IPO Report: Endurance International Group Holdings (EIGI)

Endurance International Group Holdings (EIGI) is a leading provider of cloud-based solutions designed to help small- and medium-sized businesses, or SMBs, establish, manage and grow their businesses.

EIGI is based in Burlington, MA, and scheduled a $351 million IPO with a market capitalization of $1.9 billion at a price ranged midpoint of $15, for Friday, October 25, 2013.

Three other IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

• S-1 filed October 15, 2013.
• Manager, Joint Managers: Goldman, Sachs, Credit Suisse, Morgan Stanley
• Co-Managers: Cowen and Company, Jefferies, Lazard Capital Markets, Wells Fargo Securities

Overview

EIGI is a leading provider of cloud-based solutions designed to help small- and medium-sized businesses, or SMBs, establish, manage and grow their businesses.

Organic (internally generated) revenue grew from $339.2 million in 2010 to $414.9 million in 2011 and to $474.1 million in 2012, representing a compounded annual growth rate, or CAGR, of 18%, which is not particularly impressive.

Recent subscriber growth was only 10% for the six months ended June 30 ’13 vs the comparable year earlier period.  Revenue per subscriber only increased 1% for the same comparative periods.

A good portion of September ’13 revenue growth is due to accounting gimicks

65% of the expected increase in revenue for the September ’13 quarter vs the September ’12 quarter, is attributable to businesses acquired since June 30, 2012.  Only 20% is due to an increase in the number of subscribers not associated with the acquisitions.

In addition, a portion of the expected increase results from lower revenue during the three months ended June 30, 2012 due to purchase accounting adjustments to deferred revenue.

Valuation

This is why institutions are interested in EIGI:  “SMBs are expected to spend approximately $96 billion annually on cloud-based services by 2015, representing a CAGR of 28% since 2012,” page 3 in the S-1 filing.  EIGI is a way to play the segment.

On the IPO there will be an immediate tangible book value per share dilution of $23.10.

Glossary

EIGI has an accumulated deficit of over $500 million, which suggests they have never been profitable, and the price-to-tangible book value is one of the lowest in the IPO arena.  This means EIGI has a substantial negative tangible book value.  Financially healthy companies have a positive, not negative tangible book value.

Conclusion

Yes, EIGI has a 99% customer retention rate.  However, its year-over-year growth in subscribers is only 10%, and EIGI’s revenue increase per subscriber is only 1% year-over-year, EIGI continues to loss money and private equity owners Warburg/Goldman stripped EIGI of as much cash as they can.

We don’t like EIGI at a $2 billion valuation.

However, because EIGI is in a market projected to grow at a compound annual growth rate of 28% (which seems suspect), we are neutral to negative on the IPO.

It seems that EIGI is being sold to institutions who don’t do underlying financial trend analysis.

Business

EIGI generates revenue by charging subscribers for the products and services that they buy.

A significant majority of revenue is generated on a subscription basis, and subscribers typically pay for solutions in advance through direct billing relationships.  EIGI has a 99% customer retention rate.

Not particularly impressive results

EIGI serves 3.4 million subscribers globally, after having been in business since 1997.

Organic revenue grew from $339.2 million in 2010 to $414.9 million in 2011 and to $474.1 million in 2012, representing a compounded annual growth rate, or CAGR, of 18%, not particularly impressive.

During this period, the subscriber base grew from 2.5 million to 3.2 million subscribers, accounting for 75% of revenue growth, with the remaining revenue growth attributable to increases in average revenue per subscriber.

Market

There are expected to be more than 76 million SMBs worldwide by the end of 2013, of which more than 43 million will have direct access to the Internet. EIGI believes SMBs form the backbone of the global economy and will continue to serve as an engine of innovation and growth.

Since EIGI’s founding in 1997, EIGI has focused on the needs of SMBs and have demonstrated a passion for empowering its subscribers to build their businesses and navigate the rapidly changing technology landscape.

Products

EIGI offers a platform with a wide range of products and services designed to help its diverse base of SMB subscribers establish, manage and grow their businesses.

Cloud-based offerings allow EIGI’s subscribers to select a customized set of solutions from among a broad range of internally developed and validated third-party products.

Intellectual property

EIGI uses open source technologies pursuant to applicable licenses as the basis for the technology platform.

As of June 30, 2013, EIGI has 28 pending U.S. patent applications and several pending foreign counterpart applications relating to aspects of the technology platform and offerings, including the shared services architecture, predictive analytics methods, virtualization technologies, subscriber migration technologies and web presence improvement technologies

Competition

EIGI doesn’t list competitors in the S-1 filing.  The SEC should have required EIGI should list competitors. 

This is a major omission by a company that wants to IPO at at $2 billion market capitalization, and begs the question ‘what else did EIGI omit from the S-1 filing’ and why did EIGI get special consideration to omit significant information that investors should know about.

Dividends

On November 9, 2012 EIGI paid a $300 million divident to shareholders affiliated with Warburg Pincus & Goldman Sachs, the private equity owners.

5% stockholders pre-IPO

Warburg Pincus, 61.1%

Goldman Sachs, 19.7%

Use of proceeds

EIGI expects to net $325 million from its IPO.  Proceeds are allocated to repay debt, which is customary for private equity funded IPOs.