“A smart man learns from his own mistakes, but a wise man learns from the mistakes of others.”
By that proverbial saying, the online coupon vendor LivingSocial would be considered a wise company. Having seen the disasters of other internet IPOs, it decided to pass on the idea of going public.
Facebook (NASDAQ: FB), for one, lost some 52% of its offering value within the first four months of trading, and it took 5 quarters to finally climb back above it. In the online coupon space, LivingSocial’s main rival Groupon (NASDAQ: GRPN) lost some 93% of its IPO by the first anniversary, and it is still less than half the offering price now on the nearing of the second anniversary.
IPOs are always dicey, as investors attempt to anticipate future earnings potential without very much operating history to draw from. What does LivingSocial’s short four-year history reveal? And where do its managers see the company in the future?
A Shaky Start
The concept is really quite smart. LivingSocial describes itself as “the local marketplace to buy and share the best things to do in your city. With unique and diverse offerings each day, we inspire members to discover everything from weekend excursions to one-of-a kind events and experiences, to exclusive gourmet dinners, to family aquarium outings and more.”
The Washington D.C.-based internet company is essentially a discount coupon emailing service, where subscribers receive merchant coupons directly in their email inboxes. With “more than 70 million members … in hundreds of markets across six continents,” LivingSocial houses a diverse consumer base that merchants are eager to tap.
But it also reaches another 150 million shoppers through its partner Amazon (NASDAQ: AMZN), which owns 30% of LivingSocial. That’s one of the prime advantages of e-commerce – selling digital merchandise delivered by digital means, reducing your costs to just pennies per customer. Or so you would think.
The truth of it is a little disconcerting. In the first half of this year, LivingSocial’s revenues grew 6% to $264 million. But the company still managed an $81 million net loss for the period, essentially burning $345 million in six months. That’s quite a lot of expense for a vendor selling digital merchandise.
In an interview with All Things D, LivingSocial’s CEO Tim O’Shaughnessy lessened the impact of the cash burn by allotting $64 million of it to “non-cash expenses such as depreciation, amortization and stock compensation”.
But one would think that only makes the operation look worse for two reasons:
a) it means the company still incurred some $281 million in cash expenses, which is more than its revenue for the period, and
b) its shareholders are taking compensation from an operation that is losing money. Does that seem like something a group of confident investors would do? Or does it look like some are bailing out?
O’Shaughnessy noted the company “had posted an operating profit in March and June, with April and May falling short … for hack-related reasons.” The loss incurred by the hacking – where intruders accessed registered users’ email accounts and prompted them to reset their passwords – was estimated to have reduced revenues by some 15% to 20%. At most, this represents just $66 million in lost revenue, which would still have resulted in a net loss of $15 million for H1.
Still, the CEO remained confident the company will get through its teething pains. “If things shape up how we think they’ll shape up,” O’Shaughnessy encouraged, “I think that by end of year we will have permanently and fundamentally answered that [profitability] question.”
But profitability in 2013 seems much, much too optimistic. LivingSocial is still inventing itself, testing different services to find just the right formula that will make it a success.
Three failed attempts have been made at creating a food take-out and delivery service, where members could order food for pick-up or delivery through LivingSocial’s site instead of through the restaurant’s. These included the defunct LivingSocial Instant and its high-end Room Service extension.
For its fourth attempt, the company decided to acquire Onosys, a software company whose technology takes food orders for the restaurant chains Applebee’s and Panera. Yet the service has only just come online and may take a while to become profitable.
LivingSocial has also branched outside the coupon space into the search directory space. It doesn’t want to rely solely on daily, weekly, and monthly coupons that have expiration dates, but it wants to become the go-to place for shoppers to search for longer-term and even permanent low prices and discounts. This would generate considerable traffic to the site without incurring the data input hours of the shorter-expiration coupon activity.
“Consumers still view us and people still write about us as being in the daily deals space and, frankly, that’s not what we are anymore,” O’Shaughnessy clarified the company’s expanding presence. “For consumers, we are a marketplace … for merchants, we’re a marketing platform. I don’t think people realize that yet.”
LivingSocial is looking to be more of an online shopping mall, where merchants open digital shops and manage their own marketing campaigns, and where shoppers can place their orders – all from within LivingSocial’s website.
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Perhaps One Day
For the shape it’s in right now, LivingSocial is not ready for an IPO. And credit is owed to its executives for recognizing that. There is nothing worse for a business’ image than to have its stock tank within weeks or months of going public.
Investors should be wary of any IPO that does not have a reasonable track record of profit performance. We all learned that in 2000 when business fundamentals finally caught up with high-flying internet stocks and pulled them sharply back down to Earth.
LivingSocial is admittedly still in the womb, its embryo still taking shape. “Two years ago, the perception of us was one thing; two years from now, it’ll be very, very different than it is now,” O’Shaughnessy prepares us.
It is also admittedly still haemorrhaging money, with total funding over its short four-year life reaching past $900 million. If this year’s H2 goes the way of H1, the company’s most recent funding round of $110 million will likely run out early in the new year.
But turn-arounds in the internet space have surprised us many times. O’Shaughnessy referenced Priceline’s (NASDAQ: PCLN) amazing comeback, losing 66% of its value in 2008 and then surging from $50 to today’s $981 in the five years since. And yet even Priceline floundered some 80% below its IPO price during its first year.
It seems the only investors who make money on IPOs are the sellers who are getting out, not the buyers who are jumping in. As a recent case in point, Potbelly’s upcoming IPO will see $50 million of the $75 million to be raised – 66% – going to the original founders and investors.
A company going public needs to have a lot of structure and backbone, its founders need to have a lot of brains, its employees need to have a lot of heart, and its IPO buyers need to have a lot of stomach.
For its part, LivingSocial seems to have a lot of backbone, brains, and heart. But for its IPO to avoid the disasters of others in its field, the company needs a little more time in the womb.
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