IPO Preview: LifeLock

| About: LifeLock, Inc. (LOCK)
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Based in Tempe, AZ, LifeLock (NYSE:LOCK) scheduled a $165 million IPO with a market capitalization of $876 million at a price range mid-piont of $10.50, for Wednesday, October 3, 2012.

Eight IPOs are scheduled for the week of October 1. Full IPO calendar available here.

S-1A filed September 27, 2012.

Manager, Joint Managers: Goldman; BofA; Deutsche.
Co Managers: RBC; Canaccord Genuity; Needham.

LOCK has carved out a nice, breakeven subscription business in identify theft. As of June 30, 2012 LOCK had 2.3 million paying customers, with an 85% retention rate.

But operating profits are erratic and quarter-to-quarter revenue growth is in the 6% to 9% range, commendable but not in the high multiple category.

Primary competitors are the credit bureaus that include Experian, Equifax (NYSE:EFX), and TransUnion.

Because LOCK had a number of other "expenses," IPOdesktop calculated a Price to Operating Earnings ratio for both LOCK and Equifax. The price-to-sales in the same range: 3.5 for LOCK, 2.6 for EFX, but the price to operating earnings is much higher for LOCK: 156 for LOCK to 10 for EFX.

LOCK did recently make an acquisition that puts it in the enterprise ID segment, but it's unclear whether that effort can contribute explosive top line revenue growth.

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Financial term glossary

LOCK looks OK to buy on the IPO because it is pretty much of a breakeven subscription business, gross margins are increasing, retention rate is increasing and membership is increasing.

LOCK provides proactive identity theft protection services for consumers and identity risk assessment and fraud protection services for enterprises.

The foundation of LOC's differentiated services is the LifeLock ecosystem. This ecosystem combines large data repositories of personally identifiable information and consumer transactions, proprietary predictive analytics, and a highly scalable technology platform.

As a result of LOCKs combination of scale, reach, and technology, LOCK believes that it has the most proactive and comprehensive identity theft protection services available, as well as the most recognized brand in the identity theft protection services industry.

LOCK believes that two-thirds of U.S. adults are concerned about identity theft, and that the total addressable market for consumer identity theft protection services is 148 million adults in the United States alone. LOC focuses efforts on adults with a household income in excess of $50,000 per year and who are concerned about identity theft, of which LOCK estimates there are approximately 78 million in the United States.

In addition, LOC believes the total addressable market for its enterprise identity risk assessment and fraud protection services includes approximately 2.5 billion transactions per year.

LOCK derives the substantial majority of revenue from member subscription fees. LOCK also derives revenue from transaction fees from enterprise customers.

In the consumer business, LOCK evaluates the lifetime value of a member relationship over its anticipated lifecycle. While LOCK generally incurs member acquisition costs in advance of or at the time of the acquisition of the member, LOCK recognizes revenue over the subscription period.

As a result, a member relationship is not profitable at the beginning of the subscription period even though it is likely to have value to LOCK over the lifetime of the member relationship.

Enterprise transactions
LOCK calculates enterprise transactions as the total number of enterprise transactions processed for either an identity risk or credit risk score during the relevant period.

Enterprise transactions are processed by ID Analytics, which was acquired on March 14, 2012. Enterprise transactions have historically been higher in the fourth quarter as the level of credit applications and general consumer spending increases.

LOCK monitors the volume of enterprise transactions because it is a strong indicator of revenue in the enterprise business.

On March 14, 2012, LOCK acquired ID Analytics, a provider of enterprise identity risk assessment and fraud protection services and a strategic technology partner since 2009, for a total purchase price of $186.0 million.

ID Analytics was founded in 2002, launched its identity risk assessment service in 2003, was granted its first patent in 2008, and as of June 30, 2012, served more than 250 enterprise customers. In 2011, ID Analytics processed an identity risk or credit risk score for over 184 million transactions.

For the June 2012 quarter ID Analytics contributed $6.3 million in revenue.

LOCK offers its consumer services on a monthly or annual subscription basis, with pricing ranging from $10 per month, or $110 per year, for the basic LifeLock identity theft protection service, to $25 per month, or $275 per year, for the premium LifeLock Ultimate service, subject to wholesale pricing and discounts.

As of June 30, 2012, LOCK served nearly 2.3 million paying members. LOCK's cumulative ending member base grew 21.5%, and annual member retention rate increased from 80.4% to 85.4%, each over the 12-month period ended June 30, 2012.

Enterprise customers pay LOCK based on their monthly volume of transactions. As of June 30, 2012, LOCK served more than 250 enterprise customers, including six of the top ten U.S. financial institutions, three of the top four U.S. wireless service providers, and eight of the top ten U.S. credit card issuers

Sales and marketing expenses vary from quarter to quarter primarily due to the timing of advertising expenditures. Historically, sales and marketing expenses have been higher during the first quarter because LOCK takes advantage of lower advertising rates following the holiday season and lowest in the fourth quarter when advertising rates are at the holiday peak.

Since LOCK's founding in April 2005 and the enrollment of its first member in the basic LifeLock identity theft protection service in June 2005, LOCK has experienced 29 consecutive quarters of sequential growth in both revenue and cumulative ending members.

LOCK enrolled its one millionth member in 2008, surpassed two million members in 2011, and as of June 30, 2012, served nearly 2.3 million paying members.

LOCK's consumer identity theft protection services have expanded during this time with the introduction of LifeLock Command Center service in December 2009 and LifeLock Ultimate service in December 2011.

Primary competitors are the credit bureaus that include Experian, Equifax, and TransUnion, as well as others, such as Affinion, Early Warning Systems, Intersections, and LexisNexis.

Compare competitors. Notice that Experian and Equifax both offer identify protection.

LOCK expects to net $148 million from its IPO from the sale of 15 million shares. Stockholders expect to sell 200,000 shares.

LOCK intends to use $62.6 million to repay debt. The remaining proceeds are allocated for working capital and general corporate 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. I have no business relationship with any company whose stock is mentioned in this article.