IPO Analysis: HireRight, On-Demand Employment Screening Solutions

Aug. 8.07 | About: HireRight (HIRE)

"HireRight" is a leading provider of on-demand employment screening solutions. Customers use its comprehensive screening services in conjunction with its web-based software applications to conduct and manage their employment screening programs efficiently and effectively, make more informed employment decisions, improve workplace safety and mitigate risk.

The Company offers a comprehensive set of background screening services including:

• Criminal.
• Motor vehicle and other public records searches.
• Employment, Education and Professional license verifications.
• Credit checks.
• Drug and health screening.

During 2006, the Company processed approximately 4.8 million distinct records searches, verifications, checks and screens for it's customers.

The Company earns most of its revenue from:

• Service revenue - Consists of transaction-based revenue related to providing background and drug and health screening reports.

• Reimbursed fees - Represents the reimbursement from customers for government fees, collection fees for drug and health screening and certain access fees that company incur during screening, all of which are passed directly through to customers.

• Company's sales are derived from a combination of direct sales efforts as well as through its established network of strategic alliances with many of the leading recruiting software application providers and HRO providers.

Customers/Industries served
The Company serves a diverse customer base in a variety of industries, such as:

• Business services
• Technology
• Healthcare
• Manufacturing
• Telecommunications and financial services.

The Company's customer base has expanded from approximately 800 customers in 2003 to over 1,400 customers in 2006, which included 17 of the Fortune 100 companies and 53 of the Fortune 500 companies.

Market opportunity
With rising concerns about workplace/data/critical business information security and unfolding of various flaws in large number of resumes, "employment screening" has become as a integral part of employment market. Success of "on-demand employment screening solutions" industry directly depends on growth of job market (which itself directly depends upon economic growth), meaning the more companies will hire, the more work will be generated.

The employment background screening market is highly fragmented and competitive. The Company's competitors include:

• National employment background screening providers such as First Advantage Corporation (FADV) and ChoicePoint, Inc. (NYSE:CPS).
• Regional and local employment background screening providers.
• Smaller, independent private investigations firms.

Competition is expected to rise not only within the industry but also is expected from various Govt. agencies and educational institutes, which with emergence of internet are expected to put their data rapidly online which in most cases freely or conditionally is easily assessable.

Company's Strength
• Global reach - In 2006, Company performed screening services in approximately 200 countries and territories.

• Vast and elite customer base - In 2006 company served more then 1,400 customers, which included 53 of the Fortune 500 companies.

• Range of services - Company offer a comprehensive set of more than 50 screening services

• Easy-to-use - Its web-based software applications allow customers to request its services and access the results of screens even during process in progress rather than having to wait for the completion of the entire report before viewing any of the results.

Offer & Objects of issue

Industry details and outlook

Company Outlook
The Company outlook is positive due to:

• Increased concerns about workplace/data/critical business information security.
• Rising awareness.
• Increased trend of company's toward working with few but better employees.
• Rising HRO ( human resource outsourcing ).
• Its global reach.
• Vast range of services.
• Existing relationships.
• Healthy economic conditions which normally mean more hiring by companies.

Financials ($ in million)
The Company's financial year ends on December 31.

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The Company's revenue shows a steady growth since FY 2004 and risen from $28.52 million in FY 2004 to $52.45 million in FY 2006, and further to 14.51 in Q1 2007.

The Company's cash flow can just fulfill its current needs and its balance sheet is just ok. (Although if this offering goes through, the Company's cash position will be very comfortable)

The Company is showing consistent improvements in its operations the last few years.

Valuation/Offer value ($ In million)
(Company may not be able to perform this well. Chances of company performing this well is, two out of three.)

1. 25% rise in revenue year on year
Assumed growth is less than the growth the Company showed in FY 2006 over FY 2005 because this time the base is bigger. This leaves the Company with revenue of $73 million in FY 2007 and $ 91 million in FY 2008.

2. Operating margins at 13%
Margins are expected to improve by 1% to 3% due to rising scale of operations.

This leaves the Company with operating profits of $9.5 million in FY 2007 and $12 million in FY 2008 respectively, and after accounting for interest costs of nearly $0 and $0 and income tax costs of $3 and $3.5 million, this leaves company with net profit of $6.5 million and $8.5 million, that is EPS of $.58 and $.76 for FY 07 and FY 08 respectively.

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This means even if the Company performs in-line with its past performance, at offer price of $16, shares are available at a one-year forward PE of nearly 28 and two year forward PE of nearly 21.

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We rate this IPO 3 on scale of "1 to 5" (5 for best)

• Competition is rising.
• Any economic slow down can hit job market and in turn can hit company very hard.
• Company's short operational history as screening solutions provider.
• Business in bit of seasonal in nature and might show quarter after quarter variations (historically higher demand for screening services in the second and third quarters of each year).

• Increased concerns about workplace/data/critical business information security.
• Rising awareness.
• Rising HRO ( human resource outsourcing ).
• Its global reach.
• Vast range of services.
• Healthy economic conditions which normally mean more hiring by companies.
• Its existing relationship with various customers.

Disclosure: this article reflects the personal view of the author about the company and one must read offer prospectus and consult its financial advisor before making any investment decisions.