Updates, updates…

Some more follow-ups this week:

  • coupa-softwareEarlier this month Coupa Software proved to be one of the very few completed AND successful tech IPOs this year, despite reporting a loss of $24m for total sales of $60m. The shareholders were wise enough to limit the sale to $153m worth of shares, a fraction of the $1bn+ total enterprise value, in order to price the IPO at the top of the range. On the first day of trading the share price had jumped by 121.7% to $39.71, although it has since cooled down to c.$27. In any case this event shows a clear investor appetite for this kind of assets – good news for the likes of Uber and Airbnb.
Coupa Software share price evolution in USD since IPO. Source: Yahoo Finance
Coupa Software share price evolution in USD since IPO. Source: Yahoo Finance
  • On the contrary Theranos, once valued at $9bn, is close to bankruptcy after the FDA pointed out failures in its patient data collection procedures, highlighting the risks for investors who put their money in unicorns operating in ‘regulated’ areas such as healthcare or financial services – remember Lending Club.
  • Credits: rt.com
    Credits: rt.com

    Airbnb is facing ‘life-threatening’ disputes in New York and San Francisco whose governors have expressed the intention to rein the ‘short-term rental’ offering in. It is indeed argued that this type of systems contributes to the increase of rents in tight dwelling supply areas since landlords prefer to rent unoccupied flats on a short-term basis rather than putting it back on the market. So far the New York governor has approved a law which allows the city to fine landlords who list apartments for rentals of less than 30 days – a ‘half-baked measure’ difficult to enforce given that the authorities do not have access to the landlords’ identities.

  • After China, Uber is facing tough competition in Russia where Yandex Taxi, funded by the eponymous deep-pocketed search engine, has decided to cut its minimum base fares in half, leading to a taxi driver protest.
  • More generally the funding environment for start-ups has deteriorated slightly as investors prove increasingly selective in their investment decisions. Venture capital investment in European companies dropped 32% yoy in Q3, in line ith the 35% YTD drop noticed in California. The IPO window has also proven more and more difficult to reach, with investors perceiving some proposed valuations “ludicrously overpriced compared to existing peers”.
  • Credits: www.juancole.com
    Credits: www.juancole.com

    Twitter is back in the doldrums after the last takeover candidate, namely Salesforce, dropped the case after careful deliberations. The share price had already taken a hit after Microsoft denied interest, lowering the competitive tension. Although some experts believe that the company would represent a great ‘trophy asset’ for an activist shareholder, management has now shifted its attention back to streamlining its cost structure, initially designed to serve more than 500m users, way higher than the actual user base (300-350m). This exercise will result in 300 employees losing their job this year, according to Bloomberg.

Twitter share price evolution over the last 60 days in USD. Source: Yahoo Finance
Twitter share price evolution over the last 60 days in USD. Source: Yahoo Finance
  • Carrefour and Auchan have launched initiatives to tap into the wisdom of start-ups to boost their digital capabilities. Les Echos reports that Carrefour has built relationships with more than 150 start-ups and has invested in the VC fund Partech Ventures while Auchan organised earlier this month its first ‘Salon des start-ups’. Due to its close proximity with historical retailers, Lille appears as the spearhead of ‘French retail tech’, having hosted the #conext show as well.
  • UBS became the latest major bank to join the ‘robo-advisor trend’ after it announced that it would roll-out such a service in the UK no later than next month. This decision will make the service available to users with as little as £15k in personal savings, although the 1% annual fee levied for customers investing solely in ‘passive’ funds is still high compared with industry best practices. In the same vein Charles Schwab announced its robo-advisor service was now managing more than $10bn in assets, a c150% yoy growth. The first independent ‘French tech’ player, Yomoni, has much more modest ambitions, targeting $1bn of AuM by 2020.
  • Apple reported its first annual decline (9%) in iPhone sales volumes (in line with analysts’ expectations) despite the misfortune of the Samsung Galaxy S7.
Updated chart showing yoy ASP and sale volume evolution for the iPhone. Sources: SEC filings, author analysis
Updated chart showing yoy ASP and sale volume evolution for the iPhone. Sources: SEC filings, author analysis

That’s it for now!

Blackberry: entangled in the weeds

Blackberry closed an era of mobile phone history by announcing at the end of last month that it would stop manufacturing all handsets. This decision followed a first move in July aimed at discontinuing smartphones with physical keyboards such as the Classic to focus on touchscreens. The transition period was undoubtedly short but expected as John Chen, Blackberry’s CEO, had announced that he would close the handset division if it could not turn profitable by end September.

