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The ValueCommerce IPO and affiliate advertising in general August 23, 2006

Posted by fukumimi in Economy & Business, Internet, IPO, IT, Japan.
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I guess it is better late than never (me, not the IPO), so here are my 2 yen about the ValueCommerce IPO, with some general thoughts on the affiliate advertising market.

Part of the reason why it has taken so long for me to commit this post to paper was because I believe that this company would make a good case study (at least in terms of positive advertising for the Japanese markets who could do with a lot more aspiring entrepreneurs to test their luck and skill here in Japan) of how the Japanese market isn’t a xenophobic clique closed off to foreigners and I didn’t want to burst that feel good bubble.

I also didn’t want to single out ValueCommerce for taking advantage of what is undoubtedly a good time to IPO for this type of stock, nor single out its post-IPO performance as an example of the craziness which surrounds the IPO markets, as the stock’s behaviour is just par for the course.

ValueCommerce is a leading affiliate advertising network, connecting advertisers and web property owners (websites and blogs), and their advertising model is based on the affiliate model, which basically means that advertisers pay for performance, ie a cut of revenues generated by a user referred to the advertiser’s site by a particular ad displayed on a particular web property is paid to the property owner. (they also do some SEO/SEM and business/marketing/technology consulting as well)

I would have thought that having a foreigner founder and a foreigner CEO would have made the ValueCommerce IPO an easy story for the press, but I didn’t see that much in the press, especially compared to the Drecom IPO. (Caveat: I was overseas for about a week after the IPO)

OK, so these guys have been in Japan for longer than I have, so they aren’t exactly new kids on the block. But wouldn’t that make for an even more interesting story? The CFO is Japanese by the way. I don’t think it would be impossible to have a long term resident ex-pat CFO, but if there was a listed company with a management team where all but one post was filled by a foreigner, that sole Japanese person is likely to be the CFO, because the CFO of a listed company is most likely to deal with those pesky people at the stock exchange, and the bankers, and the bureaucrats, and having a sombre Japanese face and native language skills and a familiarity with Japanese accounting rules help. I think. (Say, I’ve never met a foreigner who practices as a Japanese accountant, I know a few that work for one of the big global firms here in Tokyo, but they all have multi-nationals as clients or are not in the accounting or audit practices. Of course, I can’t understand what possesses someone to studying accounting in the first place, let alone in a foreign language….)

Anyway, some people referred me to Terrie Lloyd’s piece on the ValueCommerce IPO, which was extremely positive.

My enthusiasm is a little bit more tempered. Make no mistake, it is no mean feat to create a company and take it to IPO. The IPO was a success, too. (But I disagree with Terrie who says IPO pricings are down recently – seeing the IPO reports which are circulated at our firm shows no such trend, the post-IPO market has also been strong this month, after perhaps a fitful first half of the year – but even 1H 2006 was extremely strong in parts)

ValueCommerce’s IPO was priced at a lower valuation than F@N Communications (which operates the A8.net affiliate network), which listed on JASDAQ at the end of last year and which was a little ahead in sales (JPY4.3B vs JPY4.0B) for the last FY. The reason? F@N’s pre-tax profit was more than 3 times that of ValueCommerce (JPY765M vs 231M). The #3 player in this area, Adways (last FY sales of JPY3.5B, pre-tax profits of JPY465M) also had its IPO in June of this year.

The way the emerging markets IPOs tend to work is that the first of a kind IPOs do tend to attract a premium. Being the 3rd IPO of its peers meant that the market appetite wasn’t as big as its numbers might have suggested. F@N’s stock peaked at nearly triple its IPO price. I can’t see ValueCommerce hitting such a big high. Whilst Terrie argues that a 60% rise in price immediately after IPO is impressive, it is actually not uncommon. Adways hit double its IPO price at its peak, too. Many emerging markets stocks all seem to follow a similar post-IPO trend in stock price, with prices rising to a peak days or weeks after IPO, and then trending downwards back towards the IPO price. So I thought it was a little unfair to compare the market cap of ValueCommerce and F@N when ValueCommerce was still riding the post-IPO buzz.

