Angie's List Attracts Plenty Of Investor Interest Despite Losses

Nov.17.11 | About: Angie's List, (ANGI)

Angie’s List, Inc (NASDAQ:ANGI) opened up 38% at $18.00 on their IPO debut Thursday morning, after pricing their 8.79 million share IPO at $13.00, the top of the indicated range of $11.00-13.00. Of the shares offered, 6.25 million are offered by the company, and 2.54 million are offered by selling shareholders. The company intends to use the proceeds to fund their advertising strategy, drive membership growth, and for general corporate purposes. Based on the $13.00 pricing, the company will have a market capitalization of approximately $723 million. BofA Merrill Lynch is leading the offering.

Founded in 1995 in Columbus, Ohio by the namesake and current CMO Angie Hicks and co-founder and CEO William Oesterle, Angie’s List helps consumers find the reputable service providers in home, health care and automotive services. The site provides ratings and reviews which are only available to paid members to find the best provider for their local service needs. At the same time, they receive revenue from service providers with high ratings that are allowed to advertise.

The company has grown to 175 paid markets, over 1 million paid memberships, 350k engaged service companies, and over 22k service providers paying to provide discounts. This growth has accelerated in recent years and is highly correlated with their significant increase in marketing and sales expenditures. Of their current paid markets, 10 date back to pre-2003, 35 from 2003-2007 and the remainder since 2008. What is significant about this is that as their markets age, the revenue per paid membership increases, the average revenue per market increases and the marketing expense as a percentage of revenue significantly decreases. Also the company has proven that as their markets mature the overall penetration of target households increases, for example their overall penetration rate in their existing markets is only 2.4% of the estimated 25 million target households, yet in the most seasoned markets (i.e. Indianapolis and Columbus) that rate is approximately 15% and growing.

The company believes the paid memberships offer a level of engagement that separates themselves from competitors such as Yelp, Citysearch or Google places. As well the attractive member demographic, who typically consists of affluent, dual income, educated 35-65 year olds, tends to strike a level of engagement from the service providers as well. The number of paid members has grown from 152k in 2006 to over 1 million to date, and the number of service providers has grown from 4000 to over 22,000 over the same period. Member renewal rates have also been strong at 79% in 2011.

Revenue has grown from $13M in 2006 to $59M in 2010, and approx $62.6 for 9 months 2011. The company has operated with substantial operating losses of $23M in 2010 and $39M for 9 months 2011. The majority of these loses are due to the increased marketing and selling expenses as they have aggressively grown into new markets. In their 10 most mature markets (pre-2003) marketing expense is approx 20% of revenue. In their 35 middle age markets (2003-2007) marketing expense represents approx 56% of revenue. In their 103 newest markets (2008-2010) marketing expense represents 333% of revenue.

Despite the operating losses which appear that they will continue until about 2013/2014, demand for this offering has been solid, with the offering having been described as oversubscribed since the end of last week. Despite the many critics of recent offering from other web based growth companies LinkedIn (NYSE:LNKD) and Groupon (NASDAQ:GRPN), both offering had successful debuts. As with those companies, ANGI is the latest internet company with a strong debut based on their growth, name brand, and limited supply in this offering.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ANGI, LNKD over the next 72 hours.