Skype Files for IPO
Skype, the Internet telephony company, is looking to raise up to $100 million in an initial public offering, according to an S-1 filing with the U.S. Securities and Exchange Commission. The company will be selling American Depositary Shares (ADSs) and will trade on the NASDAQ Global Market. The offering will be managed by Goldman, Sachs & Co., J.P. Morgan, Morgan Stanley and others. The offering was widely viewed as in the cards, though I admit it came sooner than I thought.
Skype’s decision to go public is a result of the company turning into a cash machine. It currently has 560 million registered users and about 124 million of them are active on monthly basis, while about 8.1 million of them are monthly paying users — who on average pay $96 a year for the service. Any increase in the number of average monthly paying users is going to help the company erase any losses and goose up its revenues.
For the first six months of 2010, Skype reported revenue of $406 million, and net income of $13.2 million. During 2009, Skype had sales of $719 million and a loss of $99 million. Skype’s revenues are only going to accelerate as the company’s deals with folks like Verizon Wireless and television makers such as Samsung and LG start paying off.
The company had 6.4 million billing minutes during the first six months of 2010, versus 10.7 billion minutes during 2009. The company logged 88.4 billion Skype-to-Skype minutes so far in 2010, versus 113 billion Skype-to-Skype minutes in 2009. This shows that with time, the network effect only compounds usage, which is a good thing for the company. Even a fractional increase in the usage can translate into billable minutes.
All this isn’t without risk, as Skype notes in the S-1.
We have historically derived a substantial portion of our net revenues from a single product—SkypeOut. For the pro forma year ended December 31, 2009 and for the six months ended June 30, 2010, 86% and 87% of our pro forma net revenues and net revenues, respectively, were derived from the use of SkypeOut. Due to this dependence on SkypeOut as our primary source of net revenues, we are subject to an elevated risk of reduced demand for our SkypeOut product.
Why the huge gap between the number of registered and paying users, as noted above? For one, Skype says that not all registered users are unique users.
The actual number of registered users however is likely to be lower, potentially significantly, for two primary reasons. First, some legitimate users may register more than once and therefore have more than one account. Second, we experience irregular registration activities, some of which we believe are the result of fraudulent activities that involve the creation of a significant number of spurious user accounts.
The S-1 does not describe who is selling how many shares and who actually stands to make the most amount of money — though I suspect we’ll hear that in coming months. Either way, the Skype IPO has the makings of one of those hot deals — one that has a dash of irrationality attached to it.
