This analysis of Angie's List was provided to TradingIPOs subscribers in advance of its IPO. On November 16, 2011 the company announced that its initial public offering of 8.8 million shares was priced at $13 per share.
Angie's List plans on offering 10.1 million shares at a range of $11-$13. Insiders will be selling 2.54 million shares in the deal. BofA Merrill Lynch (BAC) is leading the deal, Allen, Stifel, RBC, Janney, Oppenheimer, ThinkEquity, and CODE co-managing. Post-IPO, ANGI will have 57.3 million shares outstanding for a market cap of $688 million on a pricing of $12. IPO proceeds will be funneled into advertising to drive membership growth.
3 venture funds will separately own 43% of ANGI post-IPO.
From the prospectus:
We operate a consumer-driven solution for our members to research, hire, rate and review local professionals for critical needs, such as home, health care and automotive services.
This is sort of a 'Yelp' for services. Yes I know Yelp has service reviews, however it is much more entertainment/food focused. Note that a big difference is that members are the only ones permitted to write and read the reviews on ANGI. No anonymous reviews, one must be a paid member to read and/or write reviews.
1 million paid memberships. Typical member: 35-64 years old, owns a home, college educated with household income of $100k+. The site is between the 900th-1000th most visited website in the US.
In 2010, the site had 11.4 unique searches per member and 37% of members wrote at least one service provider review.
Local service providers who are highly rated on ANGI are encouraged to advertise discounts and promotions to members.
Unlike a lot of the Groupon (GRPN) and Zipcar (ZIP) verbiage in their prospectuses, I do think this note from ANGI sums up the business: 'We help consumers purchase "high cost of failure" services in an extremely fragmented local marketplace.'
Services include: home remodeling, plumbing, roof repair, health care and automobile repair.
ANGI offers service in 175 local markets in the US. I'm not a member so could not check and see how many reviews there were in the secondary markets. 2.6 million total reviews in database or about 15,000 per market. Again I am assuming larger markets have more reviews.
ANGI believes membership growth has been driven by a national advertising strategy, something a lot of other recent online IPOs have eschewed for a more internet-based approach.
Cost - Annual membership plans range from $29 - $46. Pretty reasonable if it saves someone money. Keep in mind though, this is a site in which all content is member-generated so the fee is essentially one for access. There is no professional content other than a magazine that comes with the membership.
70% renewal rate for first year members in 2010. 51% of advertisers in 2008 were still active advertisers with ANGI in 2011. Both solid numbers.
Market - Good idea here originally by ANGI as household and professional services have always been a tough one. Word of mouth has usually been the best indicator of quality.
Growth strategy - Obviously, continue penetrating their market bases.
62% of revenues are actually derived from advertising.
Approximately $1 per share in net cash post-IPO. Expect ANGI to burn through this cash before the end of 2012 and be back for a dilutive secondary. Immediately below I will explain why.
ANGI is attempting a very aggressive valuation on IPO. I suppose this was spurred on by LNKD and GRPN, ANGI is attempting to come pretty richly valued across any metric. Currently, internet IPOs are being judged by different metrics apparently.
Growth has been solid but not really spectacular. Definitely not the growth curve of either LNKD of GRPN. Revenues increased 35% in 2009, 29% in 2010 and poised to grow 48% in 2011.
Growth is not really organic, unfortunately: Selling and marketing expenses increased a whopping 66% in 2010 and look to grow another 85%+ in 2011.
This is a massive red flag here. Normally I am uneasy if an operation is increasing revenues at just a 1:1 rate to sales/marketing expenditures. Here? ANGI is increasing sales/marketing costs FASTER than their revenue growth. They are spending more than $1 in sales/marketing to garner $1 of revenue growth. That indicates a failed business model and strategy if it is going on for any length of time and here this has been happening since the beginning of 2010. Through the first nine months of 2011 ANGI has increased sales and marketing expenses $33 million over first 9 months of 2010. Revenues however have increased just $19.5 million. In 2010, a similar story: revenues increased $13.4 million while sales/marketing expenses increased $17.5 million.
How is this a sound business strategy? I've not seen something like this since 1999. There doesn't appear to be a fundamentally sound strategy other than to burn up all cash on hand to grow the subscriber base and not remotely caring that you have spend 7 quarters spending $1.50 in direct sales/marketing costs for every $1 of new revenues. That is not sustainable, hence the plan is to funnel new IPO monies into the exact same strategy.
Losses have increased with revenues growth. Losses in '09 were $0.15, 2010 $0.40 and in 2011 should be $0.88 Again, as noted above, ANGI has implemented a business strategy that is not financially sustainable. Yes there has been growth, but the cost of that growth has been awfully high.
As 62% of revenues are derived from advertising it appears the business plan is to spend massively on subscriber growth with the goal being for ANGI to be able to go to advertisers and charge more for more 'eyeballs'. I guess that's it.
2011 - $88 million in revenues, a 49% increase over 2010. Massive loss of $0.88 per share.
2012 - IPO cash will fuel sales/marketing spending which should continue to grow revenues...albeit at a slower pace than the spending. Expect $120 million in revenues a 35% increase from 2011. Losses should be in the $1 range once again.
Conclusion - Until ANGI stops burning cash at a 1999 internet start-up pace, you just can't own this. Will they stop burning cash down the line? At this point one cannot discern the answer. The plan appears to be to spend whatever it takes to grow the subscriber base to a point in which ANGI can combine ad rates and membership revenues to reach a point of positive cash flows. Right now they aren't close. Also, I've just never been a big fan of websites that are 'exclusive', charging subscribers fees and then turn around and generate most of their revenues via advertising. That is what ANGI is doing. Based on the business plan of the past two years and the mounting losses, no interest here. I will keep an eye on it to see if things change, but this market cap is dangerously high for the cash burn rate. Party like it is 1999?Was all well and good until 2001 hit and the cash burn overtook many and zeroed them out.