October 17, 2012 2:00 am EST – With last week's very strong IPO debuts, the IPO market has officially returned from the summer lull and swung into full force last week with the Workday offering (NYSE:WDAY), which at $637 million was the largest tech IPO since Facebook. (Workday closed up over 70% in its first day of trading, despite already pricing well above its initial range). In addition to Workday, four other companies debuted last week: Realogy, Shutterstock, Kythera Biopharmaceuticals, and Intercept Pharmaceuticals. While Workday's Friday opening stock price soared more than 70% in its first day of trading, the other four offerings also climbed at least 20% in their first trading sessions on Thursday. That is the first time in more than 10 years that as many IPOs have popped over 20% in their first day of trading.  

These run-ups in pricing are a strong indicator that IPO investor sentiment - at least for "favored" sectors - heading into fourth quarter of 2012 is high compared to the September IPO market, where only 2 offerings (Trulia and Fleetmatics Group) debuted with gains exceeding 20%. As of mid-October there has been 12 IPO pricings, and 20 since September 19 alone, one of the strongest 30-day period in years for successful IPO pricings. With 111 companies having gone public in the first three quarters of 2012, 2012 is now back on track to having the second highest number of IPOs since 2007. 
 
PrivCo CEO Sam Hamadeh comments, "the current IPO market remains selective, and the most important categories are: growth, growth, and more growth. For example, the recent attempted IPOs of slow-growing restaurant companies CKE Restaurants (PrivCo Private Company Ticker: CKERP) and Dave & Busters (PrivCo Private Company Ticker: DAVEBP) were pulled despite lowered pricings. Currently, the IPO market is dominated by the emerging cloud software industry, namely B2B, SaaS and enterprise software companies. Approximately half of all IPOs in 2012 have been in these fields, according to PrivCo research. Other industries favored include branded consumer goods, which bets on the rapidly growing Asian upper-middle class, and select biotech & pharmaceuticals with promising drugs far in the FDA approval pipeline." 

PrivCo Reviews Three Of The High Profile Private Companies With IPOs Expected To Price This Month:

Restoration Hardware (PrivCo Private Company Ticker: RESTP), the luxury home furnishings retailer, is expected to go public on the New York Stock Exchange this month. Restoration Hardware executives state in their S-1 filing that the proceeds will be used to pay down outstanding debts. Also expected to enter the market this month is utility sector cloud networking solutions provider Silver Spring Networks (PrivCo Private Company Ticker: SILVRP), who is expected to use the IPO proceeds for corporate and expansion purposes. Lastly, SolarCity (PrivCo Private Company Ticker: SOLCP), the solar panels retailer/leaser is expected to debut on NASDAQ, using the proceeds for corporate needs and possible acquisitions. 

PRIVCO's SUMMARY OF KEY FACTS ON THREE IPOs ON THE CALENDAR:

1. Restoration Hardware (PrivCo Private Company Ticker: RESTP)

Offering Size: $150M

Filing Range: TBD

Revenue (Fiscal Year end January 31): $958.1M (2012), $772.7M (2011), $625.7M (2010)

1 Year Revenue Growth (2011-2012): 24%

TTM Revenue (June 30): $1.05 Billion (22% YoY growth)

Net Income: $20.6M (2012), -$7.1M (2011), -$28.7M (2010)

EBITDA: $80.2M (2012), $41.1M (2011), $17.6M (2010)

Credit Facility: The total outstanding amounts under the Restoration Hardware, Inc. revolving line of credit was $129.6 million as of July 28, 2012. The maturity date of the revolving line of credit is August 3, 2016.

Term Loan: The total outstanding amounts under the Restoration Hardware, Inc. term loan was $14.8 million, net of $0.2 million of unamortized debt issuance costs, as of July 28, 2012. The term loan bears interest at a rate of LIBOR plus 5.0%. Restoration Hardware, Inc. is required to make quarterly payments of $1.25 million beginning October 2012 with the final payment in April 2015.

Total Debt: $144.452 million 

Proposed Ticker: NYSE:RH

Expected Trading Begins: 4th Quarter 2012

Lead Underwriters: Bank of America, Goldman Sachs

Co-Managers: Piper Jaffray, Stifel Nicolaus Weisel, Baird, William Blair

Use of Funds: Repay a portion of the outstanding amounts under the Restoration Hardware, Inc. revolving line of credit and term loan and to pay other fees and expenses incurred in connection with the offering, including payments to affiliates of Catterton, Tower Three and Glenhill pursuant to the terms of the management services agreement Restoration Hardware has entered into with them.

Notes: 

  • Restoration Hardware has posted double-digit revenue growth for 10 consecutive quarters as the company has also reduced its store base
  • For the 12 months ended July 28 (TTM), Restoration Hardware's earnings soared to $33.2 million, while revenue jumped 22% to $1.05 billion
  • Consumer company IPOs outperforming broader market (Michael Kors, Annie’s); home furnishing industry performing well amid housing market recover – good timing for an IPO
  • Acquired in 2008 by Catterton Partners in a $176 million buyout (over a rival offer by Sears), and went under a brand revitalization (with significant re-merchandising)
    • The company was taken private in 2007 due to lack of profitability, over-expansion and poor market conditions
    • Hired Gary Friedman (former COO of William-Sonoma), Ken Dunaj (former SVP Logistics of William-Sonoma), and Carlos Alberini (former COO of Guess?, Inc.) 
    • Slimmed down supply chain from 63 to 25 suppliers
    • Decreased COGS as percentage of Revenue from 43% to 34% while keeping debt at a constant, manageable level
  • Risks:
    • ​Co-Chief Executive Carlos Alberini became sole CEO after Chairman and co-Chief Executive Gary Friedman (who was the key to the store’s brand transformation) stepped down due to allegations of sexual harassment with a female employee
    • Non-exclusive relationships with vendors: their vendors can sell the same products to any other stores

