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The Brode Report  |  September 2010

David Brode profile   Hi, this is David Brode. Welcome to The Brode Report newsletter, where I am sharing monthly with you my thoughts, ideas, and experiences around strategy & finance with a focus on financial modeling.

The main article this month is about building more accurate and more flexible scenario models. Also, some thoughts on the Skype IPO that is all over the news this month. Please share your feedback; I'm always happy to hear from you.
Five Tips for Better Scenario Modeling

Back to my roots: excellence in spreadsheet modeling. Recently Iíve been creating models with dramatically improved scenario features.

You know the problem: What's different between this model and that one? Spreadsheet compare tools can't handle the complexity of real business models, so you're left with crude manual tools to track down the changes, piece by piece.

Here are my 5 tips for a better way! Bookmark and Share

Skype logo Skype IPO: Where's the Beef?

The Internet was abuzz last week about Skypeís planned IPO. Sites from GigaOM to Tech Crunch to CNET and even mainstream press such as Newsweek and BusinessWeek had breathy articles about it.

I found it amusing that some articles even attempted financial analysis. From my perusal of the S-1, we donít have sufficient information to tell if this makes sense. Consider this:

Valuation. There is no target price range on this deal, nor is there information on the number of shares outstanding. Thus we have no idea how high the company is being valued.

Offering. Apparently, the $100M raise for the IPO is preliminary as well. Watch that number and expect changes soon.

Profitability and Business Model. Skype just barely had positive earnings in 1H 10 at $13M, and some commented that EBITDA was $115M, or 28%. While 28% is solid and could improve given Skypeís network effects, most of their business is based on Skype users being willing to pay to call landlines. The Skype Paradox is that the more people they sign onto their network, the fewer people have to give them revenue (Skype-to-Skype calls are free). Thus, Skypeís business model is broken. The S-1 points out this vulnerability and talks about how they plan to generate revenues through advertising, gaming, and virtual gifts. To me, this sounds like they have eyeballs and are figuring out how to monetize them.

So where does that leave us? We have private equity investors who ponied up a few billion dollars last year and are looking to start cashing out. The company has great market share, but somewhat commoditized products: voice connections, video connections, and chat. Skype may succeed in figuring out how to make money from the huge attention stream that runs through their servers, but they havenít yet. And with the price of shares unknown, well, Iím not lining up to buy. On the other hand, we all know that GOOG hadnít figured out their business model when they IPOed Ö and that deal was good to investors.

SEC S-1 Registration Document
GigaOM: Skype Files for IPO
TechCrunch: Skype Files For IPO, Only 6 Percent Of Users Pay
Businessweek: Skype files IPO registration with SEC

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