Angie’s List hopes investors see beyond the losses

Angie’s List Inc. has a lot going for it—including a unique market niche, growing brand awareness, a loyal customer base and explosive growth.

If the Indianapolis-based provider of online consumer reviews could finally start making money, it would really have something.

That’s the early reaction from financial observers who have pored over the company’s 172-page Securities and Exchange Commission filing outlining its plans to raise $75 million in an initial public offering.

The long-anticipated filing, submitted Aug. 25, includes lots of impressive figures about the 16-year-old company’s expansion. But it also includes this sobering disclaimer: “We have incurred net losses since inception, and we expect to continue to incur net losses in the foreseeable future.”

Indeed, Angie’s List lost $26 million in just the first half of 2011, and since the beginning of 2006 it’s lost $112 million. In the last three-plus years, it’s made significant headway, boosting paid memberships from 333,489 to 821,769, and increasing the number of markets it’s in from 45 to 170.

Yet the national advertising to support that growth isn’t cheap. Angie’s List spent $30 million on advertising last year, another $29 million through the first half of 2011, and it shows no signs of pulling back.

“I would think after 16 years, at some point you have to start looking at profitability,” said David Menlow, president of IPOFinancial.com in Millburn, N.J.

“From an investment standpoint, why should people be involved in the company if profitability is not around the corner?”

There are encouraging signs making money isn’t out of reach. The average revenue for Angie’s List’s most mature markets—Indianapolis and nine other cities where it has operated at least eight years—was nearly $2.5 million in 2010, five times the marketing expense.

And those markets aren’t stagnant. They collectively increased memberships 25 percent last year, according to the company’s SEC filing.

Still, there’s no guarantee Angie’s List will enjoy the same success in new markets—even as it spends ever-larger sums on marketing. In the first half of 2011, its advertising spend sucked up the equivalent of 75 percent of the company’s $38.5 million in revenue.

Menlow said establishing a timetable for profitability is an issue company executives will have to address head-on when they conduct their road show promoting the offering.

While that could put executives on the defensive, financial observers who have reviewed the company’s SEC filing say they also will have plenty to tout. For example:

• Once households become paid Angie’s List members, they tend to stick around. In 2010, 70 percent of first-year members and 87 percent of members for five years or longer renewed.

• The company doesn’t have major competitors doing exactly the same thing. Some consumers who rely on Angie’s List’s member-provided ratings might previously have flipped through the Yellow Pages, or turned to online services like Yelp.

But other Internet services allow anonymous reviews, which Angie’s List says “are inherently susceptible to outright manipulation. While anonymous and potentially misleading reviews may be good enough for helping consumers choose a bar or a restaurant, for consumers hiring a roofer, pediatrician or veterinarian, the stakes are simply too high.”

• Angie’s List members have sterling demographics, which helps draw in advertisers wanting their business. Angie’s List says its typical member is 35 to 64 years old, owns a home, is college-educated, and has a household income topping $100,000.

Angie’s List tries to get service providers with an average grade of “B” or better to advertise on its website, in its monthly magazine or by participating in e-mail promotions, and the company has had considerable success. Service-provider advertising revenue totaled $24 million in the first half of 2011, eclipsing membership revenue, which totaled $15 million.

The company hasn’t revealed details of the planned offering, such as how many shares it would sell and at what price. Because Angie’s List is an Internet-based service, Wall Street views it as a technology company. That normally would mean it could get a richer valuation for its shares than if it were in a less sexy industry.

But the oceans of red ink cloud the analysis. Many of the tech bloggers and Wall Street writers who’ve scrutinized Angie’s List’s proposed offering so far have struggled to look beyond the losses.

“Angie’s List IPO won’t come highly recommended,” read the headline to a post from InvestorPlace’s Tom Taulli. “Losses will hurt company’s push to go public.”•