Castlight Health Soars In IPO. Why?

Castlight Health prices IPO above range, shares rise sharply in debut. Do Castlight’s results and prospects justify its valuation?

Logo - Castlight

Castlight Health prices IPO


Castlight Health, Inc. (NYSE: CSLT) went on the road for its IPO with a prospectus offering 11.1 million shares of common stock at a price range of $13 to $15/share. The deal priced above the range at $16/share, raising about $177.6 million before expenses and commissions.  It closed at $39.80/share, for a 148.75% pop.

Castlight’s common stock is divided between:

  • Class A – held by insiders and has stronger voting power than Class B
  • Class B – offered to the public

Let’s value the Class A and B the same, without even trying to calculate the increase in the price per share of the Class A to account for the voting disparity or for any liquidity discount (since it is not the listed security). This means that:

  • Castlight went public at a market cap of almost $1.4 billion
  • Castlight has a current market cap of almost $3.45 billion

A tech company in the healthcare software space. Throw in a nod to “cloud computing” and “Big Data,” and a multi-billion dollar market cap makes sense, right?

Let’s be realistic for a minute. Castlight was founded in 2008. The high points:

  • In its latest and fifth year, it generated $13.0 million in revenue
  • It lost $62.2 million dollars last year

Castlight says it has “more than 95 customers,” 24 of which are Fortune 500 companies. Fine. Let’s assume it had all of those customers in 2013. That comes to less than $150,000 per customer per year. In that light, it took $33.7 million dollars in sales and marketing to generate $13.0 million in revenues. If they got the entire Fortune 500, they would have revenue of $75.0 million per year before taking expenses into account.  Does that justify its valuation?

Not fair, you say. Many of those customers could have shown up late in the year and are not fully reflected in the financials. Okay. Let’s look at an earlier filing that included an interim period. It appears that approximately $5.1 million in revenue was recognized in Q4 of 2013. Let’s give them the benefit of that doubt and annualize Q4, that would be $20.4 million in revenue and a whopping loss of $41.8 million without assuming additional sales and marketing expenses to attract the additional revenue.

Using a quick and dirty stock screener for other companies with a similar market cap, we find Cepheid, which trades on Nasdaq and has a market cap of about $3.74 billion, just north of Castlight’s market cap.  Like Castlight, it also has losses. Unlike Castlight, Cepheid has over $400 million in annual revenue!  And its losses are smaller than Castlight’s losses!

We haven’t even begun dissecting its business plan yet, which is a subject for our research clients.

I’m sure Castlight is a fine company with fine people involved. But how on earth is this company worth over $3 billion?

CSLT reaches Higher Ground.


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HubSpot Files IPO Docs, Reportedly

HubSpot files IPO documents on a confidential basis and has chosen bankers, according to news reports.

HubSpot Logo

HubSpot is preparing for its IPO.

HubSpot, which offers an “inbound marketing software platform that helps companies attract visitors, convert leads, and close customers,” reportedly filed confidential IPO documents with the SEC.

HubSpot is in a hot area, with the SaaS marketing app companies on tear lately.

Marketo (Nasdaq: MKTO) went public last May at $13.00 share and closed today at the oddly even amount of $41.00/share.

Responsys went public in April 2011 at $12.00/share and was acquired by Oracle earlier this year for $1.5 billion, or $27.00 per share.

Eloqua went public in August 2012 at $11.50/share and was acquired by Oracle (sense a trend?) in December 2012 for $23.50/share.

ExactTarget went public in March 2012 at $19.00/share and was acquired by Salesforce in June 2013 for $2.5 billion, or $33.75/share.

With online companies fighting for attention and market share, it is likely that the online inbound and outbound marketing companies will continue to be attractive to investors and acquirors.


Full disclosure: We are an investor/founder of an online advertising analytics company that is currently in pre-release. As of this writing, we have no interest in any of the companies mentioned

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Dropbox Raises A Few Million Ahead Of Reported IPO

Dropbox conducts private placement; raises cash ahead of purported IPO.

