Stock Swoon Brings Back Memories of Dot-Com Bust, but Analysis Shows Companies Have Healthy Cash Supplies

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1 TECHNOLOGY Tech Firms' Cash Piles Cool Fears of a Meltdown Stock Swoon Brings Back Memories of Dot-Com Bust, but Analysis Shows Companies Have Healthy Cash Supplies By SHIRA OVIDE CONNECT Updated May 13, :29 p.m. ET A banner with the logo of Twitter is shown on the front of the New York Stock Exchange in November. The company's stock is among several technology highfliers that have come back to earth. AFP/Getty Images The two-month swoon in technology stocks has given investors flashbacks to the dot-com meltdown. But at least one harbinger

2 of trouble is absent today: tech firms in danger of collapse. A Wall Street Journal analysis of 148 U.S. tech companies with recent or pending initial public offerings found none on a path to burn through their cash within a year, based on their pace of spending in Those findings are in contrast to the health of young tech companies during the last run-up of U.S. technology stocks, which peaked in March A cover story that month in the financial magazine Barron's spotlighted how one-quarter of 207 Internet companies were on track to run out of cash within a year. And many did. Now in Silicon Valley, debate is swirling about another possible tech bust. The companies that went public in 2013 and early 2014 were, on average, financially weaker than those that held IPOs in 2011 and By early March, young tech companies were being valued more richly than at any time since Since then, some highfliers have returned to earth: Twitter Inc., TWTR -0.75% business-software maker Workday Inc. and cybersecurity firm FireEye Inc., among others, have fallen 30% to 70%. But there are important differences from 15 years ago. Only about one-tenth as many technology firms are selling stock to the public for the first time, and today's IPOs are more mature. The typical tech company that has gone public this year is almost three times as old as the typical tech IPO firm in 1999, according to data compiled by University of Florida Finance Professor Jay Ritter. Recent tech IPOs are bigger and healthier too, with median sales about six times those of their counterparts from the dot-com frenzy, after adjusting for inflation, and a higher likelihood of profits.

3 The Journal analysis suggests that even if tech stocks collapse, the fallout is less likely to produce the graveyard of the dot-com bust. The Journal, using data from S&P Capital IQ, examined companies that conducted IPOs, or filed paperwork for an IPO, between January 2010 and Monday. The survey included companies in several broad technology categories, including e- commerce firms, social-media firms and makers of software or computing equipment. The results were far less dire than in early The Journal also analyzed companies that went public from 1996 to 1999,

4 using the same methodology it used for the current crop of tech IPOs. Then, about 67% of the 525 tech companies were spending more cash than they were taking in. About 16% were on pace to run out of cash within a year, based on their cash balances and spending pace at the end of Many on the danger list, including health website drkoop.com Inc., Internet grocer Peapod Inc. and online-music retailer CDNow Inc., were soon out of business or sold at fire-sale prices. By contrast, 43 companies in the Journal's recent analysis, or 29%, consumed more cash through operations in 2013 than they took in. Three of those companies educational-software firm 2U Inc. and information-technology companies Sysorex Global Holdings Corp. and A10 Networks Inc. ATEN +4.05% had less than a year of cash remaining as of Dec. 31, given their spending pace. Since then, each has conducted an IPO, replenishing its coffers. "At no point were we cash constrained," said Greg Straughn, chief financial officer of A10 Networks, which raised $120 million in its March IPO. Other companies in the Journal analysis, including Sysorex and 2U, said they chose to spend heavily to boost revenue quickly or said they had access to cash through loan commitments. A look at a cash-burning company from each era, etoys Inc. and Marketo Inc., MKTO -0.08% highlights differences between then and now, but also some similarities. EToys first sold stock to the public in May 1999, less than three years after it was founded and about 19 months after it started selling toys, videogames and other children's merchandise online. For the year ended March 31, 1999, etoys reported about $41 million in revenue and $28 million in cash. In the prior 12 months,

5 it had spent $33 million more in cash from its operations than it took in. (All figures are adjusted for inflation.) Marketo, a maker of marketing software, was seven years old at the time of its May 2013 IPO. The company reported revenue of $58.4 million in 2012, and its operations consumed $24 million more than it took in. It ended 2012 with $44 million in cash on its books. In its IPO, Marketo raised roughly $70 million, after expenses, giving it enough cash on hand as of Dec. 31, 2013, for 10 years of operations at its revenue and spending levels then. That's a comfortable cushion. Nonetheless, investors have recently punished Marketo and many peers because they are spending heavily on sales and marketing. In 2013, Marketo spent roughly 65 cents from every dollar of revenue on expenses such as advertising and paying salespeople. Analysts don't expect the company to turn a profit until 2018, according to Capital IQ data. Its shares have fallen 46% since their high on Feb. 11. A Marketo spokesman said the company is generating $120 million a year in predictable revenue from businesses that are renewing contracts at very high rates. "By any measure, that is a sign of a real company delivering real value unlike the bubble stories from 15 years ago that were all hype and no revenue," he added. Predicting a company's health by its cash burn isn't necessarily definitive. At etoys, the IPO gave the company $176 million in cash, or more than seven years of operations at the company's then-financial trajectory. Within two years, the company had shuttered its website and had filed for bankruptcy protection.