IPO Preview: Benefitfocus

Sep.17.13 | About: Benefitfocus, Inc. (BNFT)

Based in Charleston, SC, Benefitfocus (NASDAQ:BNFT) scheduled a $104 million IPO with a market capitalization of $559 million at a price range mid-point of $23, for Wednesday September 18, 2013.

Nine IPOs are scheduled for this week, 11 for next week. The full IPO calendar can be found at IPOpremium.

S-1 filed September 4, 2013

Manager, Joint Managers: Goldman; Deutsche; Jefferies
Co-Managers: Canaccord Genuity; Piper Jaffray; Raymond James

Summary

BNFT believes it is a leading provider of cloud-based benefits software solutions for consumers, employers, insurance carriers and brokers.

Financial analysis negatives

Moderate sales growth for the six months ended June '13 vs. June '12 of 30%. Sales growth for 2012 vs. 2011 was lower, only 19%.

Relatively low gross margin of 44%

Consistent money loser, with an accumulated deficit of -$187 million.

Loss % of sales went to -32% from -27% for six months ended June '13 vs. June '12

High price-to-book value of 33.

BNFT is a subsidiary of The Goldman Sachs Group. Goldman owns 66% pre-IPO. Shareholders are selling 33% on the IPO.

Valuation

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Annualized June '13 6 mos

Cap (NYSE:MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Benefitfocus

$559

5.8

-18.6

32.9

40.4

19%

Click to enlarge

Glossary

Conclusion

Looks like Goldman intends to use the current good IPO market for a liquidity event, for a money-losing subsidiary that did not meet its business plan numbers. Goldman will probably promote BNFT to its clients.

Because the IPO market likes cloud-based software companies with a subscription-based revenue stream the BNFT rating is neutral to positive -- also because it may be promoted by Goldman.

However, BNFT showed consistent losses, ran up an accumulated deficit of -$187 million, only showed relatively modest recent percentage increases in top line revenue, and is priced at 33 times book value, at the price range mid-point.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business

BNFT believes it is a leading provider of cloud-based benefits software solutions for consumers, employers, insurance carriers and brokers.

The Benefitfocus platform provides an integrated suite of solutions that enables employer and insurance carrier customers to more efficiently shop, enroll, manage, and exchange benefits information.

BNFT's web-based platform is designed to enable the insured consumers to access all of their benefits in one place. Comprehensive solutions support core benefits plans, including healthcare, dental, life, and disability insurance, and voluntary benefits plans, such as critical illness, supplemental income, and wellness programs.

As the number of employer benefits plans has increased, with each plan subject to many different business rules and requirements, demand for the Benefitfocus platform has grown.

BNFT was founded in 2000, and currently employs 853 associates.

Market segments

Employer market

THe fastest growing market segment, the employer market, consists of employers offering benefits to their employees. Within this segment, BNFT mainly targets large employers with more than 1,000 employees, of which there are 18,000 in the United States.

Insurance carriers

BNFT also sells solutions to insurance carriers, enabling BNFT to expand its overall footprint in the benefits marketplace by aggregating many key constituents, including consumers, employers and brokers.

BNFT's business model capitalizes on the close relationship between carriers and their members, and the carriers' ability to serve as lead generators for potential employer customers. Carriers pay for services at a rate reflective of the aggregated nature of their customer base on a per application basis.

Carriers can then deploy their applications to employer groups and members. As employers become direct customers through BNFT's employer segment, BNFT provides them a platform offering that bundles many software applications into a comprehensive benefits solution through HR InTouch.

BNFT believes its presence in both the employer and insurance carrier markets gives the company a strong position at the center of the benefits ecosystem.

Subscription-based revenue

BNFT sells its software solutions and related services primarily through a direct sales force.

Most of the revenue is from subscription fees for access to and usage of BNFT's cloud-based benefits software solutions, and related professional services.

Subscription revenue accounted for approximately 89%, 95% and 93% of total revenue during the years ended December 31, 2010, 2011, and 2012, respectively, and for 93% of total revenue during the six months ended June 30, 2012 and 2013

Subscription fees paid from employer customers are generally based on the number of employees covered by the relevant benefits plans at contracted rates for a specified period of time, which is usually one year.

Subscription fees paid from carrier customers are based on the number of members contracted to use solutions at contracted rates for a specified period of time, which usually ranges from three to five years. Carrier contracts are generally only cancellable by the carrier in an instance of an uncured breach, although some carrier customers are able to terminate their respective contracts without cause or for convenience.

Professional services

Professional services support revenue accounted 11%, 5% and 7% of total revenue during the years ended December 31, 2010, 2011, and 2012, respectively, and for 7% of total revenue during the six months ended June 30, 2012 and 2013.

Competition

BNFT believes no single competitor offers similarly expansive software solutions.

Competition in employer segment includes:

ERP software companies, including SAP, Oracle (PeopleSoft) and Infor (Lawson), each offering a cloud-based benefits administration software solution;

HR outsourcing companies, including Aon/Hewitt and Towers Watson, both of which have recently launched benefits exchange solutions;

Payroll service providers, including ADP and Paychex, both of which have expanded their core payroll services to include some form of cloud-based benefits administration services; and various niche software vendors.

Competitors in the carrier segment include:

Insurance carriers that have invested in internally developed benefit management solutions;

Member services companies, including those providing web-based subscriber enrollment and claims adjudication services, such as Trizetto and DST Health Solutions; and various niche software vendors.

5% stockholders pre-IPO

The Goldman Sachs Group, Inc., 66%
Oak Investment Partners XII, L.P., 11.5%

Use of proceeds

BNFT expects to net $61 million from selling 3 million shares. Shareholders intend to sell 1.5 million shares.

Proceeds are allocated to working capital and general corporate purposes.

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. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This BNFT IPO report is based on a reading and analysis of BNFT's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.