A snapshot of Shutterfly

Tim Mullaney

What, you expected a better pun in the headline than that?

The online photo service Shutterfly.com filed for IPO yesterday, and it looks, hmmm...sharp but not too sharp.

It had $84 million in 2005 revenue. It made $28.9 million in net income, but before you break out the checkbook to buy shares, $24 million and change came from a one-time tax benefit and a "change in accounting principles." For the last three years, it has basically been a 55% gross margin business, which gives them plenty of room to make money if they can make their technology and marketing spending scale. But so far they really haven't -- operating margins have stayed in the 6-7% of revenue range even as the company has doubled in size, so that 2003 operating profits of $2.1 million grew only to $4.4 million by last year, even as sales went from $31 million to $84 million. That's pretty ho-hum for a growth company just passing the tipping point into profitability. Actually, it's very ho-hum as tipping-point stories go.

The Wall Street Journal, in breaking the news earlier this week that Shutterfly wants to either go public or sell itself, quoted a source saying the company makes $20 million to $25 million before interest, taxes, depreciation and amortization. I assume that means it expects to earn that much in 2006, since bankers usually talk about forward earnings. But the interesting thing here is that relatively heavy capital spending for a company this size is keeping Shutterfly's free cash flow from growing any faster than revenue. FCF went from $5.7 million in 2004 to only $7.7 million last year. So how it's going to get to $20 million or $25 million by year-end is a mystery, especially since Shutterfly burned cash on operations during the seasonally slow first quarter. Better hope for a big Christmas.

The Journal also reports that Shutterfly wants a valuation between $400 million and $500 million. That's a multiple between 52 and 65 times last year's free cash flow. Which is funnier than a picture of your Uncle Fred at his college reunion. Unless there's a reason operating leverage is suddenly going to spike, ain't gonna happen. That's a premium number for a regular-unleaded income statement.

And I say this as a very, very satisfied Shutterfly customer.

Later on, we'll talk about the facts that Shutterfly has a lot of competition and that there's not much of a difference between Shutterfly and rivals like Snapfish who are also very good. And I have to think a little more about how Shutterfly might also be affected by people's adoption of in-home printers for digital photos. I don't know a lot about those issues. But the combination of the price and the numbers points to a distinctly lower valuation than you've read about. My guess is that the search for more operating leverage will mean Shutterfly hooks up with a competitor. But we'll wait for the roadshow before locking down on that argument.

What am I Bidz for Some Cubic Zirconia?

Tim Mullaney

With Omniture bleeding and Vonage grumbling that, darn it, my head must be around here somewhere, the tech IPO market turns its lonely eyes to Bidz.com. The suburban LA-based auction retailer of mostly inexpensive jewelry is expected to price this week somewhere between $8 and $10 a share. The deal stands as a test of its lead banker, the San Francisco emerging-growth boutique ThinkEquity Partners. ThinkEquity CEO Mike Moe, whom I like and admire (Logrolling alert: Moe tells me I'm getting a small plug in his coming book), is passionate about the idea that companies like Bidz need to be able to access U.S. capital markets even if they're smaller, riskier or less glamorous than companies big power banks want to back in the wake of the Web bust. Now's his chance to prove he's right.

But...

There are two ways to look at the Bidz deal. One is my way. The other is the way I heard yesterday from a money manager who doesn't like it. I report, you decide.

Continue reading "What am I Bidz for Some Cubic Zirconia?"

My Liz Smith Moment, with Jon Bush

Tim Mullaney

I'm a little wary of being the Liz Smith of deal blogging. You know, the Liz Smith that Spy magazine used to rag on for kissing the same few butts all the time? Open the paper and there's Liz on Madonna, Liz on Lindsay Lohan and most of all Liz on La Liz, Elizabeth Taylor.

But I have my little blogger's pets, and one of them is athenahealth, a software/service company that's in the e-health business. They help doctors with money management -- yo, Sisyphus, you have competition! --and are branching out into electronic medical records. It's not my Madonna: I don't write about them that often. It's more my Christina Aguilera, minus the weird husband. It's a nice company that expects to grow sharply this year. The CEO is a guy named Jonathan Bush, whose cousin George you may have heard of.

