The specter of Facebook is still knocking around Nasdaq’s headquarters it seems. Last week, another tech IPO tanked on its opening day, recalling the social network’s flubbed May 18 offering.
Cloud-based software maker E2open’s (EOPN) share price dropped 9% after it opened on Thursday. The company had priced its offering of nearly 4.7 million shares at $15 a piece, but share prices opened at $14.11 before falling to $13.60 at the close of day. Speaking to CNBC, Mark Woodward, the company’s CEO said, “I think our investors are looking at where we are going to be in the future, not necessarily where we are trading today.”
Earlier in the week, Woodward had said there was roughly five times more demand than there were shares being offered. The initial valuation was based on the strong IPO showings of other enterprise technology firms, which have done very well — unlike social media companies Facebook (FB) and Zynga (ZNGA). Cloud-based software companies such as Splunk (SPLK), Demandware (DWRE) and Guideware Software (GWRE) have all seen their share prices increase more than 50% since going public.
In other words, the dip was a surprise. “It was my opinion that based upon the so-called over-subscription and previous performance of the other cloud-based companies, it would work,” says Scott Sweet, senior managing partner at IPO boutique, a firm that rates and provides advisory services on IPOs. “But it had nowhere near the same exponential revenue growth as those companies.”
While E2open has had consistent revenue growth — up 25.1% and 7.5% in the previous two years respectively — it was well below that of the cloud-based companies it was being compared to. What’s more, on its SEC filing, the company stated, “Throughout most of our history, we have experienced net losses and negative cash flows from operations.” Honest, but not exactly thrilling news to potential investors.
Sweet had rated E2open’s IPO a “buy” with a grade of “3” on a scale of 1 to 5 (with 5 being a strong “buy” and one being a strong “sell”). He says the over-subscription for the shares was at the speculative price of $14. “It was rated highly at the start but once investors found out it was going to be priced at $15, there was a lot of price sensitivity by the middle of the week.” Sweet says that is why he revised his rating from a “4” to a “3.”
Much like Facebook, Sweet says E2open suffered from skittish investors who flipped the shares the moment the price broke, putting further pressure on the stock. “It was a very poorly done IPO,” says Sweet. “It was mispriced from the start and the underwriters, Bank of America/Merrill Lynch (BAC), didn’t support it once the prices fell.”
Sweet says there were also concerns about the one of E2open’s biggest clients, Research In Motion (RIMM) and its much-reported financial woes. Woodward says RIM’s performance wouldn’t have as much of an effect since they were growing their customer base. “Last two years we’ve added 30 new customers, it’s been significant acceleration,” says Woodward. “Two years ago they were 20% of our total revenue, they’ll be 10% this year and next year they’ll be 3% of our revenue.”
A quarter of E2open’s business comes from Europe, a fact that Woodward says is more of an opportunity than a risk. He claims the technology provided by E2open could actually help some of its struggling customers by streamlining their operations and saving money. “Europe is our strongest performing geography,” says Woodward. “When business is tough, they’re looking for places to do better and save money and we can do that with our value proposition.”
All eyes are now on Eloqua and Legalzoom, tech companies that are set to go public this week. Like E2open, Eloqua is a software company for businesses while Legalzoom is an online provider of legal documents. Sweet says Eloqua “overall looks to be a better deal financially and is better priced,” but there may still be a “hangover effect” from E2open’s performance. “The question investors will always ask of the IPO market is ‘what have you done for me lately?’” says Sweet. “It was a stumble that investors were just not used to seeing in an area that was largely immune from the market.”