IPO Report: Connecture (CNXR)

Connecture (CNXR) is a leading web-based consumer shopping, enrollment and retention platform for health insurance distribution headquartered in Brookfield, WI.

Nine other companies are scheduled for the week of Dec. 8, 2014. The full IPO calendar is available at IPOpremium.

Manager, Joint-managers: Morgan Stanley and J.P. Morgan

Co-managers: Wells Fargo Securities, Raymond James, and William Blair.

CNXR scheduled a $75 million IPO with a market capitalization of $271 million at a price range midpoint of $13 for Friday, Dec. 12, 2014 on Nasdaq. SEC Documents

Connecture IPO Report

Overview

CNXR is a leading web-based consumer shopping, enrollment and retention platform for health insurance distribution.

CNXR’s solutions support the industry evolution towards a consumer-centric experience that is transforming how health insurance is purchased and distributed.

Conclusion

Neutral plus

Rev +70%, loss rate is -26%

Never been profitable

Per share dilution of -$15.72 is higher than IPO mid-range of $13

Accumulated deficit of -$130mm

P/E of -13.5

Price-to-tangible book is -4.8

Price-to-book is -20

Proceeds to pay dividends, interest  debt

Business

CNXR is a leading web-based consumer shopping, enrollment and retention platform for health insurance distribution.

CNXR’s solutions support the industry evolution towards a consumer-centric experience that is transforming how health insurance is purchased and distributed.

CNXR offers a personalized health insurance shopping experience that recommends the best fit insurance plan based on an individual’s preferences, health status, preferred providers, medications and expected out-of-pocket costs.

Customers

CNXR’s customers are health insurance marketplace operators such as health plans, brokers and exchange operators, who must distribute health insurance in a cost-effective manner to a growing number of insured consumers.

Solutions automate key functions

CNXR’s solutions automate key functions in the health insurance distribution process, allowing its customers to price and present plan options accurately to consumers and efficiently enroll, renew and manage plan members.

The United States health insurance marketplace is undergoing a tremendous structural change that is fundamentally altering how health insurance is purchased and distributed. More consumers now have access to health insurance with more plan options and places to buy their insurance than ever before.

As a result, consumers need effective decision-support tools to help them optimize their health insurance choices.

Concurrently, health plans and brokers that have traditionally distributed a more limited set of plans to employers through group coverage must now cost-effectively sell insurance in the more fragmented individual market and in public and private exchanges, which are online marketplaces sponsored either by a non-government entity, such as an employer, insurance broker or other distributor (in the case of private exchanges) or by a federal or state government entity (in the case of public exchanges) for health insurance and related products that allow individuals and businesses to compare products and make purchases directly from health plans.

These changes are driving significant demand for innovative technology solutions to more effectively help consumers navigate the new health insurance marketplace and for health plans, brokers and other aggregators of covered lives to deploy cost-effective distribution channels.

All of CNXR’s state and federal government contracts contain provisions allowing the government counterparty to terminate the contract for convenience, or for a lack of adequate funding, generally with 30 days’ written notice, which CNXR believes to be customary for government contracts.

These contracts accounted for 12% and less than 1%, respectively, of CNXR’s revenues in the years ended December 31, 2013 and 2012, and 33% of its revenues in the nine month period ended September 30, 2014.

DRX acquisition

The increase in revenues from these contracts during this period is attributed to CNXR’s acquisition of DRX in January 2013 (and the Medicare.gov contract held by DRX) and the growth in state exchange contracts awarded to CNXR during this period. These contracts collectively represent approximately 23% of CNXR’s deferred revenue balance at September 30, 2014.

Intellectual property

CNXR uses several registered trademarks for its products and services, such as “Connecture,” “DRX,” “DestinationRX” and “InsureAdvantage,” which are registered marks of Connecture in the United States. Through claimed common law trademark protection, CNXR also protects other marks which identify its services, such as RxHealth, and CNXR has reserved numerous domain names, including “connecture.com.”

Competition

CNXR faces competition from various sources, many of which have greater resources than it has.

CNXR’s competition includes:

insurance health plans and national brokers that have invested in internally developed customer acquisition and retention solutions;

various niche software vendors;

systems integrators and large consulting firms;

third party administrators and call centers that may look to add technology capabilities; and

general enterprise resource planning or CRM software vendors.

5% shareholders pre-IPO

GPP—Connecture LLC 39.2%

Chrysalis Ventures II, L.P.  28.5%

Entities affiliated with SSM Partners       20.2%

LiveOak Equity Partners, L.P.  10.6%

Dividends

No dividends are planned on the common stock.

Use of proceeds

CNXR expects to receive $66 million from its IPO.  Proceeds are allocated to pay dividends, interest and  debt as follows:

$5.0 million in dividends will be paid on its outstanding shares of Series A preferred stock, which have accrued at a rate of 8% per annum of the original issue price of each such share of preferred stock, of which the amount payable in cash as of September 30, 2014 is $4.5 million and is estimated to be $5.0 million upon the closing of this offering; and

$4.0 million in dividends will be paid on its outstanding shares of Series B preferred stock, which have accrued at a rate of 8% per annum of the original issue price of each such share of preferred stock, of which the amount payable in cash as of September 30, 2014 is $3.6 million and is estimated to be $4.0 million upon the closing of this offering.

repay outstanding promissory notes in the aggregate principal amount of approximately $3.0 million and unpaid interest thereon, which accrues at a rate of 8% per annum; the amount payable was $3.4 million as of September 30, 2014 and is estimated to be $3.5 million upon the closing of this offering. These notes become due and payable on January 15, 2015, at which time the amount payable is expected to be $3.5 million.

repay outstanding promissory notes (held by investors affiliated with members of its board of directors) in the aggregate principal amount of approximately $1.3 million and unpaid interest thereon, which accrues at a rate of 14% per annum; the amount payable was $1.3 million as of September 30, 2014 and is estimated to be $1.3 million upon the closing of this offering. These notes become due and payable on May 29, 2015, at which time the amount payable is expected to be $1.4 million.