Goldman Sachs-Run Benefitfocus IPO Should Be Avoided

| About: Benefitfocus, Inc. (BNFT)
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Benefitfocus (NASDAQ:BNFT), an SaaS-modeled provider of cloud-based insurance benefits exchange software, is set to raise approximately $103.5 million in the next few days in its upcoming IPO.

Benefitfocus is expected to offer 4.5 million shares, including 1.5 million shares by Goldman Sachs (NYSE:GS), at a price between $21.50 and $24.50. It should be noted that Goldman Sachs is one of the lead underwriters and the major shareholder of BNFT. If the Charleston, South Carolina-based firm can hit the midpoint of that range at $23.00 per share, Benefitfocus will command a market value of $621 million.

BNFT filed on August 14, 2013
Lead Underwriters: Goldman Sachs , Deutsche Bank Securities (NYSE:DB) and Jefferies LLC
Other Underwriters: Canaccord Genuity Inc, Piper Jaffray & Co., and Raymond James Ltd (NYSE:RJF).

Benefitfocus has been in business since 2000 as an SaaS company focused on streamlining corporate benefits administration. The company offers a suite of software applications designed to allow its customers to better shop, sell, manage and exchange benefits information. BNFT sells its applications to a pair of markets: large employers, which it defines as those with more than 1000 employees, and insurance carriers.
Much of BNFT's leadership team has been with the company since its founding, and have significant experience in their field.

Benefitfocus was essentially the first in the field of cloud-based benefit management software, and therefore has a significant technical and experiential lead on its competitors, most of which have only recently begun to offer similar services. That said, some of those new competitors have far more resources, better capitalized, and have more stable sources of other income than BNFT does, notably Oracle (NYSE:ORCL) and SAP AG (NYSE:SAP).

Benefitfocus has a large and rapidly growing customer base, especially in the field of large employers, and is continuing to pursue a growth strategy. Between 2009 and 2012, BNFT increased its customers among large employers from 118 to 286 and increased its customers among insurance carriers from 28 to 34. However, the company has also posted net losses for income over the last several years. In 2011, the company sustained a loss of $14.9 million; in 2012, a loss of 14.7 million; in the six months ended on June 30, 2013, a loss of $15.2 million. It isn't clear if or when the company will regain profitability and the company states in its prospectus that Benefitfocus may not be able to achieve or maintain profitability and it may incur significant losses for the foreseeable future.

The company has never declared or paid any cash dividends and it does not currently intend to do so in the foreseeable future.

Given the Benefitfocus's lack of profitability, potential conflicts between the owners of the company and the lead underwriter, high executive compensation, lack of dividend, and a host of powerful competitors entering the field with their own benefits management applications, there could be substantial risk in buying the BNFT IPO. Therefore, we plan on avoiding this IPO.

Nonetheless, the IPO does present a potential opportunity to get a piece of a firm that can genuinely be described as the leader in its field, and it's doubtful that any of those competitors will manage to produce a platform as well-developed as BNFT's within the next few years. Therefore, if the deal is downsized and priced at a better value with no selling Goldman shareholders, it may be worth considering.

BNFT has shown growth potential, especially with its successful push into the market for large employers. Their leadership structure appears to be quite stable, as well, as both founders retain top positions at the company and other members of the executive team have been tenured for several years.

Benefitfocus's strategy of growth in a relatively unfavorable economic environment has been effective in the past; the company was founded in 2000 shortly after the dot-com bubble burst, and quickly gained ground with its clever online enrollment programs and quality benefits management applications. Their total customer numbers have also grown since the 2008 financial collapse.

The entrance of competitors into cloud-based benefits management is a significant concern, especially since Benefitfocus is concentrating its efforts on growth. While it can legitimately claim to be the leader in the field, its reliance upon income exclusively from its benefits solutions software will leave BNFT exposed to risks from the insurance market that its larger competitors will be better equipped to weather.
The potential difficulty of transition to the United States' new healthcare system under the Obama Patient Protection and Affordable Care Act must also be considered in any insurance-related industry.


Shawn A. Jenkins and Milton Alpern, have the roles of CEO and CFO, respectively. Mr. Jenkins total compensation in 2012 was $880,993 and Mr. Alpern's compensation was $1,081,799 despite the company losses of $14,700,000. The company has continued to lose a substantial amount of money in 2013 but I don't believe this fact will cause their total compensation to decrease. Jenkins had previously served as a Vice President with American Pensions, Inc., where he led sales, operations, and technology.

Additional disclosure: Potential investors should read the prospectus and consult their financial adviser before making any investments. This article was written for informational 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written for information purposes and investors should read the S-1 and speak to their financial advisers before making any investment decisions.