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LifeLock (NYSE:LOCK) made its public debut on Wednesday. Shares of the provider of proactive identity theft protection services ended their first day down 7.1% to $8.36 per share.

The public offering

LifeLocks' solutions offer proactive identity theft protection services for consumers, and risk assessment and fraud protection services for enterprises. Founded in 2005, the company serves nearly 2.3 million members with annual subscription services starting at $110 per year.

The company sold 15.7 million shares for $9 a piece. LifeLocks raised $140 million in gross proceeds in the offering process. Based on the offer price of $9.00, the firm is valued at $751 million.

The offering is quite a disappointment. The offer price is set below the preliminary $9.50-$11.50 price range set by the firm and its bankers. The firm sold 15.5 million shares, while selling shareholders offered just 200,000 shares. In total, 19% of the company's shares outstanding were offered. At Wednesday's closing price of $8.36 per share, the firm is valued at $697 million.

Major banks which brought the company public were Goldman Sachs, Bank of America/Merrill Lynch, Deutsche Bank and RBC Capital Markets, among others.

Valuation

LifeLock operates in the growing market to offer consumers and businesses with services to prevent identity theft and other online fraud. With consumers and businesses holding more data online, cyber attacks and identity theft is becoming more frequent.

As of June 2012, LifeLock has 2.3 million subscribers. It net added 377,000 new members in the first half of 2012, and the retention rate increased to 85.4% of the customer base. The average acquisition costs per member increased to $157 for the first half of 2012, while an average customer generates average revenues of approximately $9 per month.

The company reported annual revenues of $193.9 million for 2011, up 19.5% on the year. The company reported a net loss of $23.2 million, compared to a loss of $31.5 million the year before. Both losses are due to significant amounts of "accretion of convertible redeemable preferred stockholders", which severely impacted the bottom line.

For the first six months of 2012, the company generated revenues of $125.5 million, up 37.9% compared to the first half of 2011. LifeLock reported a net income of $2.3 million for the period, compared to a loss of $16.4 million in the first half of last year.

LifeLock intends to use approximately $62.6 million of the net proceeds from the offering, to repay outstanding loans in connection with the acquisition of ID Analytics. The remainder of the proceeds are used for general corporate purposes, which includes supporting revenue growth, entering new markets and develop new offerings. Furthermore, LifeLock might make further acquisitions.

Excluding the offering proceeds, the company operates with $64.5 million in cash, restricted cash and equivalents. The company operates with $72 million in short and long term debt, and preferred stock warrant liabilities. Based on the $140 million in gross proceeds of the offering, LifeLock operates with roughly $120 million in net cash.

As such, the valuation of LifeLock's operating assets comes in at around $580 million. Based on a rough annual revenue estimate of $250 million for 2012, the market values the operating assets at 2.3 times annual revenues. The company is on track to report a small net profit for the full year.

Investment Thesis

The offering of LifeLock is quite a disappointment. Shares were offered below the midpoint of the initial guided price range of $9.50-$11.50 per share. Shares were eventually offered at $9.00 per share, and lost more than 7% on its first trading day, ending at $8.36 per share. As such, shares are trading some 20% below the midpoint of the initially guided range. Despite the strong cash balances, LifeLock does not expect to pay a dividend soon.

The sentiment around the stock has been relatively bad heading into the public offering. LifeLock spend 46% of its second quarter revenues on sales and marketing expenses, in an effort to keep retention rates at record levels of 85.4%. At the same time, the company only attracted 169,000 new members during the second quarter, compared to 208,000 new members in the first quarter.

As such, the costs of attracting new customers came in at $172 per user in the second quarter. This compares to average monthly revenues of $9.14, putting the acquisition costs at the equivalent of 18 months of revenues. A net positive is the acquisition of ID Analytics in March of this year, placing the company on track to focus on technology and the business market.

While I appreciate the strong revenue growth and improving bottom line, I remain skeptical. Customer acquisition costs are on the rise, far outpacing revenue growth. While the diversification move into the business market is to be applauded, the company is vulnerable to falling retention rates and a lack of investments in technology in its core consumer identity theft businesses.

Despite the fact that shares are trading 20% below the midpoint of the initially guided price range, I remain skeptical. While LifeLock's services offer consumers a lot of protection, I doubt that shares will do the same.

Source: LifeLock IPO: This Identity Securer Is Not Necessarily A Secure Investment