Compared to its peers, ValueCommerce is just a little weaker on fundamentals; on growth compared to Adways, which is projecting 7B in sales this year compared to VC’s 5.4B, or in profit margins (VC’s projected 10.1% compared to F@N’s 16.4%). Whilst ValueCommerce’s growth is no doubt impressive, a comparison to its competitors puts a slightly different perspective on things.

Historical performance has been a bit more haphazard for ValueCommerce too, which tempered the enthusiasm of analysts. (although the relative lack of enthusiasm amongst financial professionals during the roadshow was generally more of the “oh, another affiliate advertising network” nature, according to an analyst who attended an event)

Yahoo Japan having a big stake in the company is no doubt a strong point in its favour, although contrary to what Terrie says, Rakuten are unlikely to have been interested in picking up another affiliate advertiser, seeing they have had a stake in Trafficgate, a currently unlisted company, since 2001. It was indeed Yahoo who was playing catchup as Rakuten and Livedoor were on the scene before Yahoo. Having said that, Yahoo seems to have made a good profit on their investment.

Indeed because of the crazy multiples that are being achieved at IPO, it becomes more attractive and profitable for major players to invest in companies and send revenue dollars to their portfolio companies and make some capital gains on the IPO than to go into competition.

There are more than one or two companies (I’m speaking in general terms here of internet IPOs on the Japanese emerging markets) where a big chunk of sales rely on major strategic shareholders. Because the listing requirements aren’t that strict, many of startups which affiliate themselves to a major internet player can IPO on their partners’ coattails. Hopefully by then they have built up enough brand recognition and know-how to become less reliant on their big brother.

I suspect that Trafficgate is another such vehicle, it is owned by Rakuten (50%) and Cyberagent(47.5%, 27.5% actually owned by an investment fund run by CA, a sure sign if ever there was one that this is an IPO play).

In September, another affiliate advertiser, Interspace, is listing on MOTHERS.

The segment is getting pretty crowded, and PERs in the 80-100 range for the top 3 players doesn’t seem to be sustainable. Admittedly the growth in blogs is good for these players, as micropublishing hits the big time. However, there are concerns that conversion rates for affiliate advertising on personal blogs. And I don’t think we want the blogosphere to be dominated by sites which are run with too much emphasis on driving advertising revenue. Don’t expect to see shill articles and accompanying adverts pasted all over the page from me anytime soon.

I also don’t feel there is much chance of affiliate marketing taking over from CPM/CPC advertising on high traffic properties, where property owners have much more power to strike a fairer bargain, whereas there might be a little more invasion of the space by CPC advertising courtesy of you know who.

The Big G hasn’t even started trying that hard to sell its advertising programs to the mass market. One acquaintance who has done comparison tests of advertising revenue generated by various advertising mechanisms on his network of Japanese language information sites (which actually do provide useful information on specific technology issues and gadgets (mobile phones, TVs, etc)), stated that Google’s ad services were definitely his most profitable ad revenue streams.

In a sense, getting this far may just be the beginning of the story for the players in this market. Good luck to all involved, it’ll be interesting to see how the market shakes out.

Valuecommerce IPO post teaser August 17, 2006

Posted by fukumimi in Internet, IPO, IT, Japan.
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I’ll be posting more about the Valuecommerce IPO in a day or two, with some discussion of Terrie Lloyd‘s view on the matter,a discussion about the sustainability of growth and sky high valuations for companies in this increasingly overcrowded sector (another affiliate marketing company has been cleared to IPO on MOTHERS next month), a look at Valuecommerce’s fundamentals (esp. in comparison to two competitors who have IPO’d before Valuecommerce), and a more general comment about the post-IPO stock price movements for stock listing on the emerging markets exchanges.

In the meantime, I will echo the sentiments expressed elsewhere and just say that I think it is great that non-Japanese entrepreneurs have been succesful. (Having said that, it should be noted that both Tim Williams, the Founder and Chairman, and Brian Nelson, the President and CEO, have both lived in Japan longer than I have)

Hopefully these entrepreneurs don’t see the IPO as the beginning of the end (ie thinking about personal exit strategies), but the end of the beginning.