Dropbox has been one of the more anticipated IPO candidates for a while.  Rumor has it that rival Box beat it to the punch with a confidential IPO filing after announcing a $100 million funding.

Logo - Dropbox

Dropbox raises cash ahead of rumored IPO.

Even if Dropbox does decide to go public, it may not be just for the cash. Dropbox made an SEC filing disclosing that it raised $325 million in a private offering, out of a total offering size of $450 million. Allen & Company and Goldman Sachs were the bankers and received a combined $8.1 million for their efforts. The valuation was reportable around $10 billion.

Dropbox also hired the former head of Motorola Mobility as COO, indicating that it is bringing experienced people with public company experience on board.

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Box reportedly beat Dropbox to the IPO.

We’re looking forward to a deeper dive into the business model when Box and Dropbox finally file their IPO docs publicly.

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Facebook Age Data – How Reliable?

Facebook age data may not be reliable, says Facebook.

Facebook has always warned about the validity of its key metrics, such as:

  • Daily active users (DAUs)
  • Mobile DAUs
  • Monthly active users (MAUs)
  • Mobile MAUs
  • Average revenue per user (ARPU)
Logo - Facebook

Facebook sees decline in use by younger audience, but disputes its own data.

These metrics are calculated using Facebook’s internal data. User behavior may skew the results. For example, people may maintain more than one account. This is a violation of Facebook’s policies, but it may happen. (Ed note: This is our shocked face.)

In its recent Form 10-K, Facebook included a new caveat regarding the data for its younger users. Is this bad? Facebook wants these users, but data points suggest that younger users are jumping ship.

Don’t fret, Facebook tells advertisers and investors. The data regarding declining use by younger users may not be reliable.

“For example, while user-provided data indicates a decline in usage among younger users, this age data is unreliable because a disproportionate number of our younger users register with an inaccurate age.”

So Facebook worked to make it more reliable. How is that working out?

“These models suggested that usage by U.S. teens overall was stable, but that DAUs among younger U.S. teens had declined. The data and models we are using are not precise and our understanding of usage by age group may not be complete.”

In one respect, Facebook is downplaying its declining usage by younger users. However, Facebook also recognizes the danger of losing the “Cool Factor” among younger users.

“We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook, and we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with these other products and services.”

Facebook recognizes that competition, particularly for the younger audience, in online and mobile applications is fierce. Facebook must keep fighting to keep these users. Calling the data “unreliable” does not change the perception or the risk of losing these users.

Youth of the Nation abandoning Facebook?

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Gold v. Bitcoin? “Gold,” Says Hedge Fund Manager

Gold, not Bitcoin, is the real currency alternative, says Paul Singer. favorite Paul Singer, of Elliott Associates fame, is not quite as taken with the current flavor-of-the-month in alternative currencies according to WSJ and CNBC reports. Singer reportedly wrote in an investor letter:

“We think that gold is a unique investment asset, the only real money that has stood the test of time throughout recorded history,”

In case you thought there was some wiggle room in his conclusion, Singer continued:

“There is no more reason to believe that bitcoin will stand the test of time than that governments will protect the value of government-created money, although bitcoin is newer and we always look at babies with hope.”


Paul Singer of Elliott Associates prefers gold to Bitcoin.

Singer also points out one attractive aspect of gold that seemingly attracts the Bitcoin crowd as well:

“[I]t is a store of value that should be particularly attractive at a time when monetary debasement is the major policy practiced by most developed countries to keep their economies afloat.”

