Skype files for IPO, targets SMEs to increase revenue

Skype, the VoIP service partly owned by online auction house giant eBay, has filed for an IPO nearly a year after its parent company sold a 70% stake in the business, valuing it at over $US2.7 billion.

However, the filing with the Securities and Exchange Commission also reveals Skype had to pay $US344 million to settle a dispute with the original creators of the company’s software, and that only a small proportion of its users actually pay for extra services.

In order to promote more paid users, the company hopes to develop new enterprise products and promote the use of Skype in business.

Yet no details have been revealed on the number of shares to be offered, the prince range or whether eBay will sell off its stake. But the company did put forward a preliminary figure of $US100 million.

The listing reveals a number of Skype’s financial results. Revenue for the first six months of 2010 was $US406 million, with a net income of $US13 million, and its gross margins are 51%.

Adjusted EBITDA for the first half of the year was $US115.7 million, up by a solid 54% from the same time last year.

Other figures show users made 95 billion minutes of voice and video calls during the first half of the year, and 40% of those minutes were in video. Skype users sent 84 million text messages, and as of 30 June, the service was averaging about 124 million active users a month.

However, it also states only 8.1 million of those actually pay, a miniscule amount of its 560 million registered users. Those who do pay, hand over an average of $US96 per year.

The filing clearly defines the company’s strategy for the medium-term – convert more of those unpaying customers to paid subscribers. It already offers Skype minutes, which allow users to make phone calls and text messages, and it hopes to develop new monetisation models like enterprise products and new types of advertising.

“Our users made over 152 billion minutes of Skype-to-Skype calls in the 12 months ended June 30, 2010. We believe this represents a meaningful opportunity to increase our revenue from alternative monetisation models, including advertising, gaming and virtual gifts.”

But one of the major changes for the company will be a renewed focus on businesses. With over one-third of users now incorporating Skype into corporate environments, Skype says this is an area it definitely wants to tap for some revenue.

“We believe there is a significant opportunity to better serve the communication needs of the small and medium enterprise segment, as well as larger enterprise customers, by focussing on user needs in this market and developing additional products specifically tailored to business users. We plan to address this opportunity through the following initiatives,” the filing states.

However, it also planted a seed of doubt in that plan, saying that, “we may incur net losses again and cannot assure you that we will be profitable in the future or that, if we are, we will be able to maintain profitability”.

“We believe the scale, global distribution and growth of our user base provide us with powerful network effects, whereby Skype becomes more valuable as more people use it, thereby creating an incentive for existing users to encourage new users to join.”

One of the more interesting revelations contained in the document is the fact that Skype paid $US344 million to fend off a lawsuit from software firm Joltid.

Skype uses the company’s technology to run its VoIP services, and at the time of the lawsuit, which attempted to block Skype from using the technology, it said that unless a settlement could be found it would have to develop alternative software.

The figure reveals just how serious that legal battle was and how close Skype came to effectively starting all over again.

The long-awaited filing comes after an eventful year for the company. Its former parent, eBay, always said Skype doesn’t fit well alongside its core offerings of auctions and online payments, and had intended to sell the business for some time.

“Skype is a strong standalone business, but it does not have synergies with our eCommerce and online payments businesses. As a separate company, we believe that Skype will have the focus required to compete effectively in online voice and video communications and accelerate its growth momentum,” eBay chief executive John Donahoe said at the time.

Then in September last year, eBay sold off a 65% stake in the company to a number of private investors including Andreessen Horowitz, Index Ventures and the Canada Pension Plan Investment Board. It was sold for $US1.9 billion, and valued the company at about $US2.75 billion, well under its original price tag of $US3.1 billion.

Analysts point out Skype has developed an extremely strong brand and has established itself as a key player in the VoIP market. About 10% of all international voice traffic operates through Skype, and users have even taken to using the name as a verb, saying they will “Skype” a friend or colleague.