Seeking Alpha
Large-cap, event-driven, value
Profile| Send Message|
( followers)  

Benefitfocus (NASDAQ:BNFT) and its selling shareholders are offering 4,500,000 common shares in the price range of $21.50 and $24.50 per share. The expected listing date is September 18, 2013, on NASDAQ. (Source: IPO prospectus)

Overview:

Benefitfocus is a leading provider of cloud-based software solutions for consumers, employers, insurance carriers and brokers. Its comprehensive solutions support core benefits plans, including healthcare, dental, life, disability insurance and voluntary benefits plans, such as critical illness, supplemental income and wellness. Its solutions enable its employer and insurance carrier customers to efficiently shop, enroll, manage and exchange benefits information also enables insured consumers to access all of their benefits from one place.

Markets served:

The company serves two market segments:

1. Employer segment: This segment mainly generates revenues from the large employers with more than 1,000 employees. The employers use its solutions to streamline benefits processes, keep up with complex regulatory requirements, control costs and offer a greater variety of plans to attract, retain and motivate their employees. Some of its customers in this segment include: Brooks Brothers Group, Morganite Industries, Vangent, Inc.

2. Insurance carriers segment: Under this segment, the company sells its solutions to the insurance carriers, and simultaneously serves many key constituents in the insurance market, including consumers, employers and brokers. Some of its customers in this segment include: Allstate Insurance, Tufts Associated Health Plans.

The table below shows the segment-wise revenues of the company:

(click to enlarge)

Key Financial and Operating Performance Metrics:

  1. Customer growth.
  2. Software Services Revenue Retention Rate.
  3. Deferred revenue.

1. Customer growth:

The increase in the number of customers is a key indicator of its market penetration, growth and the future revenue generation potential. The table below shows the number of customers the company serves for the periods indicated:

Year Ended December 31,

Six Months Ended June 30,

2009

2010

2011

2012

2012

2013

Number of customers:

Large employer

121

141

193

286

239

348

Carrier

28

29

30

34

33

37

2. Software Services Revenue Retention Rate:

The revenue retention rate indicates the effectiveness and the quality of its solutions and its relationship with its customers. For the years ended December 31, 2011, and 2012, and the six months ended June 30, 2012, and 2013, its software services revenue retention rate exceeded 95%.

3. Deferred revenue:

The deferred revenues indicate the future revenue generation capability of the company and also reflect the actual outcome of its present business efforts (sales and marketing), which doesn't reflect in its income-statement.

Financials:

Income statement analysis:

(click to enlarge)

  • Its revenues had shown healthy growth during the last few years.
  • The company is a loss making entity.
  • Fluctuating gross margins (see the chart below).

Balance sheet analysis:

(click to enlarge)

  • Balance sheet shows the huge shareholders' deficit due to continuous loss during the last many years.

Industry size: (Source: IPO prospectus)

HR benefits administration and insurance software market size:

"The administration and distribution of benefits to employees is a mainstay of the U.S. economy. According to IBISWorld calculations, in 2012, the market for HR benefits administration in the United States was over $59 billion. In addition, Gartner estimates that in 2012, the U.S. insurance industry spent over $55 billion on software and related services."

Employer Market size:

The employer market is the fastest growing segment of the company. "As of 2010, according to the United States Census Bureau, there were approximately 5.7 million employers in the United States. Currently, there are over 18,000 entities that employ more than 1,000 individuals."

Insurance Carrier Market:

The carrier market is the largest segment of the company. "According to the U.S. Bureau of Labor Statistics, the single largest benefit provided to employees in the United States is healthcare insurance, often encompassing more than 90% of all insurance benefits spending by employers. According to SNL Financial data, the U.S. private healthcare insurance market consists of approximately 313 carriers covering approximately 176 million individual consumers. Carriers provide benefits primarily through over 5.7 million U.S. employers."

Key points:

Key Positives:

1. Growing revenues:

Its revenues had shown a constant rise in the last few years due to the rising popularity of cloud computing and the sales and marketing efforts of the company.

2. Cloud computing based platform:

The company serves its customers through the cloud based platform which allows its end-users to access and use its services anytime, anywhere, through the Internet. The cloud based products are in high demand due to its features like:

  • User convenience.
  • Minimal infrastructure needed.
  • The low-cost of operations.
  • Scalability (as and when needed).

3. Complete package of services:

The company is totally focused on the employer insurance market. It offers multiple products that meet almost all the requirements of its customers. This complete range of the products gives numerous cross selling opportunities and also helps in customer retention. The chart below shows the products offered by the company.

4. Concentration on end-user convenience:

Though the company sells its products/services to employers and insurance carriers, the ultimate users of its products are the employees, who access its services to compare, select, buy and understand the insurance cover that they got or they have been offered by their employer. The company gives high priority to end user convenience and makes sure that employees get the correct and all inclusive information regarding their insurance coverage without getting into the cost and the regulatory complications. The company also makes sure that its software is easy to access, user friendly and secure for the end user. This end-user friendly approach further makes sure that its services are liked by employees and used frequently by them.

5. Excellent operational performance:

In the last few years the company had shown an excellent operational performance (explained above).

6. The huge addressable market (explained above).

Key Negatives:

1. Highly competitive market:

The company operates in a very competitive market and competes with players that are much bigger than it. Some of its prominent competitors are: SAP, Oracle (PeopleSoft) (NYSE:ORCL), Infor (Lawson), ADP (NASDAQ:ADP), Paychex (NASDAQ:PAYX), etc.

2. Fluctuating gross margins:

Its gross margins had shown fluctuating trend during the last few years (explained above).

3. Its balance-sheet is weak with a huge shareholder deficit and low cash and cash equivalents.

4. Normal business risks like emergence of new competitors with the better products/services offerings, any adverse change in Government regulations, any economic slowdown, etc.

Valuations:

At $23 (mid-range of offer price), the company's valuations stand at $559 million, and is available at P/S of about 6x (trailing twelve months).

Conclusion:

The company operates in a very competitive industry. Its gross margins are low, and the sales and marketing expenses are high; these things in the past lead the company toward heavy losses, and this trend is likely to continue in the near future. On the positive side, the company deals in the cloud computing sector, the sector which is creating a lot of enthusiasm in the investor community due to its future growth potential.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any decision.

Source: Benefitfocus: Operates In Very Competitive Industry