Singer is a fan of gold at this time:

“Gold is out of fashion, but we think the explanation for why it has been drifting down is not compelling. The economy seems stuck in the doldrums, but most so-called ‘experts’ have been changing their minds almost weekly about when they think the economy will finally begin a long-term acceleration to the upside,”

, which he thinks will be back in favor soon:

“If the global economy recovers strongly without a significant uptick in inflation, then gold might continue to be a neglected asset class. But low growth and high inflation are typical hallmarks of structurally unsound economies experiencing monetary debasement, so perhaps that phase is next, or soon to appear . . . We shall see.”

The Elliott Associates fund made 12.4% in 2013, with annualized returns of 14.0% since 1977. Its Elliott International Ltd. fund gained 11.8% last year.

Posted in Bitcoin, Business Strategy, Economics, Elliott Associates, Hedge Funds, Uncategorized | Tagged , , , , , | Leave a comment

Zynga Ride Continues With Acquisition Of Mobile Gaming Company And More Layoffs

Zynga sees surge after news of acquisition and layoffs and earnings release.

Logo - Zynga

Zynga acquires NaturalMotion

Logo - NaturalMotion
NaturalMotion acquired by Zynga

Yesterday, Zynga announced that it had acquired NaturalMotion, a creator of mobile games and animation software. Zynga will pay $391 million in cash and 39.8 million shares of Zynga’s Class A Common Stock for NaturalMotion. Approximately 11.6 million of the shares will be issued to continuing employees, subject to certain vesting conditions over a three-year period. All of this is subject to extremely intricate legalese that I won’t bore you with.

To the delight of its stock analysts and new formerly NaturalMotion employees, Zynga also announced a reduction in force of approximately 314 employees, constituting approximately 15% of its workforce. Zynga will incur up to $18.5 million in total restructuring expenses as a result. It feels like only six months ago when we last discussed a Zynga downsizing.

Zynga also issued its 4Q and year end financial results. Let’s get crazy:



Change from Previous Year*


Stock Price Day After Release






Fiscal Quarter





Fiscal Year




583,862,093 shares outstanding**





$1.7 billion






Fiscal Quarter





Fiscal Year




659,687,109 shares outstanding**


$2.9 billion

*Dollars in thousands.
**Based on immediately preceding Form 10-Q

Umm, so a company with 30% less revenue in 2013 than 2012 is worth 40% more after announcing 2013 results than it was after announcing 2012 results?

Was there a silver lining? We suppose only losing $37 million in 2013 versus $209 million in 2012 is a good sign. That plus a Hail Mary acquisition and more layoffs equals a 23.6% pop in the stock price.




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Wal-Mart and Costco: The Latest Idiotic Argument About Employee Wages

Wal-Mart and Costco employee pay saga drones on following State of the Union address.



After the hair dryer-like drone of last night’s state of the union address featuring the prez praising Costco, a Facebook friend reposted one of those stupid CNN articles quoting an MIT professor.  The professor noted how Costco’s higher employee pay yields superior results to Wal-Mart.

Let’s count the ways this article gets it wrong.

First, let’s do like the article and pretend that these people and companies are in any way comparable (Numbers based on last completed fiscal year):

  1. Wal-Mart’s total revenue was $469.2 million, versus $102.9 million for Costco. Winner Wal-Mart.
  2. Wal-Mart’s margin was 3.6% versus 1.9% for Costco. Winner Wal-Mart.
  3. Who does more for employees? Wal Mart employs 1.3 million people in the U.S. alone. Costco: 184,000 worldwide.

Will Costco absorb all comers from Wal-Mart for the higher wages? How about Costco and Wendy’s combined? Wendy’s had 44,000 employees at the last fiscal year end. It looks like Wal Mart does more for over 1 million people in the U.S. alone than Costco and Wendy’s do in the entire world combined.

But, you say:

“According to Ton’s research, sales per employee at Costco were almost double those at Sam’s Club, its direct warehouse competitor owned by Wal-Mart.”

Sam’s margin was about 3.5%.  Winner:  Wal-Mart.

