IPO Preview: Bazaarvoice

| About: Bazaarvoice (BV)

Based in Austin, Texas, Bazaarvoice (proposed BV) scheduled an $86 million IPO with a market capitalization of $4531 million at a price range mid-point of $9 for Friday, February 24, 2012.

BV is one of four IPOs scheduled for this week (see our IPO calendar). Notice that Yelp! is scheduled for next week.

BV is a 'social commerce' platform that provides customer ratings and information to clients. According to BV's website it serves "over 30% of the world's leading global brands."

Revenue increased 67% to$75 million from $45 million for the year ended January, 2012. Losses increased to $18 million from $15 million. BV consistently loses money because the business model is based on heavy up-front customer acquisition costs.

At this point in its trajectory and with its customer base, BV should be on a much clearer path to profitability, which it is not based on looking at the last six quarters.

It does, however, have a high customer retention rate and a nice sequential increase in top line revenue.

Our initial thought was to wait on the sidelines and give BV a chance to become profitable.

However, we changed our conclusion to buy on the IPO because the market is hungry for 'cloud' related companies, especially with the Dow flirting with 13,000.

BV is a Software as a Service company that turns social media into social commerce for the world's best global brands by enabling authentic customer-powered marketing.

BV lets consumers create and share ratings, reviews, questions, answers, and stories about products and brands on client websites. BV then syndicates that content across the Web and through the channel to reach shoppers wherever they are.

BV maintains that this customer-generated content has a tremendously positive influence on purchase decisions. It is also rich with customer intelligence, BV says, which BV analyzes and provides to clients so they can make real-time, information-based decisions that affect all aspects of their business - marketing, product R&D, and operations.

According to BV's web site it "helps over 30% of the world's leading global brands put customers at the center of their businesses - to turn social media into measurable social commerce."

Business Model
BV's business model focuses on maximizing the lifetime value of a client relationship. That means a negative cash flow up front for customer acquisition.

BV does have very good customer retention. Of the 122 clients acquired for the fiscal year ended April 2008, 93 or 76% were still clients as of April 2011.

Many clients pay in advance of the recognition of revenue and, as a result, BV's cash flow from clients may exceed the amount of revenue recognized for those clients in earlier periods of the relationship.

The Federal Trade Commission has directed attention to compensated blogging, endorsements and reviews, and state, U.S. federal and international government agencies have become increasingly focused on privacy in social networks and social commerce, including with respect to collection and use of personally identifiable information and the deployment and use of cookies.

In addition, with respect to BV's clients that are in regulated industries, such as banking and finance or healthcare, our activities may be subject to the regulations governing such businesses.

BV has several direct and indirect competitors that provide third-party social commerce solutions, including companies like PowerReviews, Inc. and Revieworld Ltd.

BV may also face competition from companies entering its market, including large Internet companies like Google (NASDAQ:GOOG). and Facebook, Inc., which could expand their platforms or acquire a competitor.

BV believes that its main competition is from traditional marketing and advertising programs used by businesses that remain hesitant to embrace social commerce solutions such as Ratings & Reviews.

Additionally, some businesses have developed, or may develop in the future, social commerce solutions internally. These businesses may consider their internal solutions adequate, even if BV's solutions are superior. BV is scheduled to price its IPO Thursday evening.

$72mm for working capital

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

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