IPO Preview: WhiteSmoke

Dec. 5.11 | About: WhiteSmoke (WHSM)

Fourteen companies scheduled initial public offerings to raise $3.7 billion in December, including Zynga (ZYNG). See the full IPO calendar.

Based in Israel, WhiteSmoke (proposed WHSM) scheduled a $17 million IPO with a market capitalization of $37 million at the price range mid-point of $9 for Thursday, December 8, 2011.

SUMMARY

WhiteSmoke uses artificial intelligence to improve writing. Nice idea although its S-1 filing could be improved with some ‘regular’ editing.

In August 2011, WHSM entered into a promotion and distribution agreement directly with Google Inc. (NASDAQ:GOOG) for the web browser Google Chrome offering a free trial. WHSM also terminated its prior distribution agreement with its major distributor. As a result, WHSM is embarking on a new sales and marketing program.

CONCLUSION

WHSM should be watched to see if it is successful with the new Google relationship, although being dependent on one distribution agreement has customer concentration risks.

WHSM intends to offer 45% of itself in the IPO. If the stock declines after the IPO and WHSM needs to raise more money it could well end up diluting the initial public shareholders.

BUSINESS

WhiteSmokeTM Writer, or Writer, is a comprehensive tool for improving the grammar, spelling, structure and style of English texts for both native and non-native English speakers. Writer is compatible with nearly all text applications and fully integrates with Microsoft (NASDAQ:MSFT) Outlook. Microsoft Outlook integration is not as important as it once was.

According to WhiteSmoke’s web site, WHSM employs “Artificial Intelligence with algorithms based on artificial intelligence and natural language processing technology.”

REVENUE

WHSM derives revenue in part from customers (mostly end-users) who pay to license our software. The primary pricing model is based on sales of the flagship WhiteSmoke Writer, sells for $99 to $299, depending on the license type. In the past, licenses were not limited in time. This changed in the third quarter of 2011, when WHSM started offering users annual licenses and extended six-year licenses.

MARKETING & SALES

WHSM’s free trial version of WhiteSmoke 2011, which is limited in usage time and may be limited in features, is bundled with third-party or WhiteSmoke toolbars or other applications, typically used in conjunction with an Internet browser.

WHSM’s free trial version drives the company’s “bundled search application” business by generating revenue through payments by monetization search and application companies in the form of one-time payments per download or based on revenue share models.

Historically, WHSM’s primary monetization partner had paid one-time bounty payments per download in the United States. That relationship engagement with Zugo Limited terminated in July 2011.

However, in August 2011, WHSM entered into a promotion and distribution agreement directly with Google for the web browser Google Chrome.

COMPETITIVE ADVANTAGE

WHSM believes it is the only provider offering a comprehensive tool for improving the grammar and style of English writing through proprietary Natural Language Processing (or NLP technology), involving rule-based and statistical algorithms, which are used by WHSM’s software to scan thousands of user-generated text passages and user emails regularly to “learn” the way the human mind works in the process of writing

WHSM believes its software not only corrects the spelling and grammar of English writing, but also enriches the writing by proposing alternative word choices and an explanation of how words are commonly used.

COMPETITION

Presently, consumers face a confusing array of electronic editing software options on the Internet. Additionally, grammar and spelling checkers included in commonplace word processing software applications cannot be relied upon as they sometimes generate mistakes and inconsistencies and provide limited functionality.

WHSM competes against other providers of English writing technologies and software. Main competitors are Editor Software UK (Ltd.) (creator of StyleWriter), Applied Linguistics, LLC (creator of Grammarly) and Ginger Software, Inc., as well as Microsoft Word’s spelling and grammar check tools. WHSM also competes with companies in the translation industry, such as Babylon.

USE OF PROCEEDS

Of $14 million

  • $1.7 million to repay debt
  • Balance for working capital and general corporate purposes

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.