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Summary

  • Imprivata, the authentication and access management provider saw a successful public debut last week.
  • Shares jumped up as investors are pleased with the solid and accelerating revenue growth.
  • Losses, key dependence on one product and potential changes of technology could hurt its future prospects.

Imprivata (NYSE:IMPR) is a leading provider of authentication and access management technologies for the healthcare industry. The company went public last week in what has been a very busy week for underwriters across the country.

Imprivata saw a successful debut to trading, yet I find shares not very appealing at the moment. Increased revenue growth is a big plus, yet I am being put off by the growing losses.

The Public Offering

Imprivata has developed a flagship solution which it calls Imprivata OneSign. This is an integrated authentication management and workflow automation platform addressing security and productivity challenges faced by healthcare providers and hospitals.

Its solutions increase time spend on patient care, improve productivity while it tackles privacy and security concerns as well. The transition from paper to electronics systems is a continuous trend, boosting demand for the company's products.

Imprivata sold 5.0 million shares for $15 apiece, thereby raising $75 million in gross proceeds. All shares were offered by the company with no shares being sold by selling shareholders. The pricing of the offering took place right at the middle of the preliminary $14-$16 offering range. At the midpoint of the range equity in the business is valued at around $340 million.

The underwriting syndicate for this offering consisted out of J.P. Morgan, Piper Jaffray, Wells Fargo, William Blair and Stephens.

Valuation

Imprivata's OneSign is typically used as it offers greater security and ease of log in. No longer do workers have to log in multiple times, rather they have a single log on, also referred as the single sign-on. Traditional passwords and usernames are furthermore replaced by stronger authentication technologies such as fingerprint, proximity cards, smart cards or tokens.

OneSign has 2.8 million licensed users at the end of March of this year, used in over 950 healthcare organizations in 20 countries. While healthcare is the primary focus of the company, Imprivata has 770,000 licenses in other industries.

For the year of 2013, Imprivata generated revenues of $71.1 million which is up 31.6% compared to the year before. The company saw its losses increase from $3.9 million to $10.5 million mainly on the back of higher operating spending as well as gross margin compression. Note that the bottom line was impacted by a $5.0 million charge related to preferred stock outstanding. The company does have the potential to boost operating sales leverage going forwards, reporting rather steep gross margins of 73.5% for the past year.

Revenues for the first quarter of 2014 were up by 36.4% to $19.4 million. Costs have been on the increase as net losses roughly tripled from $2.8 million to $8.3 million.

The company operates with roughly $5.9 million in cash ahead of the offering, while preferred stock has been redeemed upon completion of the IPO. As such, Imprivata will hold roughly $70 million in net cash following the offering.

Therefore, net operating assets of the firm are valued around $300 million at $16.22 per share. This values Imprivata's net operating assets at 4.2 times sales for 2013. The company has been posting losses in recent times, partially explained by the accretion of redeemable convertible preferred stock which no longer will impact the company's bottom line. In recent times, losses have been on the increase, notably on higher sales and marketing efforts.

Investment Thesis

As noted above, the public offering of Imprivata has been a modest success. Shares were offered at the midpoint of the preliminary offering range and saw a healthy opening day jump to $16.25 per share. This means that shares trade roughly 8.3% above the midpoint of the preliminary range.

I am a bit in doubt about this offering. Imprivata is actually accelerating its growth. The reported first quarter revenue growth of 36.4% implied an acceleration from reported growth of 31.6% for the entire year of 2013.

This came at a cost, which is the increase in reported losses. While the new public offering proceeds gives the company a lot of financial flexibility, the company will run out of cash in 2-3 year's time at the current rate. Other risks include the product reliance upon its OneSign solutions, potential changing regulation and the low ARPU per license of just $25 per annum.

As such, I will keep the company on my watchlist, yet I am not convinced about the operating performance as of this moment. Revenue growth is a big plus, as are the high gross margins of the business. Yet increased losses are a red flag for me at the moment as well as potential changing technological developments which might effect the popularity of its solutions.

I remain on the sidelines.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.