How is this for a moral argument:

If my child’s education, family’s medical care, retirement or other important things that cost money and are related to investments and financial planning, Costco is hurting me and Wal-Mart is helping. Wal-Mart’s rate of stock price growth is lagging Costco, but Costco is not nearly as big as Wal Mart. When growth stalls and the company matures, watch out. You will see its costs get in line with revenues quickly. Look at the volatility and ask if you would have liked to have been a Costco shareholder in March 2009 or

In addition, could something else account for Costco’s doubling of Wal Mart’s stock performance?



WMT’s dividend yield (2.5%) is more than twice that of Costco (1.1%).  WMT may be choppy, but in a much narrower range, and it pays a larger dividend in dollars per share and yield.

The people who work there are free to leave. Your disapproval of their choice of employment may raise another moral argument.

As to the impoverished workforce, Wal Mart gets dozens or hundreds of applications for every open position. Why would someone sign up to be impoverished? Furthermore, Wal Mart hires people that others (including Costco) won’t touch and provides them an entry into the workforce that is unavailable elsewhere. In addition, Wal Mart promotes from within, giving people the chance to move up the ranks and gain experience that companies value, providing for lateral movement as well. Price their labor out of the market, and they don’t go to Costco. They go unemployed.

If the MIT guy is so confident in his conclusion, he could open his own store and put Wal Mart out of business. We won’t hold our breath waiting.

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SunGard to Spinoff “Availability Services” Business – Disruption From The Cloud

SunGard announced plans to spinoff its Availability Services division, much like the missing “u” in its name, as the Cloud disrupts its business.

SunGard to Spinoff Availability Services Business
SunGard to Spinoff Availability Services Business


SunGard Data Systems Inc. is of the world’s leading software and technology services companies.  They said so themselves.  Last week, SunGard announced plans to spinoff its Availability Services business on tax-free basis to its stockholders.  It plans to complete the spinoff in early 2014.

SunGard’s provides this interesting public look into an otherwise large, but private, company.

Availiability Services, or AS, is one of three SunGard segments.  It provides disaster recovery services, managed services, information availability consulting services and business continuity management software to more than 8,000 customers in North America and Europe.  So, how well does it do it for SunGard?

AS is only about one-third of SunGard’s business.  Like its much larger Financial Systems sister business, its revenue decreased by 4% from 2011 to 2012 and decreased about 2% for the third fiscal quarter from 2012 to 2013.

Does this mean SunGard is offloading a dog and trying to keep the good parts in the consolidated parent?

Maybe.  The future trends do not look good for AS.  As SunGard itself explained,

“[r]ecovery services revenue has been declining due to customers shifting from traditional backup and recovery solutions to either in-house solutions or disk-based, cloud-based or managed recovery solutions.”

This could be a problem.  However, is there a solution?

“In this environment, we have introduced the Managed Recovery Program (“MRP”), which brings SunGard’s expertise to our customers’ disaster recovery operations. Demand has also been increasing for outsourced management of IT operations and applications. We expect these trends to continue in the future.”

Well, chalk this up to the cloud, I suppose.  And SunGard’s AS division is going to go after this newfangled idea.  But, isn’t this what AS already does?

“Additionally, we provide business continuity management software and consulting services to help customers design, implement and maintain plans to protect their central business systems. To serve our more than 8,000 customers, we have approximately 5,000,000 square feet of data center and operations space at over 90 facilities in ten countries.”

Well, sort of but not really.  AS could be seen a type of cloud services provider, but its customers appear to be shifting away to more generalized cloud providers.  Are Box and Dropbox and their ilk the scourge of legacy companies like SunGard’s AS business?  Possibly. 

However, AS is moving into more consulting services and maybe it can be more nimble as a standalone.  Thanks to public reporting requirements as a result of publicly registered debt, we’ll see after the spinoff.

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Crocs Trade Crocked – A Week Late, Several Dollars Short

Crocs announces Blackstone deal and CROX rallies about a week after our options expire, and we take it personally.

