Lemonade Seeks IPO As Public Benefit Corp.
Summary
- Lemonade has filed to raise $100 million in an IPO, although the final amount may differ.
- The firm operates as an online-only insurance provider for homeowners and renters.
- LMND has produced growing revenue but at a decelerating rate; net losses are high and mounting, as is operational cash burn.
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Quick Take
Lemonade (NYSE:LMND) has filed to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.
The firm provides a fully digitized insurance information and coverage purchasing service for renters and homeowners insurance categories.
LMND is a public benefit corporation which may impact how management manages the firm's financial activities potentially impacting shareholder profits.
When we learn more about the IPO's pricing and valuation assumptions, I'll provide a final opinion.
Company & Technology
New York, NY-based Lemonade was founded to create an online platform to provide renters and homeowners with insurance information and the ability to bind coverage.
Management is headed by co-founder, Chairman and CEO Daniel Schreiber, who was previously president of Powermat Technologies, a wireless charging company.
Below is a brief overview video of an interview of CEO Schreiber:
Source: CNBC
The company's primary offerings include renters and homeowners insurance coverage. Lemonade has plans to expand into additional insurance categories in the future. The firm's website uses machine learning-enabled chat bots to more quickly assist prospective clients to learn about and purchase the right coverage for their needs. The company is registered as a public benefit corporation and seeks to use the profits from premiums for donation to a charity of the client's choice and, in doing so, reduce excess claims.
Lemonade has received at least $480 million from investors, including SoftBank, Sequoia Capital, Aleph, XL Innovate, and General Catalyst Partners.
Customer/User Acquisition
The company devotes a large amount of marketing via online 'search engines, social media platforms, digital application stores, content-based online advertising' to get users to download its app.
The firm purchases search engine advertising and is active in generating earned social visibility as well.
Sales & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased, as the figures below indicate:
Sales & Marketing | Expenses vs. Revenue |
Period | Percentage |
Three Mos. Ended March 31, 2020 | 73.3% |
2019 | 132.4% |
2018 | 186.2% |
Source: Company registration statement
The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, rose to 0.8x in the most recent reporting period, as shown in the table below:
Sales & Marketing | Efficiency Rate |
Period | Multiple |
Three Mos. Ended March 31, 2020 | 0.8 |
2019 | 0.5 |
Source: Company registration statement
Market & Competition
As a proxy for the growth trajectory of online insurance, according to a 2020 market research report by IBISWorld, the market for online insurance brokerage is expected to reach $31.3 billion in 2020.
The average annual growth in online insurance was approximately 9.0% from 2015 to 2020.
The main drivers for this expected growth are an increased comfort level of usage of online information and coverage sources for insurance as well as improved technology offerings to automate the process for consumers.
Major competitive or other industry participants include:
GEICO
Progressive Casualty
State Farm
Allstate Insurance
Management says its use of advanced A.I. technologies help to streamline the entire process of learning about and purchasing insurance, at least for the categories of homeowners and renters insurance.
Financial Performance
Lemonade's recent financial results can be summarized as follows:
Growing topline revenue, but at a decelerating rate of growth
High and increasing net losses
Uneven and high cash used in operations
Below are relevant financial results derived from the firm's registration statement:
Total Revenue | ||
Period | Total Revenue | % Variance vs. Prior |
Three Mos. Ended March 31, 2020 | $ 26,200,000 | 138.2% |
2019 | $ 67,300,000 | 199.1% |
2018 | $ 22,500,000 | |
Net Income (Loss) | ||
Period | Net Income (Loss) | |
Three Mos. Ended March 31, 2020 | $ (36,500,000) | |
2019 | $ (108,500,000) | |
2018 | $ (52,900,000) | |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
Three Mos. Ended March 31, 2020 | $ (19,400,000) | |
2019 | $ (78,100,000) | |
2018 | $ (40,800,000) |
Source: Company registration statement
As of March 31, 2020, Lemonade had $274.2 million in cash and $124.3 million in total liabilities.
Free cash flow during the twelve months ended March 31, 2020, was negative ($79.9 million).
IPO Details
Lemonade intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.
Management says it will use the net proceeds from the IPO as follows:
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.
Management's presentation of the company roadshow is not available.
Listed bookrunners of the IPO are Goldman Sachs, Morgan Stanley, Allen & Company, Barclays, JMP Securities, Oppenheimer & Co., William Blair and LionTree.
Commentary
Lemonade is seeking public capital investment to fund its high and increasing cash burn as it seeks to grow its online-only business.
The company's financials show the firm is growing revenue, although at a decelerating rate of growth, while losses are high as is operational cash burn and free cash flow use.
Sales & Marketing expenses have been dropping as revenues scale; its Sales & Marketing efficiency rate is improving.
The market opportunity for selling insurance online, at least to consumers, is large and growing, although I wonder how well the firm will make the transition into other products, since selling to businesses is usually much more involved.
The firm is classified as a public benefit corporation, which means:
Under Delaware law, public benefit corporations are required to identify in their certificate of incorporation the public benefit or benefits they will promote and their directors have a duty to manage the affairs of the corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation's conduct and the specific public benefit or public benefits identified in the public benefit corporation's certificate of incorporation.
So, will the balancing of those varying 'interests' result in less potential value to shareholders' interests?
LMND has an interesting company story and growth trajectory but high losses and cash burn, so it will be interesting to see how this IPO gets priced.
I'll provide a final opinion when we learn more details.
Expected IPO Pricing Date: To be announced.
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This article was written by
Donovan Jones is an IPO research specialist with 15 years of experience identifying opportunities for IPOs. He focuses on high-growth technology, consumer, and life science companies.
He leads the investing group IPO Edge which offers: actionable information on growth stocks through first look S-1 filings, previews on upcoming IPOs, an IPO calendar for tracking what’s on the horizon, a database of U.S. IPOs, and a guide to IPO investing to walk you through the entire IPO lifecycle - from filing to listing to quiet period and lockup expiration dates. Learn more.Analyst’s Disclosure: I/we 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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What is their “secret sauce”??