2. Silver Spring Networks (PrivCo Private Company Ticker: SILVRP)

Offering Size: $150M

Filing Range: TBD

Revenue: $237.1M (2011), $70.2M (2010), $3.3M (2009)

1 Year Revenue Growth (2011-2012): 237.6%

TTM Revenue (June 30): $228.6 billion (39.3% YoY growth)

Net Income: - $92.4M (2011), -$148.4M (2010), -$113.5M (2009)

EBITDA: -$19.7M (2011), -$41.9M (2010), -$46.9M (2009)

Financials Notes: When looking at losses need to take into account the sales cycle of selling a wireless smart grid network (hence the large deferred revenue balances)

Deferred Revenue: $157M (2011), $132M (2010)

Proposed Ticker: NYSE:SSNI

Expected Trading Begins: 4th Quarter 2012

Lead Underwriters: Morgan Stanley, Goldman Sachs, Credit Suisse

Co-Managers: Jefferies, Piper Jaffray, Stifel Nicolaus Weisel, Baird, Evercore, Cannacord Genuity, Pacific Crest Securities

Use of Funds:  Silver Spring Networks plans to use the net proceeds of this offering and the concurrent private placement for general corporate purposes, including working capital and potential acquisitions

Offering Notes: Concurrently with this offering, entities affiliated with Foundation Capital will purchase from Silver Spring Networks in a private placement an aggregate of $12 million of shares of Silver Spring Networks common stock at the same price as the price offered to the public in the offering

Notes: 

  • Good market timing for IPO: Cloud SaaS service for utility sector – currently just starting to gain benefits of advanced networking, big data management and mobility of cloud (revenue growth reflects this)
  • Good financial trend: dramatic increase in revenues (Up 238% 2010-2011) and decreasing losses (able to keep costs in check as revenue grows); however, revenue growth slowing down (2012 TTM revenue only up 39% YoY)
  • Big name customers: PG&E, Florida Power & Light (FPL), Pepco, Commonwealth Edison, Progress Energy
  • International expansion:
    • Brazil in July 2012 – big partnership contract with CPFL Energia, Brazil’s biggest non-government utility
    • New Zealand in August 2012 – partnership with Unison, one of the larger electricity distribution businesses in New Zealand
  • Risks: 
    • Customer concentration: historically 3 customers have comprised of over 70% of total revenue (of these, 2 are recurring)
    • There are a limited amount of utility customers; competition in field is high
    • Networking companies historically have low margins 

3. SolarCity (PrivCo Private Company Ticker: SOLCP)

Offering Size: $201 million

Filing Range: TBD

Revenue (Fiscal Year end December 31): $59.6M (2011), $32.4M (2010), $32.6M (2009)

TTM Revenue (June 30, 2012): $110.7M

1 Year Revenue Growth (2010-2011): 83.6%

3 Year Revenue Growth (CAGR) (2009-2011): 22.8%

Net Loss: -$73.7M (2011), -$47.1M (2010), -$22.7M (2009)

Cost of Sales (2011): $47.1M

Operating Expenses (2011): $73.7M

Total Debt: $61.7M (2012), $17.2M (2011)

Total Financing Obligations: $176.7M (2012), $68.1M (2011)

Proposed Ticker: NASDAQ:SCTY

Expected Trading Begins:

Lead Underwriters: Goldman Sachs, Credit Suisse, Merrill Lynch  

Co-Managers: Needham & Company, Roth Capital Partners, LLC

Use of Funds: General corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. Expansion of business through acquisitions or investments

Notes: 

  • Revenue growth in tough industry (Up 84% 2010-2011, 23% CAGR 2009-2011)
  • ​The current pricing softness in the solar industry is hurting the bottom line of solar panels makers, but SolarCity is an installer, not a manufacturer, so lower prices actually help them increase their profit margins
  • Biggest shareholder (31.9%) is Elon Musk (PayPal, SpaceX, Tesla Motors); founders of SolarCity are his cousins Lyndon and Peter Rive
  • Raised an impressive $1.57 billion in 23 funds
  • Fundraising success due to 30% federal investment tax credit cash grants; this allowed investors to take the credit in form of cash from 2009-2012. This rate is expected to fall to 10% post 2016.
  • High cost of sales: cost of panels (79% of revenue in 2011)
  • 90% of all customers lease instead of purchasing panels, so SolarCity shoulders the costs and needs heavy funding to survive
  • Risks:

    • Alternative energy is not a favored investment, and industry track record has been terrible (Solyndra - withdrew IPO/bankruptcy, BrightSource – withdrew IPO)

    • Recently, high profile clean energy company A123 Systems, Inc. (NASDAQ:AONE) filed for bankrutpcy - Bad timing for SolarCity's IPO

    • As of October 2012, SolarCity is being investigated by U.S. Treasury Dept. and IRS for overstating market value of solar panels when claiming cash grants; this could potentially result in cessation of future grants

    • Facing supply chain pressures as Chinese solar companies (main manufacturers of solar panels for SolarCity) are facing problem of huge debt loads and some are expected to go out of business (like Evergreen Solar, which went bankrupt in 2011)

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