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GoDaddy pre-IPO financial metrics flatter; Domain-registration group uses measures that turn heads

June 12, 2014 6:45 pm

GoDaddy financial metrics flatter ahead of IPO

By Richard Waters in San FranciscoAuthor alerts

GoDaddy, the US web services company best known for its TV adverts featuring scantily clad women, has found a new way to turn heads on Wall Street: customised financial metrics that show off its business performance in a flattering light.

The lossmaking domain name registration company, which filed for an initial public offering earlier this week, has added back a number of costs, including fees paid to the private equity firms that are among its biggest investors, to the earnings measure it wants to be judged on.

The adjustments enabled GoDaddy to show a profit of $199m under its preferred measure of “adjusted ebitda” (earnings before interest, taxes depreciation and amortisation) for 2013, compared with only $27m under the standard measure. It also reported a net loss of $200m.

“The more [costs] they add back, the more sceptical Wall Street would be,” said Lise Buyer, a former top-rated Wall Street analyst who now advises tech companies on their IPOs. In her view, fees paid to investors, in particular, should not be added back to profits.

US regulators have resisted novel profit measures from companies preparing for IPOs in the past, sometimes forcing them to drop the approach.

“We know they certainly didn’t look kindly on it when Groupon attempted a highly specialised view of ebitda,” Ms Buyer said. That internet company abandoned its preferred profit measure ahead of its own 2011 IPO.

The same profit adjustments promoted by GoDaddy are already used by its main listed rivals, Endurance International Group and Web.com, which also sell internet domain names and other web site services to small and medium sized businesses.

The measures also include adding back the costs of paying employees with stock, as well as revenues from long-term subscription contracts that US accounting rules force them to defer until future years in their formal numbers.

The use of adjusted earnings measures like these has threatened to confuse even financial experts.

“Half the analysts use it and half don’t. The Street estimates are all over the place,” said one investment analyst who follows the sector. This person added, however, that most investors do their own analyses and judge the web services companies on their cash earnings, not the measures of adjusted profits they publish.

GoDaddy dropped its controversial Super Bowl television advertising, which insiders have admitted was highly “polarising”, last year. But the approach earned it high recognition for a company involved in the low-key business of registering websites for small companies. It says it has an 83 per cent name awareness that puts it “among the most recognised technology brands in the US”.

Private equity firms KKR and Silver Lake paid $2.25bn for 72 per cent of the company three years ago. Based on the multiples of adjusted earnings Wall Street uses to value its rivals, it is now worth $3-3.5bn, though it is expected to argue for a significantly higher valuation based on the growth potential from its ability to sell extra services to its 12m domain name customers, who represent a fifth of all internet domains in use.

 

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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