It has been a while since I’ve given an update on the Fund, the little fund that could. Since inception in February, it is up over 40%, with the original capital up over 89%, as of this writing.

It has not been all fun and games, and there have been some ups and downs.

Crocs Logo
Crocs, stylish and profitable, if you’re Blackstone.  I’ve always heard the Blackstone guys dress sharp.

Today’s discussion is a downer. Let’s look at some chronology:

July 26, CROX is looking beaten up, and analysis shows room to move, particularly if they attract some institutional interest. We buy some December 21 $14 calls. It closed at $13.73, while recently trading over $16 and $17 per share. Should be a good one, right?

Early August, CROX traded over $14 for a few days. Time to put the down payment on the yacht, right? It began to slip, trading in the $12-13 range for the next few months. Uh oh.

November 27, there was news that Crocs was talking to buyout firms, including Blackstone, and the stock jumped to $13.84. The beginning of a rally? Nope. It slipped again.

December 21, our options expired worthless as the market for them faded away and we hoped for a white knight.

A mere nine days later, Crocs announces a huge deal with Blackstone, and the stock jumps over 20% to close at $16.14. Seriously, you guys couldn’t have done this 10 days ago?

The lesson:  Being right doesn’t mean you’re timely.  If we had purchased the calls with a later expiration date, it may have worked out, but they were more expensive.  In either case, we had the right idea with the wrong timing and corporate financing transactions take time to work out, even if it seems like they should occur.


Missed it by that much (*holds index finger near thumb*).



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Volcker Rule’s Victims – Zions To Reclassify, Divest CDO Portfolio

Volcker Rule, an ill-advised part of ill-advised “comprehensive reform” statute, is wielded like a blunt instrument. Dodd and Frank continue reign of terror after leaving Congress.

Zions Bancorporation announced that it believes that almost all of its CDO portfolio will be considered disallowed investments under the Volcker Rule.  For those that follow such things, Dodd-Frank was federal government response to the financial crisis.  As to whether it actually addressed the causes of the fiscal crisis, opinions vary.

Logo - Zions

Zions Bancorporation discusses impact of Volcker Rule.


The Volcker Rule, among other things, prohibits financial institutions from owning “speculative” investments and engaging in proprietary trading.

So, what does this do to banks and financial institutions?  We mean in reality, not theoretically.

Zions’ stated that it will reclassify all covered CDOs that currently are classified as “Held to Maturity” into “Available for Sale.”  Accounting mumbo jumbo.  That’s it?

“The net result would eliminate substantially all of the accumulated other comprehensive income adjustment to equity related to the covered securities.”

More accounting mumbo jumbo.  What does this really mean?

According to Zions, this results in:

  • An estimated pro forma one-time non-cash charge to earnings of $629 million, pre-tax, and $387 million, after tax
  • pro forma September 30, 2013 common equity Tier 1 ratio under Basel I rules would approximately equal 9.74%, down from the actual 10.47%
  • pro forma September 30, 2013 GAAP tangible common equity to tangible assets would approximately equal 7.84%, down from the actual 7.90%

An earnings hit and a negative impact on regulatory ratios.  Hooray progress!

But wait, there’s more.  What happens when Zions goes to sell its portfolio?

“It is unclear what impact, if any, the divestitures mandated by the Volcker Rule across the bank and insurance trust preferred CDO asset class may have on trading prices; such prices are used in determining Zions’ fair value marks. Accordingly, the actual impact of the Volcker Rule may be materially greater or less than the impact estimated above.”

In other words, the flood of bad “speculative” securities on the books of financial institutions into the marketplace will cause prices to fall.  This will obviously cause income and returns to fall, which can cause the values to fall even further.  Death spiral alert!

Zions stated that is it evaluating multiple ways or combinations of ways to comply with the Volcker Rule requirements to optimize shareholder value.  Good luck with that.

Link:  Zions press release re:  Volcker Rule

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