Model N (NYSE:MODN) is pricing just over 6.5 million shares of its stock in an initial public offering. The company is raising around $87 million and after the deal which is being managed by JPMorgan (NYSE:JPM) and Deutsche Bank Securities (NYSE:DB), the company will have a market capitalization of around $290 million. The expected price range for the offering is $12.50 - $14.50 per share.
Model N's Business
Model N provides revenue management solutions to companies that help maximize revenues and reduce revenue compliance risk by streamlining revenue lifecycle into a strategic end-to-end process. Its solutions consist of two software suites called Revenue Management Enterprise and Revenue Management Intelligence. Each suite contains applications which can be purchased together or individually. The Revenue Management Enterprise package automates the execution of processes like pricing, contracting and incentive management. This is the most popular package and for the last full fiscal year, accounted for 85% of total revenues. The company sells its products to life science customers like Abbott Laboratories (NYSE:ABT), Amgen Inc. (NASDAQ:AMGN), Boston Scientific Corporation (NYSE:BSX) and Bristol-Meyers Squibb Company (NYSE:BMY) and it also sells to technology players like Dell Inc. (NASDAQ:DELL), Nokia Corporation (NYSE:NOK) and VMware, Inc. (NYSE:VMW).
Companies That Compete With Model N
Model N not only competes with both small and large software corporations, but many potential customers without significant IT resources use manual processes or personal database applications. While many large corporations are developing or have developed their own internal solutions that are company-specific. In addition, Model N faces competition from large enterprise software vendors like SAP AG (NYSE:SAP) and Oracle Corporation (NASDAQ:ORCL).
Just last week, Silver Spring Networks (NYSE:SSNI) (which makes hardware and software solutions to help utilities convert existing infrastructure to the smart grid), priced shares that rose 25% on the first day of trading. It seemed to show a willingness by investors to buy technology companies who are not profitable yet and that there is some money on the sidelines wanting to go into new tech deals. That being said, there are a lot of issues set to go public this week, with eight deals currently in the works some money could be taken off the table.
Model N's Financials
Model N has been steadily increasing revenue over the past three years, making $50 million, $65 million and $84 million for fiscal years 2010, 2011 and 2012, respectively. Unfortunately, the cost of revenue has been increasing as well because of the company's efforts to hire more personnel and expand its marketing efforts. However, the company seems to be on the cusp of becoming profitable and was actually net income positive for 2010 and 2011, with just a $5.6 million net loss last year. Model N is making a profit on an EBIDTA basis which excludes expenses from its January 2012 acquisition of LeapFrogRx, which was purchased to expand Model N's analytics capabilities.
How To Play Model N
This stock is somewhat of a speculative play as the $290 million market cap is a little rich considering it is not profitable and is only doing $84 million in revenue. This type of stock is not right for my own portfolio, however I do think there is a general interest in the company and the IPO should price near the top of the range and remain strong after the first day of trading. There is less risk involved in Model N's business than in many other tech companies and this IPO is definitely worth a closer look.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.