IPO Highflyer Hits Sidewalk After Smart Money Bails Out

The startup and IPO scene has been sizzling. Fire-breathing Wall-Street engineering firms prep the market for more startups to go public based on fanciful á-la-carte metrics designed to obscure crummy revenues and big net losses for as far as the eye can see. And the smart money is selling everything that isn’t nailed down.

The Billion-Dollar Startup Club now includes 25 US startups with not a lot of revenues, undisclosed losses, and gigantic valuations, from Pure Storage at a lowly $1 billion to Dropbox at $10 billion. Not that anyone paid that much for them. “Valuations” are established by the latest round of investors buying a small sliver of the company [How to Manipulate the Entire IPO Market With Just $250 Million].

But post-IPO debacles are already hitting the sidewalk, even in the immensely hyped and sacrosanct Cloud and Big Data sector, the future of the US tech industry, the last hope of tech stalwarts like IBM. This time it’s Infoblox. “We are a leader in automated network control and provide an appliance-based solution that enables dynamic networks and next-generation data centers,” it explained in its IPO description. After the bell yesterday, it pre-announced. Today, its stock is down 47%. From October last year, it’s down 64%. SPLAT.

There is nothing atypical about Infoblox, which has been around since 1999. But it was time for the smart money to unload it while that “healthy” IPO market allowed them to. So they did some doctoring to make it look good just before the IPO, and lo and behold, revenues jumped, though it still lost money, but what the heck.

It went public in April 2012 at $16 a share, giving it a lofty valuation of about $700 million. For fiscal 2012, ended on July 31, it had $169.2 million in sales, and a net loss of $8.2 million. So it spent 2012 languishing and dropping. By November that year, it hit $13.95. And that was probably still too high.

But then, mirabile dictu, it got caught up in the hype of 2013, in QE Infinity, in a boundless ocean of liquidity looking for a place to go, and the market soared, and so did IPOs and valuations. October 2013, BLOX hit $48.97 a share, up 250% in less than a year, giving it a market value of over $2.5 billion. About 10x revenue!

The hype was all there. But where was the beef?

On November 26, 2013, the company posted quarterly revenues of $63.5 million, up 28% year-over-year. It was still losing money. And revenues in the next quarter would be in the range of only $65 million to $66 million, the company said. The stock plunged 22%. To inject some hope into the poor souls holding the stock, analysts pointed out that guidance in the last three quarters had been “conservative,” suggesting that revenue would actually be better than guidance. Which led to a beautiful sucker rally.

Yesterday after the bell, the company doused that exuberance with more ice-cold reality when it pre-announced that it lost from $0.08 to $0.10 a share in the quarter ended January 31. And there was a revenue shortfall: $60 million to $61 million instead of its prior guidance of $65 million to $66 million, the very guidance that had caused its stock to plunge in November and that analysts had painted as “conservative.”

November and December apparently had been decent, but January had suddenly been “much weaker,” the company said, managing not to blame the weather directly.

It would book a loss of up to $0.10 per share for the quarter, based on Generally Accepted Accounting Principles (GAAP). But the company and analysts who promote the stock want us to look at its “non-GAAP net income,” which for the quarter would be $0.30 to $0.34 a share. Its own expectations had been in the range of $0.44 to $0.54 per share. So this was not good.

But “non-GAAP net income” is an insider joke. It wilfully excludes a host of big-ticket expense items. Among them: Stock-based employee compensation expenses; amortization of intangible assets (items paid for in cash or stock and temporarily parked on the balance sheet as an “asset” to be expensed at a later date as “non-cash”); and acquisition related expenses, including “costs for transitional employees, other acquired employee related retention costs, integration related professional services….”

You get the idea. To heck with some of the biggest expense items. Focus only on “non-GAAP net income” and “non-GAAP EPS.” But even these dolled-up measures fell short! And now, that the stock has crashed, the downgrades are hailing down on it.

The smart money that had unloaded this thing, and the bookrunners Morgan Stanley, Goldman Sachs, and UBS, and Wall Street engineering firms that had hyped it, and everyone else involved in the IPO pipeline – they’ve already rolled their gains onto dry land. But retail investors, many of whom might not even know they own the stock because it’s hidden deep inside a mutual fund, are taking the losses.

That’s how the system is supposed to work. It’s the IPO “window” that opens up during stock market bubbles, but only briefly. So the smart money and Wall Street have to pump and dump these stocks in all haste. There are a lot more startups to go. The pressure is on. And some of them, like Dropbox, already have mega “valuations,” and only the sky can possibly be the limit.

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