Dice Holdings IPO Offering Price Too High

Dice Holdings (DHX) is offering 16700000 share in the price range of $11.00 and $ 13.00 per share. The company is provider of specialized career websites for select professional communities. Dice Holdings, Inc. was incorporated on June 28, 2005. On August 31, 2005, the company purchased all of the outstanding common stock of Dice Inc. Further on October 31, 2006 it acquired all of the outstanding capital stock of eFinancialGroup Limited. Its career websites serve as online marketplaces where employers and recruiters find and recruit prospective employees. The company also hosts career fairs and open houses.

The company earns it revenue by charging employers for using its database of resumes and also by listing their jobs on its websites.

Financials

The company's financial year ends on December 31. For FY 2005 company shows revenue of 50.90 millions (Dice Inc. + Dice Holdings from June 28,2005) and operating income of 9.05 million

Fir FY 2006 the company shows revenue of 83.66 million (Dice + efinancials from October 31 2006) and operating income of 16.60 million

For Q1 FY 2006 the company shows revenue of 16.07 million (Dice + efinancials) and operating income of 1.99 million

For Q1 FY 2007 the company shows revenue of 30.50 million (Dice + efinancials) and operating income of 4.16 million

The company has shown significant revenue growth of 90% in Q1 FY 2007 as compare to Q1FY 2006, although significant part of growth has come from acquisitions, organically the company shows a revenue growth of 51% in Q1 FY 2007. The company's first quarter FY 07 results shows operating margins of nearly 13.6% and net margin of below 1% (pro forma without considering income tax benefits) as compare to 12.3% and 2.9% in first quarter FY 06. The main reason behind decline in net profit margin is rise in interest cost (the company raised funds to pay preference stock dividend, declared in Q1 FY07).

The company presents its revenues under three segments DCS online (US operations), eFS (International operations) and others (Include the job fair business, Dice India, and JitM). While DSC online and eFS are showing constant growth in terms of revenue and margins, the other segment contribute less then 10% of total revenue and have a negative margins (-66%) which is dragging down the profitability of company in a big way.

On the expenditure side, the company spends nearly 42% of its revenues on sales and marketing and nearly 17% on amortization.

Company/Business Outlook

Overall demand for employment advertising and recruiting and career development products and services has significant growth potential. The worldwide market for staffing and employment advertising is large and shifting online at a rapid pace. Growing market size and rapid shift from offline mediums (print etc) to online mediums (websites etc) presents a positive outlook for industry.

The company's outlook is positive due to its own growth and due to growth potentially of the industry in which it operates, moreover going forward company's financials are likely to improve with time. The company's revenues are likely to improve further due to money spent on marketing and advertising by company (44% of revenue) and reduction in amortization expenses (currently 17% of revenue and likely to reduce not only in % but in term of absolute numbers also). Its interest expenses are also likely to come down with time because the company is generating enough cash and it is not likely to raise more funds to support its current business and it is not intended to declare any more hefty dividends in future. Going forward it is also expected that its loss make units will also start showing positive results, which will be a big positive for the company.

Valuation/Offer Value ($ in thousand)

The company may not be able to perform this well; chances of company of performing well are two out of ten.

Assuming that company shows:

1. 50% percent rise in revenue year on year in FY 2007 and FY 2008 from $ 101630 (consider e-financials contribute for whole year) in FY 2006 to $ 152440 in FY 2007 and to further $ 228650 in FY 2008.

2. Operating margins increase by 4% to reach 23% in FY 2007 and 6% to reach 25% in FY 2008 due to reduction in expenses in % terms as compare to revenue and also due to positive contribution from currently loss making units/business (job fair business, Dice India, and JitM).

This leaves the company with operating profits of $ 35061.2 and $ 57162.5 in FY 2007 and 2008 respectively and after detecting interest cost of nearly $ 16000 and $ 12000 and income tax at 35%, which leaves the company with net profits of $12390 and $29355; that is EPS of $ 0.20 and $ 0.47 for FY 07 and FY 08 respectively.

This means even if the company performs exceptionally well, at an offer price of $12 the company's share is available at one year forward PE of nearly 63 and two year forward PE of nearly 26, in best case scenario, whereas its nearest competitor, Monster Worldwide (MNST), is available at one year forward PE of nearly 30 and is currently growing at above 20%, with much bigger size, much stronger balance sheet and a strong stock repurchase plan.

We rate this IPO 2 on scale of "1 to 5" (5 for best) on account of two things:

1. The offer price seems to be too high.

2. There was a huge amount of non-mandatory dividends ($107.9 million or $1.95 per share) that the company paid just before this offering, which has made its balance sheet much weaker then earlier. (The company is not expected to declare any dividend in foreseeable future)

Disclosure: none