Benefitfocus: An Overlooked Gem

| About: Benefitfocus, Inc. (BNFT)

Summary

Benefitfocus' benefits management platform is growing in popularity with large businesses who are shifting benefits management to the cloud.

Revenue growth has been strong and revenue retention rates are excellent.

Investors should ignore the technical downtrend and accumulate shares as financial results continue to improve.

Benefitfocus

INTRODUCTION:

Benefitfocus (NASDAQ: BNFT) is a benefits management company that boasts, "A powerful data-driven platform to shop, enroll, manage and exchange benefits all in one place". The South Carolina firm separates its solutions into those aimed at employers and those aimed at insurance companies. The stock price has fallen from a peak of $74/share in 2014 to trade at $30.90/share as of the 1/17/2017 market close. Despite this freefall, the company has made real progress towards its stated goals and there is cause for optimism that share price will begin to appreciate.

Financial Metric History

The Benefitfocus business has grown significantly over the past three calendar years. The rapid employer shift of benefits management to the cloud has empowered significant improvement in the most important financial metrics.

2013

2014

2015

2016 (3 Quarters)

Revenue (Millions)

104,752

137,420

185,143

170,688

Gross Profit (Millions)

42,341

49,950

82,292

82,529

Net Income (Millions)

-30,361

-63,179

-62,084

-32,959

Profit Margin

-74%

-45%

-33.5%

-19.31%

At first glance a prospective investor might be turned off by the fact that Benefitfocus' net income seems to be headed in the entirely wrong direction. Losses have ballooned from -30M in 2013 to -62M in 2015. However it is important to note that the company's net income as a percentage of its revenue is headed in the right direction. The profit margin has improved from -74% in 2013 to -19.31% through three quarters of 2016. The fact that revenue growth has far outstripped cost growth over the past few years indicates that positive operating leverage is inherit in Benefitfocus' business model. If these trends continue Benefitfocus should reach breakeven sooner rather than later.

Recent History

The Q3 2016 earnings call did not lack for bullishness. Shawn Jenkins, the company's C.E.O., revealed that revenue grew 28% yoy resulting in a 2100 basis point EBITDA margin improvement. This improvement was enough to produce $1.1M of EBITDA profitability turning this metric positive a full quarter before management was planning. The company once again boasted revenue retention rates in excess of 95% driven mainly by 55% growth in revenue from employers. The C.E.O. expressed confidence that over time the growth in employer business will drive growth in the carrier business. This makes intrinsic sense as the growing number of employers on the platform will increase the number of potential customers insurance carriers can reach through the company.

Mr. Jenkins offered his outlook on the several key bullish trends he sees driving the company's business in 2017. The company is observing a secular shift amongst large employers who are transitioning their benefits management to the cloud. This market dynamic shift resulted in the newly formed national accounts team closing six national accounts, twice as many as the three closed in Q3 2015. Choosing to utilize the Benefitfocus platform helps these accounts by assisting in engaging employees, increasing plan personalization, streamlining compliance and reducing benefit expense. It seems that this shift is in the very early stages and this team should be able to capitalize by rapidly growing their account victories quarter over quarter and year over year.

The affordable care act and its questionable future stands to help the company as the focus shifts back to employer provided insurance. The individual market has witnessed significant increases in premiums and faces an uncertain future with a republican president and congress seemingly dedicated to repealing the controversial law. Mr. Jenkins notes that this market dynamic has resulted in, "increased activity in our carrier sales pipeline as it relates to investments in their employer group businesses and ways to expand their offerings to those employers". Mr. Jenkins goes on to speculate that the value of employer provided benefits will becoming a competitive advantage in the labor market and that this phenomenon will push companies to modernize their benefits solutions quickly.

Liquidity and Valuation

Management has done a good job securing available cash for Benefitfocus, which is not a corporation that has to worry about "growing broke". On the most recent earnings call the Chief Financial Officer announced that the size of the company's revolving loan facility increased from $60M to $95M. Cash, cash equivalents, and marketable securities ended the quarter at $55.3M on the balance sheet. Considering that cash used in operating activities during Q3 2016 improved over $8M from Q3 2015 to be a mere -$627,000 there is no significant liquidity risk in the near future.

All of this begs the question, "Are Benefitfocus shares a good investment for the patient shareholder?" The answer is an emphatic yes. As of this writing the company sports an enterprise value of $969M calculated as the company's market cap + all long-term liabilities - cash and equivalents. If Benefitfocus meets the lower end of its revenue expectations for Q4 2016 it will achieve $232.9M in revenue for the year. This gives the company an enterprise value to revenue ratio of 4.16. This metric for software companies often fluctuates between 4.52 and 6.76. This demonstrates that Benefitfocus is not valued too richly when considered next to its peers and given all the reasons to believe in the firm's bright future.

Conclusion

Shareholders stand to make lovely returns if they are brave enough to bet on Beneftifocus' ability to transform the benefits management space. The company is growing revenue at a tremendous rate, has demonstrated an incredible ability to retain that revenue, and has reached EBITDA profitability a full quarter ahead of schedule. Next year the company believes revenue will continue to strengthen while break even free cash flow will be achieved as well. There is no reason to believe liquidity will be an issue and the company's valuation is reasonable when compared to its peers. A brave investor should ignore the technical downtrend and purchase Benefitfocus shares with discretionary funds.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BNFT over 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.

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