One interesting fact found in the prospectus:

One Ichiro Suzuki, of Toyoyamacho, Nishikasugaigun, Aichi Prefecture is listed as holding 130 shares. That’s half a million dollars right there.

But I guess this particular guy won’t really care, as he gets paid $11M to play for the Seattle Mariners this year, and who knows how much he gets in commerical endorsements. Yes, it is that Ichiro. It is on pg142 of the prospectus, for those that care to check. Ichiro’s investment goes back to 2000.

I do wonder how a professional baseball player ended up making an (admittedly small ~0.14%) investment in this company. Even at that level of investment, he is the second largest individual investor in the company (excluding employees and ex-employees, of course).

Mixi, the #1 Japanese SNS to IPO on September 14th August 14, 2006

Posted by fukumimi in Internet, IPO, IT, Japan.

The Tokyo Stock Exchange announced today that Mixi will float on the TSE’s MOTHERS exchange on the 14th of September.

No word yet on the price, but it is expected that the shares will be heavily oversubscribed. Just 4,500 shares are being offered new shares are being issued, which would bring the total number of shares to 70,500. (that’s about 6.3% of issued shares I think) An additional 2,100 existing shares are also being offered as part of the IPO, comprising of shares held by CyberAgent (1,050 shares of a total holding of 6,000 shares, the balance of which will be subject to a 6 month lock-up), 350 shares owned by the founder and CEO, and a total of 750 shares controlled by Netage Capital Partners. (An additional 500 shares may be offered if the offering is oversubscribed)

Mixi’s latest financials (for the FY ending March 2006) show pre-tax profits of JPY912M (net earnings of JPY576M) on sales of approx JPY1.9B. Two-thirds of sales are related to the “FindJob!” job advertising service, which was started 4 years ago (Mixi was originally called e-Mercury, and its original service was an internet based press release service called @Press, which they sold off last year. To Netage Capital Partners, which also happens to be the 2nd largest shareholder in Mixi), the SNS appears to have brought in about JPY640M in sales, more than 80% of which is advertising related. That means just over $1M in non-advertising revenue for the SNS, the majority derived from premium service revenue (@JPY315/mth/user) and perhaps also for traffic referral to Goo, the NTT Resonant search engine which provides Mixi’s search engine functionality.

As I’ve said before, an easy way to get more money would be to get Google to pay to put their search engine and advertising services on Mixi. Google would probably jump at the chance to address 5million+ of Japan’s heavy internet users. Looking at the MySpace/Google deal, it is not hard to imagine Google offering tens of millions of dollars per year for the rights to advertise in what is Japan’s hottest web property and give their search engine more exposure, in what has been a difficult market for them to penetrate (relatively speaking, of course. They do lag significantly behind Yahoo! in Japan, and a deal with Mixi seems to be the easiest way to cut Yahoo!’s lead).

It sure seems like a better bet than developing their own search engine, at least in the short term.

Given that Fox paid $580M for MySpace (Intermix) a year ago when user numbers were maybe around 20million registered users and page views around 9billion/mth, one might think that a reasonable price for Mixi would reflect Mixi’s stats in these areas (approx 5million registered users and 6billion page views/mth – note the relatively high number of page views/registered user compared to MySpace), which would give valuations in the low hundreds of millions of dollars.

However, you only have to look at the Drecom IPO to witness crazy PERs, Drecom was valued at nearly $800M at one point, and is still valued at over JPY50B or nearly $500M, with a PER of 386 as of today. Taking a hypothetical PER of 400 would value the company at nearly $2Billion. I’m not sure if people will go that high, but a billion dollar valuation doesn’t seem unrealistic given current market conditions and the appetite for such a high profile stock (even if the valuation is totally crazy, which I think it is).