Anyway, I digress. We've said before athenahealth wants to go public next year. Now we know who wants to help them do it. Birds are buzzing that underwriters will include Goldman Sachs, Merrill Lynch and Morgan Stanley. That's a pretty decent welcoming party for a post-bust tech company. Earlier next year is more likely than later next year. We'll tell you more when we know more, and we'll tell you what we think when we see real, audited numbers that private companies don't release. Who knows? Maybe it will be as big as Christina's weird hubby.

More on Vonage Bulls

Tim Mullaney

I'm not a Vonage buyer, even at these prices, but as noted last week some people are. After my story on bears emerging from hibernation ran last week, I got a note from Dan Berniger of the boutique firm Tier1 Research, who was willing to let me link to his report. Take a look, tell us what you think.

Great Minds Think Alike (Or Else One Great Mind Thinks Alike All the Time)

Tim Mullaney

It was a funny, if slightly out-of-body, experience to read this morning's New York Times. They followed a story I did last month on Netflix, a 2002 IPO I've followed ever since (hence its place in the Deal Flow blog). The column by BW alum David Leonhardt was fine -- close enough to mine that I could say "I beatcha" but clearly his own work. The money pitch was reading these quotes from CEO Reed Hastings...

From today's Times...
"At the heart of any good investment, I tell investors, is a contrarian thesis that they and the company believe very deeply," Mr. Hastings said, "and that the rest of the world thinks is crazy."

From BW Online Last Month...

"Any great investment has at its heart some contrarian thesis the rest of the world thinks is ridiculous. Ours is that DVD will dominate for a decade or more. If one believes DVD will evaporate in two or three years, they shouldn’t invest in Netflix."

The quote ran in BW's print edition this way...

“Any great investment has at its heart a contrarian thesis...and ours is that DVD will dominate for a decade or more,” says Hastings

That Reed Hastings is one on-message dude.

Vonage Plaintiffs: They Don't Teach Spell-Check in Law School

Tim Mullaney

About the only thing Wall Street likes better than a story about overpaid investment bankers is one about red-faced lawyers. And what looked like one turned into the other this week, as I dug into the filing of the first class-action suit stemming from Vonage's May 23 IPO.

In federal court filings, plaintiff’s firm Motley Rice LLC claimed underwriters led by Citigroup took 17% of the $531 million deal as fees -- more than double the usual 7%. The charge was so shocking Motley Rice made it in bold italics: “Investors were willing to and did pay these large underwriting fees...because investors believed that such fees were being paid, in substantial part, to assure that the underwriters had conducted a thorough analysis of the transaction.” Indeed, the suit says, investors paid more for extra due diligence because Vonage chairman Jeff Citron has a sketchy history with the SEC and was a pal of disgraced, imprisoned stock promoter Robert Brennan (Citron lives in Brennan's old house, according to published reports). Horrors! Investment banks that don't do due diligence!

Invited to to explain their math, though, Motley Rice ‘fessed up to its own due-diligence slip: The charge was a typo. Underwriters were actually paid a little over 7%. Motley Rice insisted the goof won’t affect the case. “The whole gist is that the IPO was bungled,“ lawyer James E. Evangelista tried to explain. Oh sure.

But you know how sympathetic people get when lawyers screw up. “Unfortunately, I’m not allowed to comment but I do appreciate the good laugh,” Citigroup spokeswoman Danielle Romero said. And so Motley Rice is left to ponder an old rule of business: There are no typos, only thinkos.

Signing off, I'm Timothy J. Mullaney --J.D.

