This year marks a significant milestone for Philippine technology company Xurpas: it will hold an initial public offering (IPO).
You’ve probably never heard of the company. But if you’re a mobile user in the Philippines, chances are, you’ve played its casual games, bought its stickers, or subscribed to its horoscopes.
Xurpas is the company that develops the content that telcos Smart Communications, Globe Telecom, and Sun Cellular offer their subscribers. Over the last 13 years, it has grown to become one of the largest in its category in terms of revenue.
And it was able to do so under investors’ radar.
Unlike most tech companies we know today, Xurpus did not take in any venture capital. The IPO is the first time it will raise funds ever – and it will play a big part in its bid to become a dominant player in the region.
From bootstrapping straight to IPO
Founded by entrepreneurs Nix Nolledo, Raymond Racaza, and Fernando Garcia, Xurpas started in 2001, with a minimum paid-up capital of PHP62,500 (US$1,392).
The three set up the company after their stint at iAyala, where they created “enterprise type of solutions” related to mobile phones.
Except for their computers and his father’s small office that they rented for free, Nolledo said they had no physical assets to boast of. All they had was an idea and foresight.
“We thought there was so much fun stuff you could do on your phone and the opportunity was on the consumer side,” Nolledo shared. “There were six million cellphones and two million PCs at the time, and because the cost of the cellphone was lower than the PC, we felt the future would be mobile.”
And they were right. The Philippine mobile phone market has exploded to 110 million subscriptions today.
Nolledo said they never took out a loan or raised capital. They had a conservative approach to their growth: they invested only in products that would give them fast returns. He said it also helped that in their business, “everything is paid for.”
“We were already profitable year one. It’s not like the internet where you spend to host this much traffic, but you only monetize a portion of that traffic,” Nolledo said.
Back then, he said most mobile users had dumb phones that were loaded with prepaid credits. So the content they first developed was what we now call “legacy content” such as ring tones, horoscopes, jokes, and inspirational quotes.
As more and more people gained access to the internet and upgraded to feature phones and smartphones, Xurpas also expanded its array of offerings. It started producing casual games and messaging applications.
Xurpas distributes and co-markets its products through the telcos, and these products are branded by the telcos. Xurpas receives a share in the revenues derived by the telcos from fees paid by the subscribers in exchange for the content. The share may vary depending on the type of content or service, but it’s typically equivalent to at least half of subscription or usage fees.
Photo taken from the company’s IPO prospectus.
Eventually, the company also began to engage in the development of mobile enterprise services, which have proven to be another profitable segment. Here, it creates mobile platform solutions for the telcos, government agencies like the Land Transportation Office and Social Security System, and companies like Robinsons Land and Nestle Philippines. These solutions are “mission-critical,” such as customized call/SMS/data bundles, mobile airtime credit transfers, and various forms of mobile commerce like raffle promos and information on demand.
As of December 31, 2013, the company’s total revenue and net income from its mobile consumer products business were PHP190.01 million (US$4.2 million) and PHP99.55 million (US$2.2 million), respectively, while total revenue and net income from the mobile enterprise segment were PHP61.80 million (US$1.4 million) and PHP20.92 million (US$465,919), respectively.
Typically, Nolledo said Xurpas is simply defined by the market as a mobile content provider. But he said he looks at the company differently. “Xurpas is a fast-moving consumer goods company.”
Xurpas, he explained, is like Unilever and P&G, but instead of selling bars of soap, for example, it sells digital content. And instead of selling its products in retail stores, it sells them through cellular phones. “We’re open 24/7. We never run out of inventory. We have over 100 million branches nationwide because every cell phone is a store. We have the perfect distribution system – from our manufacturing plants (our servers) to the palm of your hands, all in a few seconds.”
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Games main driver
Nolledo said Xurpas only started growing exponentially over the last three years, when internet access in the Philippines also rose dramatically.
From 2011 to 2013, Xurpas posted revenue growth of 75 percent on average per year, and margins of 42 percent average earnings before income tax, its IPO prospectus revealed.
Much of this growth can be attributed to its casual games, which are “on track to become the company’s largest line of business,” with operating margins in excess of 70 percent.
These casual games include PlaySmart, which is offered by Smart, and Globe Games with Friends, offered by Globe.
According to Nolledo, their games are appealing because of three key factors: they are lightweight as internet speed in the Philippines remains a challenge; they’re simple – the mechanics are easy to understand; and they’re cheap.
“In the US, you can buy a console game for US$59.99 and they charge you another $2.99 for a virtual item. We charge for as low as PHP1 (US$0.02) for a game. We do bundles like PHP15 (US$0.33) for 15 games for one week, unlimited play,” he noted.
Despite its impressive growth, Nolledo said there’s still plenty of room for improvement in this segment. “Once a subscriber graduates from a phone with no internet to a phone that does, a new world of possibilities opens for you. You see opportunities for monetization. Our revenues increase as capabilities of handsets increase.”
IPO funds for expansion
Now, Xurpas wants to export its businesses to other countries in Southeast Asia. It is raising up to PHP1.44 billion (US$32 million) from its IPO to fuel this expansion.
Nolledo said they plan to expand in three ways. They may do it organically – by negotiating with telcos directly, enter into partnerships with companies that have relationships with these telcos, or acquire companies that will give them access to these telcos or provide them more content.
“Southeast Asia has a lot of very good tech talent. They might be cashflow positive, profitable, but they’re not growing fast enough so they don’t really attract so much VC. They would be good targets. The more content and mobile subscriptions we have access to, the more revenues we can generate on a per customer basis,” he stressed.
While money is a large factor in their decision to go public, Nolledo said there are “non-monetary benefits” to this move. “We feel it’s a different conversation branding-wise, reputation-wise when we talk to potential partners as we expand our markets if we are a listed company.”
“The telcos overseas are being approached every day by different software vendors. I think it’s different when you say, ‘our books are online. These are our partners. Our valuation is this much. Our stock has performed as such.’”
After its IPO, Xurpas will enter Indonesia, Bangladesh, and Thailand first – markets that “predominantly [use] prepaid” similar to the Philippines, said Nolledo.
“There are 10 countries in ASEAN, we’d like to be in all 10 at some point,” he added.
Xurpas expects to receive the Philippine Stock Exchange’s approval for its IPO on November 12. The company eyes to list its shares on the PSE in the last week of November or early December.
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This post Straight to IPO: How Philippine tech company Xurpas grew without venture capital appeared first on Tech in Asia.
Straight to IPO: How Philippine tech company Xurpas grew without venture capital
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