage hardware, which has seen revenue grow by 167 percent to $159 million in the first half of 2015 and which was valued at $3 billion in its last private round in 2014. And there is also Boxlight, a maker of interactive projectors for classrooms, which recently cut its deal size in half. (Both companies are going public with net losses.)

What the pipeline is missing is a private tech company that has a brand name recognizable by smartphone users. An Uber, or an Airbnb, or a Pinterest. Those are still frolicking in the vast unicorn farms near Sand Hill Road. And so, the closest we'll have to a brand-name tech IPO this year won't even happen on US markets. It's Deezer, the French music-streaming company.

Deezer filed a prospectus in France recently for an offering that could value the company at $1 billion, just enough to let it squeak into unicorn status. Deezer has a music library of 35 million tracks and, thanks to its purchase of Stitcher Radio last year, 40,000 podcasts. The company says its service is available in 180 countries and has 6.3 million subscribers. Revenue rose 41 percent in the first six months of 2015 to $104 million. And after years of burning through cash, Deezer generated $5.9 million in operating cash flow in that period. 

That's the good news. Here's the not so good. Deezer posted a net loss of $10 million in the first half of the year, bringing its aggregate loss since 2012 to $97 million. Deezer doesn't just offer an alternative to the thin gruel of US IPOs, it offers an insight into the grim economics of streaming music. Labels like Sony, EMI, Warner and Universal own 15 percent of Deezer's pre-IPO diluted shares, and they extract a good portion of its revenue as well.

Nearly half of Deezer's revenue comes from France, its core and oldest market, where growth is slower: about 21 percent in the first half of 2015. The France business is EBITDA profitable, but it may slow further as an exclusive partnership with carrier Orange to bundle Deezer into its mobile services is slowly winding down. Growth in Europe ex-France and in Latin America is much faster, but these operations are losing money on an EBITDA basis.

Deezer has partnerships with other companies like Sony and Samsung, but it's pushing to have more revenue come from standalone subscriptions. The problem is that Deezer is facing tougher and tougher competition from giants like Apple and Google, which can afford to support a money-losing service for years, not to mention Spotify, which has 20 million paying subscribers.

Of the 6.3 million subscribers, only 3 million are active subscribers – with “active” defined as anyone who played at least 30 seconds of a single track in the past month. The risk is that increased competition from Apple or others could lure away Deezer subscribers, especially those inactive ones but even some of the “active”.

On the other hand, If Deezer is able to hold onto its French subscribers and win more in Europe, Latin America and North America, it could gain enough scale to help push it into the black in coming years. That prospect could help make it one of the few consumer-tech companies to manage an IPO in 2015, the year of the anti-IPO. It won't, of course, appear on US markets, but even so it's enough to make Deezer unique among the consumer-tech unicorns.