Startup Fixes DNA to Treat Cancer

Justin Hibbard

With the American Society of Clinical Oncology's annual meeting happening this week in Atlanta, a new generation of cancer treatments is attracting attention. (BusinessWeek's Catherine Arnst reports on the progress here.) Meanwhile, a new Silicon Valley startup is developing treatments for cancer associated with defective DNA repair mechanisms. The DNA Repair Company was founded two years ago to create technology based on a patent held by Harvard University's Dana Farber Cancer Institute and Oregon Health & Science University, both of which have discovered various genes linked to cancer and have studied the body's response to damaged DNA that can lead to cancer. The DNA Repair Co.'s treatments aim to alleviate damage to the body's mechanisms for repairing DNA. Alan D'Andrea of the Dana Farber Cancer Institute is on the company's board, as is William A. Haseltine, former chairman and CEO at Human Genome Sciences, Inc. In April, the startup raised $2 million from VC firm Mohr Davidow Ventures in its first round of financing. MDV partner Michael Goldberg is serving as CEO.

The Next Green Thing: Clean Water

Justin Hibbard

At the TiECon conference in Santa Clara (Calif.) two weeks ago, John Doerr, partner at VC firm Kleiner Perkins Caufield & Byers, gave entrepreneurs a hint about the kind of company he'd like to fund next. "I'd love to find a company that can make a big-scale difference about clean water," he said. "Today, 10,000 people die per day because they choke to death on their own vomit. They have dysentery because they don't have clean water." Though Doerr would "love to find" such a company, perhaps he has already heard of Crystal Clear Technologies, Inc., an 18-month-old startup based in KPCB's hometown of Menlo Park (Calif.).

Continue reading "The Next Green Thing: Clean Water"

on Vonage: It Ain't a Bubble When they sell it

Tim Mullaney

Aaron Pressman's post reminds me of a funny story of my late father, who passed in 2003. All through the bubble, we'd talk about how he couldn't get IPO shares of any of the companies I'd talk to him about. Then he excitedly told me his broker had offered him some AT&T; Wireless. Uh, Dad. No.

But the lesson from this morning's action in Vonage is pretty simple: There is no Web bubble, no tech bubble, no IPO bubble. There's a pretty brainless piece on Bloomberg this morning claiming high valuations are bringing companies out of the woodwork, but high corporate profit growth and a nothing-extra stock market actually has market multiples pretty firmly in check. Even Google, which everyone gets so worked up about, trades at 30 times 2007 estimates and 40 times this year's. In 2003, when I tried to pick an argument with Barron's about its Bubble II cover, Web leaders like eBay and Yahoo were trading at about 50 times 2004 estimates. Google's PEG ratio, which adjusts P/Es for growth, is 50% lower than either Coke's or Pepsi's and lower than the S&P; 500's. Some bubble.

Vonage was not the sign of a new bubble because this market has learned Mullaney's First Law of Bubbles. And it is thus:

Section I. It Ain't a Bubble When They Sell It, because Wall Street will always try to sell risky or even junky companies that can pay investment banking fees. If Bank A won't do it, Bank B surely will. If that's a definition of a bubble, it's always a bubble. There's never a good time to buy stocks. And everyone needs a mattress. Which is silly, and supremely ahistorical.

Section II. It's Only a Bubble When You Buy It. Because no one is making you. Never did. Never will. And my Dad never did buy that AT&T; Wireless, either, even when men were men and bubbles were rrreeeeeaaaaaallllllyyyyy bubbles.

And they didn't really buy Vonage, did they?

Vonage: I Guess We're Both Right

Tim Mullaney

Skeptics -- present company included -- thought the Vonage IPO was a dud. Some of us thought it would never get done, a view that gained currency even as bankers were out selling the $531 million deal that valued the Voice-over-Internet phone provider at nearly $3 billion. Others thought it was a sign that the Republic was in danger, that its very presence on Wall Street is the first sign of a bubble where money-losing, poorly situated companies facing competition they logically shouldn't overcome can and do go public anyway.

Bankers apparently were believers, though they haven't said anything much in public. They said they could sell it, and they did. It got done.

The market, however, gets the last word, and its first comments seem strikingly sensible. Vonage shares traded down 4% from the $17 a share IPO in early trading and are at $16.29 as I write. Initial impression: It was a doable deal, but not a hot one. No one is chasing this one up the ladder, and at least nobody is infected with euphoria that's not backed up by the fundamentals. So we're both right.

Tell me why not, readers. Did anyone reading this buy shares in this money-losing company with both real and future competitors who are much bigger, richer and better known? What were you thinking? I'll include your comments in our piece later today about the deal.

