Blog Post

Skype Files for IPO

Skype, the Internet telephony company, is looking to raise up to $100 million in an initial public offering, according to an S-1 filing with the U.S. Securities and Exchange Commission. The company will be selling American Depositary Shares (ADSs) and will trade on the NASDAQ Global Market. The offering will be managed by Goldman, Sachs & Co., J.P. Morgan, Morgan Stanley and others. The offering was widely viewed as in the cards, though I admit it came sooner than I thought. (For more on what this filing means for tech IPOs, check out Stacey’s story. )

Skype’s decision to go public is a result of the company turning into a cash machine. It currently has 560 million registered users and about 124 million of them are active on monthly basis, while about 8.1 million of them are monthly paying users — who on average pay $96 a year for the service. Any increase in the number of average monthly paying users is going to help the company erase any losses and goose up its revenues.

For the first six months of 2010, Skype reported revenue of $406 million, and net income of $13.2 million. During 2009, Skype had sales of $719 million and a loss of $99 million. Skype’s revenues are only going to accelerate as the company’s deals with folks like Verizon Wireless (s vz) and television makers such as Samsung and LG start paying off.

The company had 6.4 million billing minutes during the first six months of 2010, versus 10.7 billion minutes during 2009. The company logged 88.4 billion Skype-to-Skype minutes so far in 2010, versus 113 billion Skype-to-Skype minutes in 2009. This shows that with time, the network effect only compounds usage, which is a good thing for the company. Even a fractional increase in the usage can translate into billable minutes.

All this isn’t without risk, as Skype notes in the S-1.

[W]e have historically derived a substantial portion of our net revenues from a single product—SkypeOut. For the pro forma year ended December 31, 2009 and for the six months ended June 30, 2010, 86% and 87% of our pro forma net revenues and net revenues, respectively, were derived from the use of SkypeOut. Due to this dependence on SkypeOut as our primary source of net revenues, we are subject to an elevated risk of reduced demand for our SkypeOut product.

Why the huge gap between the number of registered and paying users, as noted above? For one, Skype says that not all registered users are unique users.

The actual number of registered users however is likely to be lower, potentially significantly, for two primary reasons. First, some legitimate users may register more than once and therefore have more than one account. Second, we experience irregular registration activities, some of which we believe are the result of fraudulent activities that involve the creation of a significant number of spurious user accounts.

eBay (s EBAY) sold a 65 percent stake in Skype to private equity investors in November 2009 for about $1.9 billion. The group of investors included Silver Lake Partners, Canada Pension Plan Investment Board. Skype founders Niklas Zennstrom and Janus Friis settled with the company after a long prolonged fight over intellectual property and got a hefty portion of the new Skype. Skype gave JoltID, a company controlled by Zennstrom and Friis, about 10 percent of the equity (valued about about $224 million) and a net payment of $85 million in cash. JoltID bought 3.4 percent of shares in cash for $85 million. In addition, Skype invested $10 million in Niklas and Janus’ venture fund, Atominico and and another $6 million in their new service, Rdio.

The S-1 does not describe who is selling how many shares and who actually stands to make the most amount of money — though I suspect we’ll hear that in coming months. Either way, the Skype IPO has the makings of one of those hot deals — one that has a dash of irrationality attached to it.

Related research from GigaOM PRO (subscription required):

* Report: The Consumer Video Chat Market, 2010-2015
* Web Worker Survey 2010: Skype accounted for 91% of the web working market for VoIP apps in our survey.Report: The Consumer Video Chat Market, 2010-2015
Skypekit analysis: SkypeKit: Skype’s Platform for CE-Based Communication

47 Responses to “Skype Files for IPO”

  1. The growth in users is their undoing actually. Why pay for calls when you can have it for free? Especially when Skype moves to mobile (3G, WiFi, Wimax), skype online availability will only increase, so less propensity to skype out.

    Skype should’ve at least expanded into other ventures – social networking (a couple hundred mln. users strong not a bad start), things that these scandinavian guys do (video, music) through the skype client, microblogging, etc.

    Compare Skype to Facebook. They look some kind of similar with the number of users, revenues. But skype’s margins are going to be much lower.

    • I think you make an important point here. Skype is very dependent on telecom carriers keep the internet ‘open’. If service providers, either wireline or wireless, starting deprioritizing skype traffic, the quality would drop and would lead to skype losing customers.

  2. Tyler York

    There seems to be way, way too much cross-pollination between Zennstrom and Friis’ companies. Skype has invested in their VC fund, their music startup Rdio, and their video startup Baaima/Joost. Not to mention that Skype paid out over $300m to buy IP from JoltID, which is another Zennstrom/Friis company.

    • The ordinary person may be able to buy shares for less than institutional buyers who pay the IPO price. The vasy majority of this year’s IPOs are trading below their offering prices, including Broadsoft which was the latest VoIP related company to go public a couple of months ago. This will probably trade at a premium to Vonage, but won’t be a high flier.

      • Skype is valued at over $2B. Vonage market cap is 500M with only $70M in net debt now. Their margins, revenues, etc. are very similar… save for the top line growth rate obviously. Skype without question has a big big opportunity.

        But interestingly enough, Vonage is now in the free p2p and enhanced servies game with their free facebook network calling app launched last week, somewhere they’ve never been before.

        When Vonage starts enabling more social communities with their p2p strategy which doesn’t require any new account/pw, only an app… competition is going to really heat up between the two imo.

      • My point regarding Vonage was not to compare current valuations. If you recall, Vonage went public with great fanfare – priced the stock at $17 per share and had a $2.6B market cap, when revenues were a fraction of what they are today. But the stock went nowhere but down and hit a low of $0.37 per share, despite turning profitable and growing revenue.

        It doesn’t really matter what the valuation of Skype’s last funding/buyout was, it matters what investors are willing to pay in a public market. The IPO underwriters seem to do a great job these days of touting the stock to institutional investors during the road show and getting the IPOs to market (thus “earning” their underwriting fees), but the problem is that 85% of these IPOs subsequently trade down in the public markets.

        Skype may be a little different case, since they are probably floating a very small number of shares (they hope to raise $100M and last valuation was $2.7B). So if there are few shares trading, this may create enough of demand shortage to artificially inflate the stock price, at least for a while.

        The other variable is whether they can convert customers to pay for premium services like video. It takes an awful lot of $0.01 per minute phone calls to add up to big profits, but 40% of their calls carry video, and they are just launching this year with embedded HD video capability on several flat screen TVs. This could ultimately become a premium paid service that will blow away any success they’ve had with voice-only calling.

        Not to mention the mobile apps on iPhone and Android, that will make them the world’s largest carrier of mobile voip calls.

        But it’s all about execution and profitability…