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Cotiviti Holdings: Striving for Payment Accuracy

cotivitiCotiviti Holdings (NYSE: COTV), based in Atlanta, Georgia, is a recent addition to our Battle Road IPO Review Business Services sector coverage. The company provides payment accuracy solutions in the form of analytics and services to the healthcare and retail industries. For 2016, Consensus estimates call for revenue of $614 million, followed by a 10 percent increase in 2017 to $676 million. EPS is expected to be $1.30 this year, followed by $1.36 in 2017, an increase of just five percent.

Cotiviti is the result of the May 2014 merger between Connolly Superholdings, a provider of post-payment accuracy solutions for the healthcare and retail sectors, and iHealth Technologies, a provider of pre-payment accuracy solutions for the healthcare sector. The leveraged merger was managed by Advent International, which now owns roughly 65 percent of the outstanding shares.

COTV priced its 12.5 million share IPO at $19 per share on the NYSE on May 25, 2016. All proceeds from the IPO went to the company, thus raising roughly $225 million, net of underwriter and other fees. The IPO was led by Goldman Sachs, J.P. Morgan, Barclays, Citigroup, Credit Suisse, Morgan Stanley, RBC Capital Markets, SunTrust Robinson Humphrey, R.W. Baird, and William Blair. At a recent share price of $33, COTV’s market cap is roughly $3 billion.

Cotiviti’s solutions help healthcare providers identify claim discrepancies throughout the claims process, from pre to post payment. Also referred to as recovery auditing, solutions from Cotiviti help government agencies and companies recover erroneous payments made to suppliers and customers. The US healthcare sector accounts for roughly 85 percent of the company’s revenue, and eight of the top 10 US healthcare providers are customers in some shape or form. Over 40 healthcare organizations utilize the company’s services, including Medicare and Medicaid. The remaining 10-15 percent of sales is derived primarily from the retail sector. Cotiviti counts eight of the top ten US retailers as customers. Cotiviti claims that commercial healthcare clients realized over $2.5 billion in savings utilizing its solutions in 2015, up from $2 billion in 2014.

Cotiviti has indicated that its ten largest healthcare customers on average have been customers of the company for ten years. That said, the company has significant customer concentration, as its top three customers accounted for 32 percent of sales in 2015, and its top ten customers comprised 59 percent of sales in 2015. Prior to its IPO Cotiviti had a net debt position of nearly $1 billion. Thus, it is not surprising that the company recently used proceeds from its IPO as well as cash from operations to pay down $238 million of its second lien credit facility. To learn more about where COTV trades in relation to its Business Services peers within our Battle Road IPO Review, please contact Battle Road Research.

SecureWorks
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SecureWorks: Security Hybrid

SecureWorks SecureWorks (NASDAQ: SCWX), based in Atlanta, Georgia, is the newest addition to our Battle Road IPO Review Software coverage. The company provides managed IT security services and subscription software to over 4,300 companies in 59 countries. For the fiscal year ending January 31, 2017, Consensus estimates call for revenue of $425 million (up 25 percent from the prior year) and a loss per share of $0.32. For FY’18, revenues are expected to rise by 20 percent to $509 million, while its loss is expected to narrow to $0.10 per share.

SecureWorks priced its 8 million Class A share IPO at $14 per share on the NASDAQ on April 21, 2016, below an expected range of $15.50 to $17.50 per share, thus becoming the first technology IPO of 2016, ending a significant drought. The company is a spin out from Denali Holdings (formerly Dell). Denali continues to own 70 million Class B shares, along with 98 percent of the voting rights. The IPO, which raised over $100 million for the company was led by Bank of America Merrill Lynch, Morgan Stanley, Goldman Sachs, J.P. Morgan, and 13 other securities underwriters-investment banks. At a recent share price of $14, SCWX’s market cap is roughly $1.3 billion.

Founded in 1999, and acquired by Dell in 2011, SecureWorks is something of a hybrid between a software company, and an IT services company. SecureWorks offers a broad range of managed security services and software solutions designed to protect companies against security threats, with an emphasis on early warning and detection of suspicious activity stemming from security breaches, the introduction of malware, and threats from hackers. The company’s more than 4,300 customers are represented across a wide range of industries, including banks, telecom service provers, healthcare services and product companies, and retail chains. Bank of America was its largest customer last year, accounting for nine percent of revenue.

In the most recent quarter, SecureWorks continued to improve its gross margin, which reached 50 percent from 43 percent last year, assisted by the growing percentage of revenues driven by subscriptions, which totaled more than 80 percent last year. At the same time, the company narrowed its operating loss from $26 million in the prior year, to $19 million. Post IPO SecureWorks has a strong balance sheet with $124 million in cash and no debt. SCWX trades in the second half of our Battle Road IPO Review Software sector coverage.