Unpacking Gaming Company Razer’s IPO

Morning Report: Razer, a gaming company, hopes to raise over half a billion in its impending IPO. Let’s peek at the numbers.

First filing in July, gaming company Razer has set a price range for its IPO. It hopes to sell over one billion shares at a price of “HK$2.93-HK$4.00 [or] $0.38-$0.51” in its debut, according to TechCrunch. Those prices value the firm at as much as $4.55 billion.

Its pricing and ensuing valuation are raising eyebrows, with the Wall Street Journal writing this morning that “Razer’s IPO Looks an Expensive Game,” which is headline speak for “is this shit really worth that much?” It’s a fine question and one that we can at least partially answer.

According to its various IPO filings, the company’s recent revenue growth has come with a notable increase in loss. In short, the firm’s top line did the following:

• 2014: $315.2 million.
• 2015: $319.7 million.
• 2016: $392.1 million.

Which led to profits as follows:

• 2014: $20.3 million.
• 2015: -$20.4 million.
• 2016: -$59.6 million.

The first half of 2017 kept the trend going, with H1’17 revenue growing to $198.0 million from a year-prior $152.7 million. Its corresponding losses grew to $55.5 million from $20.2 million.

You are probably wondering what happened to the company. How did it go from large and modestly profitable to modestly larger to oh my it will lose over $100 million this year at this pace? One clue is the firm’s personal computer business.

Quickly, the company’s revenue mix has changed as its operating costs have grown. Razer’s “Systems” revenue grew from 19.3 percent of its revenue in H1’16 to 31.4 percent in H1’17. Over the same period, the category boosted its gross margin from -0.1 percent to 7.8 percent.

So the company’s growth came largely from a business that, for some time, was barely a break-even affair. And personal computer income remains far less profitable than Razer’s other revenue. The company’s peripherals business, in contrast, which constitutes the rest of its top line, posted 33.2 percent and 35.4 percent in the first halves of 2016 and 2017.

Why does it matter that a large slice of the firm’s revenue growth has come from a business that, until recently, was generating zero gross profit?¹ Because Razer’s rising operating costs have grown steeply over the same period. The company’s “selling and marketing expenses” grew from just over $25 million in H1’16 to over $38 million in H1’17. Over the same time period, the firm’s R&D costs grew from $20.8 million to $36.2 million while its G&A line item grew from  $16.6 million to $35.9 million.

All while in the first half this year gross profit grew to $54.5 million from $40.6 million in the year-ago period. That’s quite a lot of new expense to extract from a far-smaller gross profit expansion.

Returning to our prior concern about valuation, Razer will have to convince investors that its rising costs can be controlled and that its growing personal computing business can generate a more meaningful gross profit result. Its top and bottom lines point in different directions, and the company’s trajectory is uncertain. Given those concerns, the firm’s hoped-for valuation could be too stiff compared to its implied revenue multiple.

More when it prices.

1. The firm’s peripherals business in raw revenue terms was bigger in 2014 than it was in 2015 or 2016, and 2017 pro-rated out will produce a smaller number as well.

From the Crunchbase Daily:

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iStockPhoto / MATJAZ SLANIC