That is of course if there are no nasty surprises in the next month. The IPO filing does contain some issues which require some thought. The filing states Mixi has received a cease and desist notice from an unnamed domestic company, relating to functionality deployed in the SNS service citing patent infringement. There is also the issue of the fundamental SNS related patent granted to Friendster. Mixi, whilst being a “Japanese” SNS, has plenty of users resident in the US, which would make Mixi potentially vulnerable to having proceedings for infringement brought in the US, home of the big ticket settlement/award. If I were lawyers advising either the unnamed firm or Friendster, obviously I’d wait until Mixi has a dazzling IPO making it extremely valuable, before attempting to sue for a lot of money.

The other issue is of SNS sites in general being a potential breeding ground for illegal behaviour (prostitution, minors being targetted and groomed by paedophiles, etc). Mixi claims that it, in contrast to for example some major US SNS sites which allow minors to use the site, only allows users aged 18 or above to register and use the site. However, a quick search on Mixi will show plenty of user profiles returned when searching for something like “high school student” and “17” or “16”. So stricter policing definitely seems required. Again, given the accessability of this site from the US by US minors, the site may also fall foul of US laws in this area as well.

In other (related) IPO news, Netage Group, the holding company that owns Netage Capital Partners (which is the #2nd largest shareholder in Mixi), is having its own IPO at the end of this month. Bookbuilding closes on the 17th of August, and the IPO price will be announced on the 18th. I am guessing the Mixi IPO approval will result in a major increase in Netage IPO price, which was estimated to be in the JPY560k-600k region, which would value the company at somewhere a little above $200M. But given that Netage owns more than 16% of Mixi (although approx 9% is actually owned by a fund for which NCP is the GP (no idea as to how much LP money is actually in this fund), at least 7% seems to be owned by NCP as a principal investment), I am guessing the stock will be positively influenced by the imminent IPO of Mixi (if investors don’t get cold feet thinking about the various potential legal liabilities…)

Bubble2.0 stock update (June 12) June 12, 2006

Posted by fukumimi in IPO, IT, Japan.
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It's been a while since we checked back on Drecom and Hikaku.com. In the last few months, the markets have been weak and the Bubble2.0 stocks have been in a virtually permanent slide from the crazy prices posted immediately post-IPO.

Drecom closed today at JPY1.78M, still a crazy PER of 262, and still more than twice the offer price of JPY0.76M.


Hikaku.com closed at JPY0.71M, still considerably above the float price of JPY0.45M.


Bubble2.0 stock updates April 3, 2006

Posted by fukumimi in IPO, IT, Japan.
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The Japanese markets had another strong day.

Drecom closed at JPY4.01M, up 1.52%. Stock has been trending gradually downwards since the craziness of the first week post-IPO in early Feb.

Hikaku.com closed at JPY1.66M, up 7%. This stock started trending downwards since the first trade was made post-IPO. Still appears overpriced at a $500M+ market cap.

In unrelated news, the CyberAgent operated sites which disappeared from Google's index appear to have been reinstated. 

Drecom update 3/16 and other tech IPO craziness March 16, 2006

Posted by fukumimi in IPO, IT, Japan.
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Drecom is still trading at over 4million yen (JPY4.05M at today’s close), making the company worth JPY80Billion, give or take a few yen.

And in other news…..

Another recent (floated yesterday) IPO hikaku.com has also spyrocketed, IPO was at JPY450k (raising approx $20M for the company) and the current price is JPY1.86M having reached the maximum allowable gain/day on its first 2 days of trading. The current price would value this company at approx JPY58B, on operating profits of JPY110M last FY (estimated JPY150M net profit for current FY). PER is north of 400.

Price comparison sites are nothing new, the market leader is kakaku.com, note the similar sounding names (hikaku means comparison, whereas kakaku means price, in Japanese)….

Kakaku.com listed on TSE Mothers in 2003, and is currently listed on the TSE proper. It is valued at JPY63.6B, on operating profits of JPY920M.

Perhaps hikaku.com’s main visual differentiator is that the top page is the discount airline ticket page, but the offered catagories (from travel to electronics to insurance, 42 in all) are remarkably similar. Even their favicons look remarkably similar….. Hmmm…..

A potentially key functional differentiator is that Kakaku.com offers BBS functionality for each product/service offered and a user rating scheme, both of which may be helpful to prospective buyers.