A future collector's piece. Credits: ww.blackberry.com
A future collector’s piece. Credits: ww.blackberry.com

We could not criticise Blackberry for failing to try and reverse its fortune though. In the same month of July it released a new Android-powered phone, the DTEK50, lucidly dropping its out-of-favour Blackberry OS – which the firm for long thought was protected by subscription fees levied from its 80m+ users. This ‘last-ditch’ attempt met the same fate as the Priv, another Android phone the Canadian firm launched in November 2015. Despite advertising proprietary encryption technology, both models did not prevent Blackberry’s market share from dropping into ‘0.1% territory’ (even the American Senate dropped the phone earlier this year), which makes profitability almost impossible to reach. Handsets will now be manufactured under license and sold primarily in emerging Asian markets, including Indonesia.
Blackberry has since then decided to focus solely on enterprise & government security software, which now account for two thirds of the company’s revenues. The division has been boosted by a string of acquisition in recent years, including Good Technology. Former competitors, such as Samsung, have now become partners.

Blackberry has now found a more modest niche to focus on, although this does not mean that trouble is over. Last June I wrote (privately) a short equity analyst note on the firm, in which I concluded that the stock was a ‘sell’ at $7.26 per share – price is $7.68 as of today.

Blackberry share price evolution since 2006. Source: Yahoo Finance.
Blackberry share price evolution since 2006 (in USD) – flat electro-encephalogram. Source: Yahoo Finance.

I still believe many of the conclusions are still relevant:

  • The software arena (or ‘Enterprise Solutions & Services’ in Blackberry language) is not immune from competition, as Samsung and Android have been developing their own range of services and applications, and it remains Blackberry’s sole lifeline. Given that Blackberry has not yet secured a robust and diversified range of B2B customers for its solutions, the ground is ‘up for grab’.
  • Blackberry has built its security software through a range of acquisitions (7 over 2 years) completed at a fast pace and which may have subsequently been overpaid – 50% of the $724m spent on acquisitions in 2016 has been recorded as goodwill. Furthermore, the harmonious integration of these various pieces as well as the construction of a real ‘in-house’ R&D capability in this field remain to be proven – especially since Blackberry has been cutting its R&D effort over the last 5 years.
Historical evolution of Blackberry's annual R&D 'effort' between FY12 and FY16 (in USDm). Source: Author research.
Historical evolution of Blackberry’s annual R&D ‘effort’ between FY12 and FY16 (in USDm). Source: Author research.
  • The value of shareholders’ equity now largely depends on the value of intangible assets, primarily patents, whose valuation could be subject to significant impairment. As an example in 2015 and 2016 Blackberry decided to cease enforcement and abandon legal right and title to patents with a net book value of $34m and $136m respecctively (approximately 5% of today equity’s book value).

blackberry_patch_l1

Readers born after 1995 will certainly watch the following video with ‘amused’ eyes – yes, this used to be the sharp end of mobile technology.

3 follow-up points from earlier articles

I have been covering an increasingly broad range of topics on this blog, some of which have been recently making the news:

  1. Credits: www.forbes.com
    Credits: www.forbes.com

    A loss-making Twitter has been wooed by a handful of high-tech companies including Google and Salesforce. The Financial Times debates the rationale for such an acquisition: unlike LinkedIn, which was recently acquired by Microsoft, the information published on the social network is fully public – and the ‘voice from the public’ is the only asset that Salesforce could leverage. Google, conversely, can use Twitter as an advertising vehicle – which makes the FT believe that Facebook could also represent a credible bidder. Twitter and Deutsche Bank both suffer from a wrong stance towards diversification (excessive in the case of Deutsche, too limited in the case of Twitter), argues John Gapper from the Financial Times – a view I personally subscribe to.

  2. Large supermarkets have been squeezed between decreasing traffic and food prices and increasing rents. This ‘scissor’ phenomenon has led food retailers to try to diversify their revenue streams; Sainsburry’s has for instance added Argos in-store concessions in some of its largest formats.
  3. Instead of perceiving start-ups as overvalued threats to incumbent tech titans, could we imagine a win-win partnership? This is the question asked by Ludovic Ulrich in TechCrunch. A successful relationship with an established brand name gives credibility to the start-up (and its valuation) and grants immediate access to a much wider audience, while helping the big corporate handle the rapid pace of change. This comes at a time when the IPO window is narrowing, although Takeaway.com managed to list itself last week without any reported quarterly profit yet.

