Skype Calls Up a $100 Million Initial Public Offering


Skype, the rapidly growing internet calling service, has filed for an initial public offering. The Luxembourg-based company plans to raise $100 million, although it could increase the amount by the time the offering comes to the market, which is expected to happen in the fall. While many details are still fuzzy, Skype expects to list on the Nasdaq.

The Voice-over-IP (VoIP) company has a tangled corporate history. Founded in 2003, the company sold out to eBay (EBAY) for $2.6 billion two years later. But the deal had little synergy resulting in a $1.7 billion writedown. EBay sold about 70% of the company for just over $2 billion to an investor group led by private equity firm Silver Lake Partners, the Canada Pension Plan Investment Board and Andreessen Horowitz. Other investors include Joltid (the venture fund of Skype's founders), Niklas Zennstrom and Janus Friis. EBay retained a 30% stake.

A Look at Skype

There seems no end to the growth for Skype. For the first six months of 2010, Skype users logged a staggering 95 billion minutes of voice and video calls. According to TeleGeography Research, this makes the company the top global provider of international communications. Skype's user base has grown from 397 million to 560 million from 2009 to 2010. The average number of monthly paying users comes to roughly 8.1 million.

Its financials are also attractive. For the first half of this year, Skype posted $406.2 million in net revenues and adjusted EBITDA of $115.8 million. This is mostly from SkypeOut calls, which allow users to call landlines and mobile devices. Skype plans to broaden the ways it monetizes its service with new premium services as well as licensing and advertising.

The Opportunity

While the global telecom market is enormous -- by some estimates it generates about $1.5 trillion in sales -- players such as Skype and Vonage are disrupting the business by using the internet to make calls. The internet services segment represented $41 billion in revenue in 2009 and has been growing at a 34% compound annual growth rate since 2006.

To stay ahead of the curve, Skype needs to keep innovating, scaling its platform and hiring exceptional talent. As it brings on new engineers and executives, the number of employees at the firm has risen from 640 to 839 over the past year.

Skype is also making investments in its infrastructure, budgeted for $37 million in 2010. The company has also been aggressive in striking key strategic relationships, such as with Verizon (VZ) , LG, Panasonic and Samsung.

Remembering Vonage's IPO

Will Skype stumble? Vonage Holding Company went public in 2006 and the IPO was a disaster as the value of its shares tanked, thanks partly to complications over its decision to offer its customers shares on an Internet site that did not provide a link to a prospectus or the appropriate legal documents.

In Skype's case, such a mishap will be unlikely, especially given the company's reputation for being strong in execution.

As for its business, Skype benefits from a powerful networks effect: The platform becomes more valuable as more people use the service, which encourages even more users. This locks-in users and results in lower marketing expenses. What's more, Skype is based on a peer-to-peer technology system which means that it can leverage the computer systems of its users -- providing a lower cost structure since there is no need to develop a physical telecom network.

All in all, Skype offers the kind of deal IPO investors want. It has strong revenues and cash flows, barriers to entry and a nice growth ramp that should continue for some time.