Business model wise, Kakaku.com is an affiliate model, whereas Hikaku.com is on a CPL advertising model. Hikaku.com has a high operating margin (43%) which may be attracting investors.

In terms of pageviews and reach, Kakaku.com is a lot stronger than Hikaku.com, but the relative revenues reflect more efficient monetisation of Hikaku.com’s business model. (and/or overhead related to additional functionality available at Kakaku.com)

Alexa data here (via alexaholic)

The Hikaku.com website is very slow. Looking at Alexa, since the IPO, traffic has doubled, but if that is the cause of the slow response, it would appear to reflect poor planning.

It will be interesting to see where the stock price settles down.

Drecom update 2/20 February 20, 2006

Posted by fukumimi in IPO, Japan.
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The markets just closed here in Tokyo, and Drecom shares ended the day where they began, at the bottom of the allowed single day price fluctuation range, down JPY1million (-17.79%) at JPY4.62 million, after having dipped above JPY5million during the day’s trading.

That means JPY2billion was wiped off the company’s valuation in one day, but looking on the bright side (if you got a slice of the IPO action), the shares are still worth more than six times the IPO float price….

Stay tuned to see if this blog software/service and search advertising firm’s share prices rebound or if this is the beginning of a slow and painful downwards descent…

Drecom Update 2/17 February 17, 2006

Posted by fukumimi in IPO, Japan.

Drecom closed at JPY5.62million, up 2.74%, valuing the company at JPY111.2billion valuing the company at approximately $940million. To reiterate, the company had profits of approx $0.5M on sales of $2M for the year ending March 2005. PER is above 900. Anyone for a $1B cap and PER in 4 digit territory?

Drecom raised just $15million from shares floated at 2000shares@JPY0.76M…

Drecom IPO update February 12, 2006

Posted by fukumimi in IPO, IT, Japan.

Drecom, the Japanese blog and search advertising firm IPO’d on the MOTHERS exchange on the 9th.

Just 2000 shares were offered, at a price of JPY760,000. Currently the share price is at JPY3.15million having reached maximum allowable single day gains on the first two days of trading.
The current share price values the company at more than $600M, with a PER of more than 500.

Financials for the year ending March 2005 were net profits of approx $0.5M on sales of approx $2.5M.

Crazy PERs are not uncommon on the emerging market exchanges in Japan, but this takes the biscuit.

Japanese blog provider IPO confirmed for Feb 9th January 12, 2006

Posted by fukumimi in IPO, IT, Japan.
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Drecom (http://www.drecom.co.jp) have confirmed an IPO on the Tokyo Stock Exchange’s Mothers (market of the high-growth and emerging stocks).

Drecom is a Japanese company started in 2001 by a student at Kyoto University, and posted sales of approx USD2M and net earnings of approx USD0.48M in the year ending March 2005. For the current financial year, they project sales increasing by 189% to approx USD6M and net earnings to increase by 120% to approx USD1M.

Drecom provides B2C and C2C blog related services (blog software, blog asp, blog portal, blog tools, blog search, etc), and is the first pure BSP IPO in Japan.

The blog market is hot in Japan (as it is pretty much everywhere) and there are a whole host of BSPs in this space. However, with the recent strength in the stock market, and as the first pure play Blog related IPO to hit the market, it is likely that Drecom will have a very strong IPO. Only 640 shares up for grabs though. Expect this IPO to be heavily oversubscribed, and for the stock to be valued at a huge PER, something over three figures may not be unrealistic with the state of the current market.

The “alternative” Japanese markets (Mothers, JASDAQ, Hercules) may be a good potential exit candidate even for overseas companies, given the relatively lax listing requirements. There are already many overseas companies eyeing a Japanese IPO. As an alternative early liquidity event (vs trade sale/M&A) these markets should be given serious consideration. Japan’s stock markets are buoyed up by private investors moving their savings out of savings accounts which accrue virtually no interest and putting the money into the stock market, this trend is expected to be maintained in the next few years as a huge number of new post-war baby boomer retirees come onto the scene with plenty of savings and time to play the markets.