Genealogy Dot-Com Getting Mixed Messages From IPO Watchers

• Amy Reeves
• On 6:10 pm EST, Monday November 2, 2009

Ancestry.com Inc.

Provo, Utah

(801) 705-7000

ancestry.com

Lead underwriters:

Morgan Stanley and

BofA Merrill Lynch

Offering price: $13-$15

Expected date: week of Nov. 2

Ticker: ACOM

THE BUZZ

The IPO calendar is keeping busy with six offerings slated for this week. Investors, however, are still picky. Of the 13 IPOs that came out in October, only four are trading above their offering price.

But Ancestry.com is different from other recent debuts, says Scott Sweet, managing partner at IPO Boutique. The popular online service more or less owns the business of helping people construct their family trees on the Web. And although many of the shares are being sold by private equity owners, the company doesn't come with the huge debt load of many private-equity-backed deals.

"This is more like the IPOs we were seeing several months ago that were working, providing they were showing consistent increase in revenue, consistent increase in profit as well as a low debt load with a strong niche product," Sweet said.

Still, some have qualms about the deal. Financial commentary site Breakingviews pointed out that in June, for stock-option purposes, the company valued its own shares at only $8.54 apiece.

"The Nasdaq stock index is up more than 15% since then," Breakingviews said. "But that would account for only a fraction of the difference."

THE COMPANY

The firm's offline predecessor, Ancestry Inc., was incorporated in 1983. It changed its name to Ancestry.com in 1998 after launching the Web site. In 1999, it changed its name to MyFamily.com, and in 2006 to The Generations Network.

In 2007, Spectrum Equity Investments poured $355 million into the firm and now owns 67% of the stock. Ancestry.com has been reorganized as a holding company, with Ancestry.com Operations as a fully owned subsidiary.

The company says it has the largest collection of digitized family-history records in the world, including records of births, deaths, marriages, immigrations, lawsuits and so on. Over the last 12 years, the firm says it has put online 3,000 databases and 25,000 titles, totaling 4 billion records with 8 billion names. Much of the recent content has been added by Ancestry.com's online community, which totals around 1 million people. Genealogy enthusiasts use the site to share information and upload new documents and photographs they unearth. Some 43% of subscribers have belonged to Ancestry.com for at least two years, the company says.

Registered users can pay $19.95 a month for U.S. Deluxe, which allows access to records in the U.S., or $29.95 for World Deluxe, allowing global access. Two-thirds of subscribers are American, and most foreign subscribers are in English-speaking countries. The firm does, however, have Italian, German, French and Swedish sites.

Ancestry.com uses a proprietary technology platform to help users find information. The search engine turns up both matches and near-matches for names, dates and locations. It also includes "record hinting," resembling the "you might also like ..." function on retail sites, suggesting other records that might be useful. The recently launched Member Connect service brings together people who share common relatives.

RISKS/CHALLENGES

Subscriber "churn" (cancellations divided by new subscribers) is about 4% a month. So even though the site gains about half a million subscribers a year, the net growth rate is in the low double digits. Occasional spikes in new users, due to publicity, also tend to draw users with lower commitment, thus raising churn.

Ancestry.com offers a mix of monthly and annual subscriptions. A large portion of reported revenue in each quarter is actually deferred revenue from subscription agreements, so actual subscription drops may take a few quarters to show up in results.

The company's main competitor is FamilySearch, a nonprofit run by the Mormon Church, which has been gathering genealogy records for 100 years and makes them available for free. That group plans to take its records online over the next few years.

Although the debt burden is not as great as some other recent IPOs, it will still amount to $102 million after the offering, nearly 50% of annual revenue.

The company plans to expand its business in foreign countries, including China. Previously the business had been very focused on the U.S. and other English-speaking countries. It will have to adapt its model to new languages, cultures and regulatory climates.

THE RESULTS

In the first nine months of the year, revenue rose 13.5% from the year before to $164.8 million. Profit more than tripled to 32 cents a share.

USE OF PROCEEDS

Ancestry.com expects to net about $48.4 million from its portion of the 7.4 million shares being offered. It will use $12.1 million to repay debt.

THE MANAGEMENT

Timothy Sullivan

President, chief executive and director

Joined in 2005 after three years as head of Match.com. Previously he held managerial positions at Ticketmaster (NasdaqGS:TKTM - News) and Disney (NYSE:DIS - News). He holds an MBA from Harvard Business School.

Howard Hochhauser

Chief financial officer

Joined in January from Martha Stewart Living Omnimedia (NYSE:MSO - News), where he worked for eight years, the last two as CFO. Before that he held multiple positions at Bear Stearns. He holds an MBA from Columbia University.

Christopher Tracy

Senior vice president of operations

Joined the company in 2004 and attained his current position in January 2008. Before that he spent two years as general manager at Time Warner (NYSE:TWX - News) and three years in various positions at NextCard. He holds an MBA from Harvard Business School.

Buzz up!