RealTime IT News

Loudcloud Faces Tough Future

It's now clear why managed services provider Loudcloud chose the toughest IPO market in memory to go public: the company needed the money to stay in business.

Loudcloud raised about $150 million when it went public in March, which it was able to do only after it reduced the deal terms three times and engineered a reverse stock split. In its first quarterly report released after the bell on Tuesday, Loudcloud said it expects to have a cash and cash equivalent balance of $110 million at the end of the year, down from $205 million at the end of the first quarter, which ended April 30.

Only a company with Netscape co-founder Marc Andreessen as chairman could have gone public in this market with a cash burn rate like that. Or so we hope.

Loudcloud lost $60.3 million on revenue of $11.7 million in the first quarter, a wider loss than the $58.8 million loss posted the previous quarter, and the company slashed revenue forecasts for the rest of the year. The $1.25 a share loss topped estimates by a nickel. Revenues rose 31% sequentially from the $8.9 million booked in the previous quarter, but that growth rate will slow to 20% sequential growth in the second quarter. That's still impressive growth, but it's going to take more than that to make up for the $95 million the company plans to burn through the rest of the year.

The company believes it can do it. From the press release that accompanied the earnings announcement: "As a result of the cost reduction initiatives announced May 1, Loudcloud has a fully-funded business plan.''

But the company has its doubters, not the least of which are Goldman Sachs and Morgan Stanley Dean Witter - the companies that took Loudcloud public. Goldman dropped Loudcloud from its Recommended List to Market Outperform after the company's quarterly report, and Morgan cut the company to Neutral. Goldman said the downgrade was due to economic conditions and was not company-specific, but coming from an underwriter, it was quite a statement. Investors responded by driving the stock down 25% to 2.55 a share, 58% below the $6 IPO price.

If you're going to invest in individual stocks, you need to read companies' SEC filings, because they contain information that you probably won't get from a company press release (a good source is 10kwizard.com). In particular, the statement of risks is a must-read ("Factors that may affect future results"). It's written by lawyers, so it includes everything under the sun in an attempt to limit liability, but it gives you a good sense of where the landmines are.

Here's one quote of particular relevance from Loudcloud's quarterly report (10-Q): "We have a history of losses and expect to continue to incur significant operating losses and negative cash flow, and we may never be profitable."

There you have it, in the company's own words.

Once upon a time, it took three quarters of profitability for a company to go public. It would be a good idea if that tradition were to return, if it hasn't already. Otherwise, public investors are placed in the same role as venture capitalists, forced to sort the winners from the losers, a role for which they are ill-equipped. Investors have only themselves to blame by bidding up companies that never earned a nickel, but it would be a good idea if they learned from the last year and stopped snapping up shares of unprofitable companies that go public.

Like many private companies founded in 1999 or early 2000, Loudcloud was caught in the cusp between the gain-market-share-at-any-cost mindset and the current emphasis on path-to-profitability. But unlike other private companies that are struggling for survival, Loudcloud had a chairman with the clout to tap the public markets. The company may yet overcome the odds and survive, but that question should not be up in the air at the end of its first quarter as a publicly-traded company.