Another tech company, LogMeIn, lit up the blogosphere (e.g., this story) today by pricing its IPO at $14 to $16 for 6.67M shares. It’s been a long row to hoe for LogMeIn; they filed their original S1 in January, 2008.
The revised S1 was filed 6/16/09. Here are some quick highlights:
- 2008 revenues of $51.7M
- 2008 revenue growth of 91%
- 2008 operating “income” of -$5.4M, down from -$9.2M in 2007
- 1Q09 revenue of $17.2M
- 1Q09 year-over-year revenue growth of 72%
- 1Q09 operating “income” of -$3.7M
- 2008 sales and marketing costs of 61% of revenue
- $27M in cash, pre-financing
At first blush, you might wonder how this sales-and-marketing-intensive, money-losing operation can be generating cash and the answer is, alas, a high-growth subscription business. You sell annual subscriptions (94% have a one-year term), take the cash up-front, and amortize the revenue over the year. This explains part of it.
But the rest comes in the renewal rate, which they say is currently 80% (page 61). Let’s do some quick, very rough math. If 80% of the 2007 revenue renews, then of the $51.7M in 2008 revenue, $30.1M is new and $21.6M is recurring.
Since the sales and marketing (S&M) cost of renewals should be negligible, you should more properly analyze S&M expense as a percent of new revenues, not total revenues. When you do so, you see that S&M as a percent of new-revenues is 105%. So they’re spending $1.05 to get each $1.00 in new revenue. Does that make sense? Sure, if the renewal rate stays high.
At some credibility risk, I’m going to argue that their financials still roughly validate my currently asserted 50/50/0 IPO bar, which means $50M in TTM revenues, 50%+ growth, and 0% EBITDA (or operating income).
LogMeIn has:
- $59M in TTM revenues
- 72% year-over-year quarterly growth rate (decelerating from the 91% annual growth rate)
- -37% operating income in 1Q09 and -10% operating income in 2008
So how does this gibe with the 50/50/0 model?
- They’re on-target with respect to size (good)
- They’re high on growth rate (good), but it’s decelerating (bad), but then again it’s subscription (very good)
- They’re low on operating income (bad)
Good + good + bad + very good + bad = very good. QED.
Hence, with one eye closed and some body English, I can argue that this indeed is another validation of my 50/50/0 IPO bar hypothesis.
