Online video advertising specialist Tremor Video (Nasdaq: TRMR) went public today, but the results weren’t spectacular and this IPO dud is likely hang over a crop of venture-funded ad technology companies that are trying to make their way to the public market.
Tremor’s shares fell 2% in early trading after pricing 7.5 million shares at $10, below the expected range of $11-$13, raising about $75 million for the company.
Credit Suisse Securities and Jefferies were co-book managers for the IPO. Canaccord Genuity Inc. and Oppenheimer & Co. Inc. were co-managers for the offering.
The Tremor deal highlights a trend back toward less inspiring tech IPOs that may mark the end of a cycle, as many tech investors have been burned in IPOs after the last couple of years (sound familiar?). I’ve covered some of the more egregious IPOs in recent years, including the Groupon (Nasdaq: GRPN) disaster and Facebook’s (NYSE: FB) overzealous IPO valuation. Facebook shares are still down almost 40% from the first-week IPO trading range of about $36-$40 in 2012. (Disclosure: I own Facebook shares, having been unable to resist them when they fell below $20.)
If you are wondering why I’m concerned, take just the first risk factor in the S-1 filing: “We have incurred significant net losses since inception, and we expect our operating expenses to increase significantly in the foreseeable future. Accordingly, we may never achieve or sustain profitability. “
A quick look at the financials: In the year ended December, 2012, the company posted $105 million in revenue, with a loss from operations of $16 million. Cost of revenue was $61 million and total operating expenses were $60 million. So adding up these numbers (or more like, subtracting these numbers), it’s clear to see the company is losing money and has a narrow window of profit potential.
But that’s not what bothers me the most. Another red flag is that the company isn’t really growing that fast. From 2011 to 2012, revenue increased from $90 million to $105 million. That’s 17% growth, not a spectacular number for a fresh IPO that has yet to earn a dime. In the IPO filing, it company cites numbers from research firm eMarketer saying that video advertising spend is expected to grow by 28.9% annually. In other words, it points out in its own IPO filing pointing that the company is growing below the industry trend.
Let’s give Tremor some credit — over the years, it has shifted its business model to its most promising service, serving in-stream video advertising on the Internet for big brands. With the growth of the tablet and mobile market, video advertising is growing fast and there is certainly potential. But the problem is that this market is absolutely jam-packed with competitors — many of them venture-funded startups that will likely be looking for an IPO exit now that the unprofitable Tremor is able to cash in. Prominent venture-backed video ad startups include Adap.tv, BrightRoll, Criteo, Rocketfuel, and YuMe, among many others.
This Reuters article pretty much nails the problem — pointing out that in a cluttered field it’s hard to differentiate the technology and decide who has an edge.