Is a $35B Tech LBO Imminent?

Justin Hibbard

At the heart of every joke is a little grain of truth. Consider this quip made today by Silver Lake Partners co-founder Jim Davidson at the JPMorgan Technology Conference in San Francisco: "No one in the private equity industry knows that Intel trades at 8.2 times EBITDA, so let's go do that!" Though Davidson was joking, the idea that a gang of private equity megafunds could buy a $105 billion icon such as Intel is not beyond the realm of possibility these days. Texas Pacific Group partner Gene Frantz, who sat on a panel with Davidson at the conference, wasn't joking when he said, "I think you can predict with reasonably high likelihood that some time in the next 16 months you'll see a $25 to $35 billion buyout in technology." Raj Kapadia, managing director of leveraged finance at JPMorgan, was quick to add: "No deal is too big in the tech sector." What a time to be in private equity!

Mr. Bubble

Justin Hibbard

Hey Gary Rivlin at the Jayson Blair Gazette: I was suprised to see you criticized our recent bubble story in your latest column--and then went on to make the same points our story made. It is beneath you, sir!

Koders Gets Cash for Open Source Code Search

Justin Hibbard

Just when you thought all the ideas for search engines were taken, Koders, Inc. gets funded. The two-and-a-half-year-old, Santa Monica (Calif.)-based company has already made a name for itself among open-source hackers, who use its search engine to scour through 225,816,744 (and counting) lines of open source code. Koders offers a free version of its service, a paid subscription version with extra goodies, and an "enterprise" license for corporate software development teams. Additional revenue comes from banner ads on search results pages and sales of search data to marketers. Founder and CEO Darren Rush is a veteran programmer who developed the engine for his crew and then decided to market it. Koders raised $760,730 this month in a sale of series A preferred stock. Investors: The Founders Fund, a San Francisco-based VC partnership run by PayPal co-founders Peter Thiel and Ken Howery; Gil Penchina, VP and GM of eBay's international business and an angel investor (Penchina is also on Koders' board); and Payman Pouladdej, Atlanta-based founder and CEO of software company Softblox, Inc.

Khosla's East Coast Ethanol Play: Mascoma

Justin Hibbard

If you watched Dateline on May 7, you know Silicon Valley VC Vinod Khosla is a big proponent of biofuels. His firm, Khosla Ventures, in April joined VC firm Kleiner Perkins Caufield & Byers and other investors in a $50 million financing of Altra, Inc., a Los Angeles-based biofuels startup. Khosla has been busy on the other coast, too. In March, his firm plowed $4 million into Mascoma Corp., a Cambridge, Mass.-based biofuels venture. Mascoma has licensed a process developed by co-founder and Dartmouth professor Lee Lynd and Virginia Tech professor Y.H. Percival Zhang for cost-effectively making ethanol from corn stover (i.e. the parts of corn that humans don't eat--leaves, stalks, and cob). That's an interesting approach, considering corn stover is the most abundant agricultural leftover in the U.S. It certainly distinguishes Mascoma from other companies that have been racing to cash in on ethanol fever. Hey, I'm all for alternative fuels, but can this last?

Beware of hyping hype itself

Tim Mullaney

Calvin Coolidge, or so legend says, told a friend once that when he saw 10 problems coming down the road he didn't worry -- eight were sure to run into a ditch before getting to him. The same is true of the IPO market: At every filing of a speculative IPO, someone's sure to do a story about speculative excess coming back. I've kinda, sorta done it myself. But we're always wrong.

Which brings us to Vonage Holdings (SG), the Internet phone company that would like to go public in a $500 million to $600 million deal that values the money-losing VOIP leader at nearly $3 billion. Vonage has been held up as the proof that speculative excess is back, but the stance here has been that the deal would run into the ditch before you had to sit your elderly Mom down and insist she not buy it. According to former VC and Wall Street deal maven Andy Kessler, that's apparently happening now.

Repeat: We have learned our lesson. We have learned our lesson. If you want to sell a money-losing (and, apparently, getting worse) startup these days, the place to do it is not Wall Street.