February 6, 2002 4:35 PM PST

PayPal delays IPO

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PayPal delayed its highly anticipated initial public offering Wednesday after a patent infringement suit was filed against the online payment company.

The lawsuit was filed earlier this week by CertCo, a privately held, New York-based online security company.

A PayPal spokesman declined to comment on the suit or the delay, citing the company's quiet period. Representatives for CertCo did not return calls seeking comment.

A representative for Salomon Smith Barney, which is underwriting the IPO, confirmed that PayPal had delayed the public offering because of the patent infringement suit. The IPO had been set for this week.

The Salomon Smith Barney representative, who declined to give his name, said the company has not determined when it will go through with the public offering.

The company had set a range of $12 to $14 for its 5.4 million share offering. The shares were scheduled to be priced Wednesday night and to debut Thursday, Salomon said. PayPal would trade under the symbol "PYPL."

PayPal originally filed for a public offering last fall. Analysts at the time speculated that the filing may have been a vehicle to show its finances to potential buyers.

The company's service allows consumers to make and accept online payments. A payer deposits money into a PayPal account using a credit card, bank account or existing PayPal account. The recipient can leave the money in the account to earn interest, transfer the money to a separate bank account, or have PayPal cut a check.

The service is wildly popular for person-to-person transactions such as online auctions. eBay customers make up the bulk of PayPal's users. According to the company's prospectus, 63 percent of dollar volume for transactions in the first nine months of 2001 came from settling auction purchases, particularly on eBay.

Although eBay provides PayPal with a significant number of customers, it also represents a competitor. PayPal is far more popular than eBay's Billpoint service, but there is no guarantee that eBay will continue to allow PayPal access to its customers. Yahoo, the U.S. Postal Service and Citibank, among others, also offer competing services.

Tech IPOs got a boost last month with the successful offering of Synaptics, a maker of touch pads for notebook computers. That IPO, the first one of the year, closed the day up 19 percent, giving investors a promising sign.

But Synaptics has something that PayPal doesn't: profits.

In a throwback to the Internet IPOs of a few years ago, PayPal states in its prospectus that it anticipates "having a net loss from operations in fiscal 2001 and may not be able to reach or sustain profitability in the future."

In the quarter ended Dec. 31, PayPal lost $18.54 million on revenue of $40.4 million, an improvement from a year ago, when the company lost $41.9 million on revenue of $8.8 million.

But just because it's losing money doesn't mean it's the same as all those other profitless dot-com IPOs, said David Menlow, president of IPOfinancial.com.

"Their financial growth and revenue lines look like a hockey stick--straight up. Although they are losing money and continue to lose money, they continue to lose less," he said. "If revenue continues to skyrocket and losses diminish, then at some point those two curves will cross."

PayPal had planned its public offering in the midst of what Menlow referred to as an "IPO drought." Investor interest could be high when PayPal resumes plans for its offering because there's not that much else out there.

The offering was expected to bring in between $63.3 million and $73.1 million, depending on how the underwriters would handle their allotments of stock. The company planned to use $10 million to $15 million of that to finance transaction processing with outside vendors such as credit card and ATM companies. The money is used to guarantee against charge-backs, which occur when a credit card charge is disputed or fraudulent. In that case, the credit card company charges PayPal.

Another $10 million to $15 million would be used for capital expenses, including networking equipment, storage equipment, servers and redundant data facilities. The remainder would go toward "general corporate purposes."

 

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