Should Investors Lock Into LifeLock IPO?

| About: LifeLock, Inc. (LOCK)
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Identity theft giant LifeLock (NYSE:LOCK) will hit the open market Wednesday with a 15.7 million share initial price offering. The LifeLock IPO was set to price in a range of $9.50-$11.50. Shares priced late Tuesday at $9, below range for the IPO. The company sold 15.5 million shares, while two existing shareholders are offloading 200,000 shares. Did the lower pricing create a new buying opportunity for investors?

LifeLock relies on paying subscribers for its identity theft monitoring. The company is famous for its $1 million guarantee, offering money back if subscribers have losses occur from identity theft. Subscribers pay $10, $15, or $25 per month depending on three different levels of membership. The company believes that there is a market of 148 million adults in the United States that need a program like LifeLock's. LifeLock's offerings are:

  • LifeLock - $10 month, $110 annual
  • LifeLock Command Center - $15 month, $165 annual
  • LifeLock Ultimate - $25 month, $275 annual

As of June 30th, LifeLock had 2.3 million subscribers. The company has been increasing its number of members, but also increasing its membership retention. Retention is one of the key levels to measure as an investor. With a company relying on monthly subscribers, it is important to maintain current members. LifeLock saw its member retention increase from 80.4% to 85.4% in the most recent six months (ending June 30, 2012).

LifeLock's competitive strengths are listed as:

  • "Breadth and depth of our data repositories";
  • "Strong network effects";
  • "Patented and proprietary analytics";
  • "Most comprehensive service offerings"; and
  • "Leadership position".

In 2011, LifeLock recorded revenue of $193.9 million. The company had a net loss of $4.3 million for the year. In the most recent six months ending in June, LifeLock saw revenue of $125.5 million. The most recent six month period saw net income of $11.6 million. Revenue has grown from $131.4 million in 2009 to $193.9 million in the most recent fiscal year. Free cash flow has grown significantly for LifeLock. After posting free cash flow of $22.3 million in fiscal 2011, the company generated $21.0 million in the last six months.

According to the company, LifeLock's strategy going forward is:

  • "Extend our leadership position through continued enhancement of our services";
  • "Expand our data repositories and analytics";
  • "Grow our customer base";
  • "Continue our focus on customer retention"; and
  • "Increase sales to existing customers".

In March, LifeLock acquired ID Analytics for $186 million. ID Analytics was founded in 2002, with a goal to serve enterprise customers. The acquisition gave LifeLock an entry into enterprise business, but also ownership of services that it was paying ID Analytics to use. LifeLock's acquisition gave it over 250 enterprise customers. Among the customers are:

  • 6 of the top 10 United States financial institutions
  • 3 of the top 4 United States wireless service providers
  • 8 of the top 10 credit card issuers

Enterprise customers accounted for $7.2 million in the most recent six months. This accounted for around 6% of total revenue.

After the initial price offering, there will be approximately 83.38 million shares outstanding. The proceeds from the IPO are being used to pay back debt from the ID Analytics acquisition. LifeLock also has to buy out shareholders with Series E preferred shares with proceeds. Series E shares have a bar of $15.76, making every $.01 the IPO prices turn into a $0.01 payment to shareholders by LifeLock. Directors and five percent owners will own 57% of shares after the offering, down from a previous 70%. Goldman Sachs (NYSE:GS) will own 9.1% of shares after the offering. Publicly traded Symantec (NASDAQ:SYMC) will own 6.7% of shares after the offering. Chief Executive Officer and co-founder Todd Davis will own 2.8% of shares, after the offering and his sale of 100,000 of his own shares.

Since 2005, LifeLock has recorded twenty nine consecutive quarters of revenue growth and subscription increases. These two trends are a great sign going forward. Another huge positive is LifeLock's average revenue per subscriber is increasing. While LifeLock is spending more money to acquire its members, it is making up for it with higher subscription fees through the higher priced subscription offers, and a higher retention rate. Identity theft is an increasing problem that is not going away any time soon. As the offering points out, increased internet and mobile utilization by people increases the chance of providing vulnerable information to thieves. All of LifeLock's customers are in the United States, setting the table for possible international growth. I think the enterprise business is in its early stages and could be the easiest target for international expansion. With shares under $10, investors should consider buying this market leader.

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.