March 7, 2001 8:20 AM PST

Andreessen's Loudcloud braves icy stock market

Can Marc Andreessen do it again?

Nearly six years after taking Netscape Communications public at the tender age of 24, the high-profile Internet pioneer is again preparing to introduce a company to the public market.

Loudcloud, which designs, builds and maintains Web sites for businesses such as Nike, is expected to raise nearly $180 million when it sells 20 million shares for between $8 and $10 to institutional investors on Thursday. The company's IPO was expected Wednesday, but a major snowstorm on the East Coast prompted Loudcloud to delay the offering for a day.

Although Netscape's share sale arguably jump-started an unprecedented five-year boom in tech IPOs, some analysts and investors say Loudcloud is bringing up the rear--and may possibly be too late to Wall Street's party.

Steven Tuen, a portfolio manager with Kinetics Internet Fund, said he is not planning to purchase any Loudcloud shares because of the weakened market conditions and other specific concerns about the company.

"Granted, they have Marc Andreessen heading up the company, but I think the climate is especially bad for the moment," Tuen said. "I think that's going to be a big blow for Loudcloud."

Loudcloud executives declined to comment, citing a "quiet period" mandated by the Securities and Exchange Commission before the IPO.

As Loudcloud's chairman, Andreessen stands to instantly add some $77 million to his existing wealth if the shares fetch $9. In September, Forbes magazine estimated his personal fortune at $498 million.

According to the company's IPO filing with the SEC, Andreessen will own 8.6 million shares, or 12.8 percent, of Loudcloud after the offering.

Andreessen, who bought 6.1 million of his shares at 32 cents each, stands to immediately add millions in paper wealth. But for other investors, analysts say, the returns are far less certain.

A hostile climate
Although the Nasdaq posted a modest gain Tuesday, Loudcloud is testing the public markets at a time when a steady stream of profit and revenue warnings has battered scores of tech stocks.

The Nasdaq has slid some 60 percent since March of last year as one tech company after another has stunned investors with warnings. Among those issuing warnings in recent weeks: Gateway, Oracle, Applied Micro Circuits and 3Com.

Earlier in February, Nortel Networks issued a warning, and bellwether Cisco Systems announced flat sequential revenue growth for the next two quarters.

In total, 203 companies have issued warnings since the beginning of February compared with 35 during the same period last year, according to earnings-tracking firm First Call. In the technology sector, 41 companies warned in February, compared with nine at the same point in the fourth quarter of 2000.

"What's significant is the pace is actually accelerating," said Chuck Hill, director of research for First Call/Thomson Financial. The number of warnings in the fourth quarter "was a record, and we're going to far exceed that this quarter."

The IPO market has been a direct casualty of the market conditions. Only 17 companies have launched IPOs so far this year, compared with 86 during the same period last year, according to market research company CommScan. Telecommunications equipment company Riverstone Networks is one of the only other high-profile technology companies to launch an IPO this year. Since its mid-February debut, shares of the company have slid 12 percent from their $12 IPO price.

Competitors to Loudcloud, such as Exodus Communications, also have been punished. Like Loudcloud, Exodus has yet to show a profit; it reported a loss of 15 cents per share, or $65.2 million, in its fourth-quarter earnings announcement.

Exodus shares trade for about $14.50, near their 52-week low of $13.62. In the past year, the stock has traded as high as $89.81.

Apparently responding to these conditions, Loudcloud and its lead underwriters, Goldman Sachs and Morgan Stanley, recently altered the terms of the offering to help entice investors--a move that considerably slashed the company's proposed market value.

Loudcloud originally intended to sell 10 million shares--or about 10 percent of the 105 million shares that would be outstanding--for $10 to $12. Under this scenario, Loudcloud would have raised about $110 million and had a market cap of some $1.1 billion.

But in mid-February, the underwriters reduced the price range of the company's shares to $8 to $10 and decided to sell a whopping 30 percent stake to the public. The number of shares to be sold was increased to 20 million, and the number of outstanding shares was cut to 67 million, according to SEC filings.

Assuming Loudcloud receives $9 for each of the 20 million shares, it would raise about $180 million (excluding underwriting fees) and have a market cap of about $600 million--half of what it initially hoped for.

Elusive profit
Like many tech companies that have gone public in recent years, Loudcloud's balance sheet is still in the red.

The company develops and maintains Web sites for businesses. And while Loudcloud has accumulated a strong customer base of more than 40 clients--including Ford Motor, Blockbuster, Nike and Juniper Financial--this has not been enough to push it to profitability.

Some analysts say this is because the company spent heavily on up-front costs to get the business off the ground.

"They have to spend an enormous amount of money on third-party facilities and software and people," said Joel Yaffe, senior analyst with Giga Information Group. "They just haven't given themselves enough time to prove out their business model before going public."

For the nine months ended Oct. 31, 2000, Loudcloud reported revenue of $6.5 million. However, the reported revenue figure fails to show $120 million in signed service agreements, according to the filing.

The business model of recognizing revenue monthly gives the company "more credibility," said David Menlow, president of IPO Financial Network, as investors prefer not to rely on projected income.

Nonetheless, he said, investors will need to "regularly read the 10Qs to see if the losses are slowing."

Since its inception in September 1999 through last October, the company racked up a deficit of $180 million, according to its SEC filing. The bulk of this loss--about $124 million--is related to noncash deferred stock compensation.

The Andreessen effect
Whatever Loudcloud may lack in immediate revenue, it more than makes up for in the promise of what could be. Call it the Andreessen effect.

Wanting to get in on the next business venture by the co-founder of Netscape, investors are willing to give the company incredible leeway in its current financial situation.

"I think that's what is ultimately going to get this deal off the ground," said Melanie Hase, an analyst with Renaissance Capital.

Other analysts agree.

"Andreessen is a lightning rod for business activity," Menlow said. "He is going to be bringing new talent, new names, new accounts--everybody wants to be with him."

Loudcloud has applied to trade on the Nasdaq under the ticker symbol "LDCL." Goldman Sachs and Morgan Stanley will co-manage the sale.

 

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