Last Friday, Xoom Corporation (XOOM) made its public debut. Shares of the online international money transfer service company rose 59.3% on their first trading day, ending at $25.49 per share.
The Public Offering
Xoom Corporation is a pioneer and leader in the online consumer-to-consumer international money transfer industry. Customers use Xoom to send money to friends and family in over 30 countries. Since January 2008, customers have used Xoom to send $6.6 billion to their friends and relatives.
Xoom sold 6.3 million shares for $16 a piece. The firm sold 5.2 million shares in the offering, while selling shareholders offered another 1.1 million shares. The company raised $83 million in gross proceeds in the offering process, valuing the company at $509 million.
The offering was a huge success. The offer price was set above the preliminary $13-$15 price range set by the firm and its bankers. Some 20% of the shares outstanding were offered in the public offering. At Friday's closing price of $25.49, the firm is valued at $811 million.
The major banks that brought company public were Barclays, Needham & Company, Raymond James and Baird.
Xoom generates the majority of its business from people living in the U.S. who use computers or smartphones to send money back home to friends and family. The company generates revenue by charging a fee on these transactions, which typically ranges between 1% and 3%.
The market for remittance payments is expected to continue to grow. According to the World Bank, international consumer money transfer volumes will grow from $513 billion in 2011 to an expected $685 billion in 2015, or by some 7% per year. Xoom which is focused on online payments, hopes to outpace competitors by avoiding waiting lines and operate faster and cheaper. In this market the firm competes against the likes of Western Union (WU) and Moneygram International (MGI).
The company reported annual revenue of $80.0 million for the full year of 2012 on which the company lost $5.9 million. Revenue grew roughly 60% compared with the year before, when the company lost $4.4 million.
Xoom generates the majority of its business in key developing countries including the Philippines, Mexico and India. Roughly a quarter of its revenue is derived from mobile devices while the remainder is generated from online devices. The adoption of mobile devices is increasing rapidly in the recent operating history of the firm.
Xoom operates with $45.0 million in cash and equivalents before the public offering. The firm will receive approximately $83 million in gross proceeds from the offering, or roughly $75 million after deduction of offering expenses. As such the firm will operate with approximately $120 million in net cash, valuing the operating assets of the firm at roughly $690 million.
Based on this valuation, the market values the firm at 8.6 times 2012's annual revenue.
As noted above, the offering of Xoom has been a success story. Shares were initially offered 14.3% above the preliminary offering range and closed 82.1% above the preliminary midpoint range on Friday.
CEO John Kunze commented on the public offering and the firm:
We are a disruptor. We've seen this play out before: An offline customer experience that is highly challenged, and then that experience is disrupted by digital properties with a better price proposition.
The prospects for Xoom look great. The company processed $3.25 billion in payments in the full year of 2012, up 90.3% compared with the $1.71 billion in payments, which it processed in 2011. The firm processed 6.62 million transactions, up 62.7% compared with last year.
The firm has 776,426 active customers, which on average generate $103 in revenue for Xoom. During 2012, it attracted 405,304 new customers at an acquisition costs of $44 per customer. As such it takes the firm little over five months in revenue to recoup the customer acquisition costs. Note that if revenue will increasingly be generated by existing customers, the total customer acquisition costs will come down.
Xoom points out that it expects to outpace competitors in terms of speed, peace of mind and costs. The firm expects to outgrow competitors in a global market, which is still expected to grow by 7% per annum until 2015.
At the same time the market is super profitable. Western Union, which is a less advanced competitor, but much bigger than Xoom, reported a $1.03 billion profit on revenue of $5.66 billion for 2012. The firm is valued at 1.5 times annual revenue and approximately eight times annual earnings. While Xoom should be able to compete effectively with Western Union, it will still have to compete with online-based payment tools including PayPal and Square.
For investors contemplating an investment it should be a vote of confidence that venture capital firms including Sequoia Capital, T. Rowe Price, New Enterprise Associate and Agilus Ventures are not selling in the public offering.
Note however that investors should expect quite some volatility. Key to this success story is a continuation of revenue growth combined with improved operating profitability. Based on historical performance metrics shares are obviously very expensive. However, the market could continue to attach this high valuation, or even a higher valuation, if the investment community continues to believe in the growth story, and if Xoom can deliver.
I remain on the sidelines at this point in time. Although the current valuation is too high, the company could "grow" into the valuation and a short position would be too risky at this point in time given that the market could continue to be bullish on Xoom's prospects. A take-out would be possible as well given the enormous success that PayPal brought to eBay (EBAY).