U.S. IPO Recap: Candy Crush IPO Is Now In Play

by: Renaissance Capital IPO Research

Last week did not have any offerings [Sundance (NASDAQ:SNDE)] postponed a $136 million IPO), reflecting the shortened holiday week and the passed deadline to go public without full 2013 financial results. Despite the slowdown, the IPO world was abuzz after King Digital Entertainment's (BATS:KING) initial filing. The maker of Candy Crush, one of the highest grossing cross-platform apps and the most popular game on Facebook, demonstrated the power of a blockbuster mobile hit as revenues jumped more than tenfold in 2013. However, the company's most difficult challenge may be differentiating itself from the last game developer to go public, Zynga [(NASDAQ:ZNGA), down 47% since IPO], which was unable to duplicate the success of Farmville after its IPO in late 2011. From a broader perspective, the tech surge continued with a growing trend of SaaS and ecommerce companies entering the pipeline.

Just one company sets terms

Varonis Systems (NASDAQ:VRNS) set terms on Tuesday and was the only company to do so last week. Varonis produces software that allows enterprises to manage and search internal unstructured data produced in spreadsheets, word files, presentations, emails, and audio and video files. Last year's standout business intelligence company, Tableau Software (NYSE:DATA), has traded up 223% since its debut. Varonis is expected to price this week.

IPOs setting terms (week of February 17, 2014)
Company (Ticker) Business Deal Size ($mm) LTM Sales ($mm)
Varonis Systems (VRNS) Software that handles human-generated unstructured data $86 $75

The King and Zynga

Mobile and social gaming has attracted a lot of attention with King's recent IPO filing, along with news that Chukong Technologies could be planning its own IPO for the 2H14. While King's meteoric rise in revenues will draw interest, investors may be cautious considering its peer Zynga’s failure to recreate its pre-IPO success. A major concern is whether King is overly reliant on Candy Crush Saga, which accounted for 78% of revenue during 2013. And as Zynga demonstrated, it is difficult to predict the trajectory of casual gaming companies, whose customers are fickle and whose competitors face low barriers to entry (illustrated by the recent overnight success of Flappy Bird). In addition, King's most recent quarter saw sequential drops in revenue, EBITDA, and average monthly unique payers (MUPs), as Candy Crush matured. Yet King has several advantages worth noting. The company had 12.2 million average MUPs for the 4Q13, compared with Zynga's 3.4 million for the entire quarter before it went public. King's explosive growth was due to its ability to effectively market its product on mobile devices, which account for 70% of revenue (vs. 24% for Zynga in 2013, with the rest coming from Facebook). While Zynga was forced to acquire other developers (such as OMGPOP for $200 million in 2012), most of King's success has been internal and modeled on testing out new releases on its website before scaling up the best titles.

Key comparisons between King and Zynga
Metric (at IPO) King Digital Zynga
Expected Proceeds $500mm $1,000mm
LTM Revenue $1,884mm (up from $164mm) $1,025mm (up from $457mm)
EBITDA % 44% 31%
Acquisitions 1 19
Daily Average Users 124 million (109 in prior quarter) 54 million (59 in prior quarter)
Average Bookings Per User $0.056 ($0.065 in prior quarter) $0.058 ($0.051 in prior quarter)
% Revenue from top 3 games 95% 59%
% Revenue from top game 78% 27%

Education and ecommerce companies enter the pipeline

Two education-related companies submitted initial filings last week. Based in Hong Kong, Nord Anglia (NORD) operates 27 premium private schools for grades K-12. While for-profit schools are unusual, 2U (TWOU) has the more exciting story of the two. Tuition prices have skyrocketed, leading schools to face pressure from the government and massive open online courses (MOOCs). 2U provides a SaaS platform for universities to deliver online degree programs, post videos and documents, and harness a school-specific social media outlet.

In addition to King and 2U, another tech filer from last week was the ecommerce platform company Borderfree (BRDR), a SaaS provider that manages all aspects of a US retailer's international online sales. The company follows another global trade tech filer from the week before, Amber Road (NYSE:AMBR). From markets abroad, foreign exchange ecommerce listings expected soon include AO.com and Boohoo. JD.com, the major Chinese online retailer that filed last month, could soon control Tencent's (OTCPK:TCEHY) ecommerce platform in exchange for a 6% stake in JD.com. Tencent is Asia's largest Internet company and the maker of WeChat, a messaging and social app with large market penetration in China. JD.com’s deal was reported one day after Facebook acquired WhatsApp for $19 billion (see the key differences between WhatsApp and WeChat). Of course, the behemoth ecommerce IPO in the shadow pipeline is Alibaba, which has not yet announced an exchange.

New IPO filers (week of February 17, 2014)
Company (Ticker) Business Deal Size ($mm) LTM Sales ($mm)
King Digital Entertainment (KING) One of the largest mobile and Facebook game developers; maker of Candy Crush $500 $1,884
Nord Anglia Education (NORD) Operator of private schools teaching grades K-12. $300 $370
A10 Networks (NYSE:ATEN) Devices that improve network performance and security $100 $142
2U (TWOU) SaaS that enables universities to deliver education content online $100 $83
Borderfree (BRDR) International ecommerce platform for US retailers $86 $110
Versartis (VSTS.RC) Treatments for growth hormone deficiency $80 $0

IPO market snapshot

So far this year, the Renaissance IPO ETF, a basket of newly public companies that trades under the symbol IPO, has gained 5%. The 35 IPOs in 2014 have raised $6.8 billion and produced an average return of 25% from the IPO price. There have been 48 IPOs in the past 90 days, with total proceeds of $12.4 billion and an average return of 34% from the IPO price, and a post-IPO return of 11%, as measured by the Renaissance IPO ETF. The active IPO pipeline includes 104 companies looking to raise a total of $26.5 billion.