Snap shoots for the sky,
promises little in $3 billion IPO pitch
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[February 03, 2017]
By Lauren Hirsch and Liana B. Baker
(Reuters) -
Snapchat
owner Snap Inc shot the opening salvo in its $3 billion initial public
offering on Thursday, outlining aggressive expansion plans but offering
new investors no say on how the company is run and no promise of
profits.
Snap's publication on Thursday of its IPO registration document sets the
stage for its upcoming marketing campaign to convince investors to look
past its widening losses and the firm grip of its founders, and focus on
its rapid growth of active users.
The number of Snap's daily active users grew to an average of 158
million at the end of December, up 48 percent year-on-year, Snap
revealed. However, its net loss widened to $514.6 million in 2016 from
$372.9 million the year before.
While Snap will have time to polish its marketing pitch in the run-up to
the IPO planned for March, some analysts were taken aback that the
company was just beginning to reap cash from its product.
"What surprises me the most is that it is still very early days when it
comes to Snap making money," said Rohit Kulkarni, managing director at
private securities investment firm SharesPost.
Snap had confidentially registered with the U.S. Securities and Exchange
Commission for an IPO late last year. It kept the filing under such
tight wraps, even some of its IPO underwriters had not seen it prior to
publication on Thursday, sources familiar with the matter previously
told Reuters.
Snap said in the IPO registration document published on Thursday it
would become the first U.S. company to go public with shares on offer
not granting voting rights to stock market investors. Its founders, Evan
Spiegel and Robert Murphy, will keep control of the company.
Snap could be valued at between $20 billion to $25 billion, according to
sources familiar with the situation who asked not to be named because
the matter is confidential. That would give the company the richest
valuation in a U.S. technology IPO since Facebook Inc.
Snap, which launched itself in 2012 with an app that sends disappearing
messages, rebranded itself last year as a camera company and started
selling $130 video camera glasses. It generates the majority of its
revenue from advertising, seeking to challenge the dominance of internet
giants such as Facebook and Alphabet Inc's Google.
"The industry has been crying out for new advertising units" says Ian
Schafer, founder and chairman of ad agency Deep Focus, referring to the
tight hold Facebook and Google have on the digital advertising
marketplace.
In its IPO registration document, Snap cited Apple Inc, Google, Twitter
Inc, Facebook and its photo-sharing platform Instagram as its
competitors.
TIGHT CONTROL
Spiegel, the 26-year-old Snap co-founder, last year earned $503,205 in
salary, with a $1 million bonus. Imran Khan, Snapchat's chief strategy
officer whom it hired from investment bank Credit Suisse Group AG in
2014, earned $241,539 last year with a $5.2 million bonus. In 2015, Khan
also received $145.3 million worth of Snap shares as a sign-up bonus.
Spiegel and Murphy will maintain tight control over Snap's stock through
a unique three-share class structure. The structure will give Spiegel
and Murphy the right of 10 votes for every share. Existing investors
will have one vote for each of their shares, while new investors will
have no voting rights.
Snap said it couldn't predict if the structure would "result in a lower
trading price or greater fluctuations" in the stock.
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A billboard displays the logo of Snapchat above Times Square in New
York March 12, 2015. REUTERS/Lucas Jackson/File Photo
Keeping tight control is common in companies closely associated with their
founders, who often prefer to grow their business without being questioned by a
broad array of investors. Still, offering a class of stock with no votes in an
IPO is unprecedented.
Though the structure has drawn some criticism for not giving stock market
investors the opportunity to have input, some people close to the company have
argued that investors can "vote with their feet" by not buying into the IPO if
they are not comfortable with the arrangements.
"Investors have to decide, am I going to avail myself of the opportunity to buy
the stock, and forget about the fact that somewhere down the road they are
likely going to run into trouble?" said James McRitchie, an independent
corporate governance activist who has pressed for more equal voting rights at
companies including Facebook.
PAYING GOOGLE
Snap had $404.5 million in sales in 2016, up from $58.7 million in 2015.
However, it had adjusted losses before interest, tax, depreciation and
amortization last year of $459 million, compared with $292.9 million in 2015.
Snap's biggest losses stem from "hosting fees" which it pays to cloud computing
companies such as Google to use their infrastructure for its data. It will pay
Google $2 billion over the next five years to use its cloud computing services.
Because Snapchat users rely heavily on data-heavy pictures and video, the cost
of these service is high. Still, the proportion of the company's costs to its
revenue has been declining. Its strategy has been to bargain for better hosting
rates as its growing number of users buoys its negotiating leverage.
"They
are adding infrastructure ahead of growth, and that is why you have some
front-loading of losses," said SharesPost's Kulkarni.
Some companies such as Facebook have their own hosting platforms, though this
model can be more costly.
Facebook's Instagram, which recently introduced disappearing video content
similar to Snapchat, had 600 million users as of late last year. Like Snapchat,
Instagram sells advertising on its platform.
Snap's aggressive expansion is reflected in its staff numbers. By the end of
last year, it had increased its number of employees to 1,859 from 600 in 2015.
Snap said it would use the proceeds from its IPO for general purposes, including
working capital, operating expenses and capital expenditures.
Snap said it will list on the New York Stock Exchange under the ticker SNAP.
Morgan Stanley, Goldman Sachs Group Inc, JPMorgan Chase & Co and Deutsche Bank
AG are leading the offering as underwriters.
(Reporting by Lauren Hirsch in New York and Liana Baker in San Francisco;
Additional reporting by Tim Baysinger in New York, Julia Love in San Francisco
and Ross Kerber in Boston; Editing by Meredith Mazzilli and Bill Rigby)
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