‘Proper’ posts back later this week (hopefully).

9 investor considerations about unicorns (2/2)

[continued from Monday]

logo6. Private information leaves investors in the dark: No other example could better embody this issue than Rocket Internet. Valued at €6.7bn after a successful IPO in 2014 the company is now worth less than 50% of this amount. The lowered valuation reflects two major investor concerns. First, none of the companies in Rocket Internet has proved profitable yet, despite earlier management commitments to IPO one of its companies by end 2016 – a pledge that has now become a promise to turn at least 3 companies profitable by end 2017. Second, and more importantly, in the absence of benchmark, Rocket Internet can use a lot of discretion when valuing its private investments and the Global Fashion Group case shows that Rocket errs on the very aggressive side of the spectrum. This explains why Rocket Internet currently trades at 1/3 of the value of its companies as reported in April – the market believes there are other exaggerations lying in the dark. Research teams focused on private companies (Pitchbook is one of the most famous) have been proliferating in an attempt to guide prospective investors – but the task proves harder in the absence of official financials.

Share price evolution of Rocket Internet since IPO (in EUR). Source: Yahoo Finance.
Share price evolution of Rocket Internet since IPO (in EUR). Source: Yahoo Finance.

7. Soaring valuations are a rational but meaningless answer to a biased set of incentives: Showcasing the highest possible entreprise valuations, especially greater than the ‘magical’ $1bn, represents an efficient way for stakeholders to get (almost free) publicity in a hypercrowded VC market, but such assumptions make little economic sense. In the extreme, if I invest $1 in any given company to get 0.0001% of its capital, the company will have been implicitly valued at $1bn and could theoretically claim to be a unicorn. In real life, Airbnb used a $30bn valuation to raise $550m, i.e. less than 2% of the pre-money capital. Venture capitalists could thus be incentivised to dilute themselves in order to benefit from a better valuation. For instance, if a VC wants to invest $100m in a company, in the case it gets 12% of the shares the company will reached an implicit equity value of $833m ($100m/12%); but if the VC decides to agree on not 12% but 9% of the shares (which make a limited difference a exit unless the firm becomes the next Facebook), the company is now valued $1,111m  ($100m/9%) and has now entered the unicorn club. Great publicity for the firm, but also for the VC, which will be able to leverage this investment case to attract new investment opportunities and/or investors – in that respect Quanergy or Takeaway.com will certainly offer a good window for its backers. For the company’s existing shareholders, this capital inflow priced at a discount is a godsend – Deliveroo raised a $275m Series E last month with no real growth agenda.

8. In fundraising, quality is at least as important as quantity: A global investor footprint is also crucial, especially when the company is considering international expansion. Raising debt, which implies periodical interest payment and thus some form of cash flow predictability, is also a good indicator of the robustness of a business model – Airbnb raising $1bn of debt is a positive sign in that respect.

9. Glimpses of hope announce a rude awakening: As investors are digesting the first wave of start-up investments, they are showing decreasing tolerance for ‘hockey sticks’ in business plans, and TechCrunch recently noted that required metrics and milestones for Series A fundraising are now closer to the ‘classic’ Series B. The number of new European unicorns reached 10 in 2015, down from 13 in 2014. Fundraising amounts in Europe were down $1bn yoy in H1 2016 to $5.9bn.  Showing a clear path to profitability is a key consideration to raise additional fund and investors are less prone to buy the ‘scalability’ argument. Has the European market slowed down quickly enough? This was at least the viewpoint that the Financial Times was defending before the summer – referring to the fact that there is one new unicorn in Europe every 2.5 months compared with one every 1.7 months last year. On top of a structural regression to the mean, Brexit could harm the financing of UK-based start-ups, although the first post-referendum figures tend to contradict this belief. The adjustment could be tough to make internally: entrepreneurs need to switch from ‘hypergrowth’ to ‘sustainable growth’, a mode that requires different skills, a revised strategic approach and a distinct management style.

andrew-evans“Unicorn valuations, in many cases, are a triumph of hope over reality.”

(Andrew Evans, Equity Value fund manager at Schroders, in the Financial Times)

Any other thoughts? Please feel free to contact me or comment under this article.