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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
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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