Skype Registers for IPO

Skype has submitted its preliminary S-1 to the SEC for an initial public offering. Helium comments. And some quick thoughts from us:

• The IPO document is 581 pages. Many of the fields for amounts and share quantities are still blank.
• Skype was founded in 2003.
• In 2010, Skype had 560 million registered users, a bit more than half the number of Facebook members.
• Skype claims the same “network” effects as Facebook, where the service becomes more valuable as more people use it.
• A group of private investors purchased Skype from eBay in November 2009, including Marc Andreessen’s venture capital firm, Andreessen Horowitz. These investors received a $60 million “success fee” for saving Skype from the rapine ways of eBay (along with $1.3 million for “out-of-pocket” expenses. Legal and advisory fees for this transaction totaled an astonishing $37 million. The purchase price was $2.7 billion.
• Management services agreements exist with current owners where these owners will provide certain unspecified management, financial, consulting, and advisory services for as yet unspecified sums of money.
• The capital structure looks to be immensely complicated.
• Sullivan & Cromwell is providing legal representation to Skype. Richard Morrissey is head of the firm’s M&A group and is based in London. David Rockwell is a London partner with experience in European corporate finance.
• Chief underwriters are Goldman Sachs, JP Morgan, and Morgan Stanley. Kevin Kennedy of Simpson Thacher represents the underwriters.
• Growth rates and absolute growth numbers – measured by registered users, connected users, paying users, and revenue – have diminished in the past year.
• Given the flattening of the growth curve, the most significant pillars of Skype’s business model going forward seem to be advertising and business use.
• Net income in the first half of 2010 fell to $13 million, compared to $22 million in the first six months of 2009.
• Skype carries about $268 million in cash and current assets and more than $1 billion in short-term and long-term liabilities.
• One of the risk factors declares that the “registered users” number employed by Skype overstates the number of unique individuals who register to use its products – due to multiple registrations by users and to fraudulent activity. Skype also includes 20 million automatically registered MySpace users that they believe are infrequent users of Skype services.
• “Connected user” numbers are also misleading, as they include people whose computer automatically starts the Skype service whenever it is turned on.
• As a global service, compliance with multiple telecommunications and intellectual property laws is challenging.
• Skype incurs signficant charges from identity theft and credit card fraud.
• The list of risk factors is quite substantive (ie, non-generic) and very long.
• Skype experiences revenue seasonality, with lower use during warm weather months and heavier use during the winter holidays.
• About 7 percent of Skype’s connected users generate most of Skype’s revenue.
• As of June 30, 2010, Skype employed 839 people.
• This initial S-1 does not yet include executive compensation details.

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