Giving voice to profit

Gadu-gadu (GG), creator of Poland's most popular online instant messenger, is entering the Warsaw Stock Exchange. The firm's share price has been set at zł.21 and it looks ready to earn zł.75 million from the issue of three million shares.

The event has courted some controversy, with the media's quoting of analysts who claim that the value of GG shares was overestimated and the company could have problems using the capital wisely. The amount is several times higher than the company's revenues.

Remigisz Sopel, an analyst from IDM SA, believes the value of the company was estimated very carefully. "There is no similar company on the Warsaw Stock Exchange. GG's potential is comparable to the biggest listed internet portals. Many investors look at GG as just an instant messenger, not at the number of users it has acquired through the years," says Sopel.

Popular solution

A survey by PBI Megapanel shows that 50 percent of all of Poland's internet users have a GG number - this amounts to some six million users, with half of them logging on every day. At the same time, Skype has only 2.7 million users, and Tlen.pl, the third most popular instant messenger, only 800,000.

GG is also one of the most recognizable brands in Poland. Apart from being an instant messenger, GG has other services like Generacja Gadu-gadu, a social portal with four million registered users, and Gadu Radio, which offers 13 thematic channels. The latter was launched last September and already had 200,000 listeners by January. One further service is Gadu-gadu Nagłos, a VoIP telephony-provider with 250,000 pre-paid users.

According to Sopel, all of that should be taken into consideration when setting GG's value. "We should compare it to Skype, which wasn't profitable at the start. Skype's value was set through the number of hits it got, its market share, advertising potential and the number of users. There is still a difference between the two companies: GG is profitable," says Sopel.

Talking big numbers

Gadu-gadu's net revenues for 2006 are estimated at zł.10.5 million, compared with zł.8.3 million in 2005. Its estimated net profit in 2006 exceeds zł.3.7 million, whereas in 2005 it amounted to zł.3.2 million. The company's ROE profitability reached 61 percent in H1 2005 and 66 percent in H1 2006.

Krzysztof Szalwa, a member of GG's management board, is optimistic about the company's financial results. "Looking at the growth of the market, our results could be incomparably higher within the next two or three years," says Szalwa.

Ad revenue

The internet is an attractive medium for advertisers. According to CR Media Consulting, the value of the market reached zł.218 million, some 47 percent more than in 2005. The prognosis for 2007 estimates its value at zł.290 million.

GG is taking advantage of the growing advertising market and over 90 percent of revenues in 2006 came from ads. The company wants to spend zł.45 million, the largest chunk of the funds it acquires from the IPO, to increase its share on the rapidly growing internet and online-radio markets.

Out of this zł.45 million figure, zł.39 million will go to acquisitions of firms operating in the same segment, both foreign and domestic companies. "We are currently negotiating. We are aware that we need to do it quickly, not only because investors expect us to, but also because the market of new technologies is changing and developing dramatically. If we want to maintain our position on the market we need to take part in the consolidation processes," says Szalwa.

GG will spend another zł.12 million on investments in technical infrastructure and the development of Generacja Gadu-gadu, as well as Gadu Radio. Szalwa says the company wants to provide two types of radio: one with set programming and one with a selection of content to be chosen by the listener. He doesn't deny looking at the internet-TV market.

Currently only 10 percent of GG's revenues come from Gadu-gadu Nagłos' VoIP services. Despite that, according to Szalwa, the company has the largest share of the internet-telephony market in Poland, which is why zł.21 million of the overall IPO is earmarked for the development of mobile virtual network operator (MVNO) services. "The most important telecommunication project is entering the virtual mobile market. We want to fully integrate a mobile offer with our current services," says Szalwa. The management says they want to complete the project as soon as possible.

This is, however, not the end of GG's plans. The company also wants to launch a paid, business version of its instant messenger and has allotted the final zł.3 million from its IPO funds for the project, which should be ready this year. "In many companies our instant messenger is widely used, therefore we estimate that around 13,000 small and medium-sized companies could be interested in the product," says Szalwa.

Crossing borders

Gadu-gadu's strategy goes beyond the borders of the Polish language. Within the next few months the company will launch a Ukrainian version of its instant messenger, called Bałaćka. "Currently, we are doing final tests on the Ukrainian version. In the longer run, we want to reach Bulgaria and Romania. We could enter those markets in two or three years," says Szalwa. Given Ukraine's proximity to Russia - geographically, economically and linguistically - this may be another prime market for Gadu-gadu in the future.

Tomasz Kulisiewicz, an independent telecommunications analyst, says that the expansion plans are very ambitious. "I would be more careful in the case of Russia. The market is difficult and the Russians are already planning telecom acquisitions," says Kulisiewicz.

IDM SA's Sopel believes that even if the company doesn't acquire a decent market share in Russia, they still need to be there in order to count on the Ukrainian market. "They will have some three million users in Ukraine within the next one or two years," says Sopel.

Szalwa is very optimistic about GG's future and believes that the firm's dynamic growth will continue in the long-term. "GG is a project which is not oriented towards just one segment of the market, so this is another advantage and a reason for further growth," says Szalwa.

Sopel goes further and says the value of shares will grow after the debut. "I don't exclude [the possibility that] it will reach zł.40," he adds.

CEOs: Krzysztof Szalwa & Piotr Pokrzywa

Strengths:
-Strong and recognizable brand 
- Well established group of six million users

Weaknesses:
- Lack of an investor from the industry with a strong financial background
- Potential for paid telecommunication services as yet untapped