I feel compelled to cover IPOs of Enterprise software companies that have a network or platform element. Connecture (CNXR), which went public in December is almost one of these companies–but not quite. Connecture is certainly an enterprise software provider, but it is not really a multi-sided platform company; Connecture itself does not make a healthcare marketplace. Connecture helps others act as multi-sided platforms by providing healthcare marketplace platform software.
Connecture sells web-based consumer shopping, enrollment, and retention software to healthcare insurance plan providers, state exchanges, Medicare.gov, and private exchanges. For those not intimately familiar with the health care market (including me), think of CNXR as e-configuration and quoting software, plus algorithms and integration to other systems to make plan recommendations, assess eligibility, and calculate subsidies for consumers. Connecture, sells this healthcare marketplace software to market-makers, but does not make the market themselves. They are a relatively traditional enterprise software company, albeit in a gigantic, growing market.
As even I know, the Affordable Care Act created the need for state healthcare marketplaces, an infamous federal marketplace (previously built by CGI and now managed by Accenture for a little over $100 million per year), as well as many private exchanges employers increasingly use to push the healthcare decision to the employee. (Just as they pushed the retirement plan decision to employees with defined contribution plans (401ks) in lieu of defined benefit plans (pensions).) The numbers that Connecture advertised in its prospectus are pretty impressive:
Connecture only captures a tiny amount of the $130 billion in spend that is going through their software, but the amount is growing. For the nine months ended 9/30/2014, the company received about $57 million in revenue, up 70% from the year before. CNXR’s adjust EBITDA loss shrank from about -$20 million to -$5 million in the latest nine months, giving investors hope for a profit some day.
The shares IPOd at $8 in mid-December and now trade at about $9.80. This valuation equates to a rather modest (by today’s standards) 3-4x EV/Sales ratio. Why the modest valuation? Probably several reasons:
- CNXR is not a true SaaS/Cloud player. Many of the exchanges it sells to are privately hosted, so there are limits to the benefits of multi-tenancy.
- As mentioned before, CNXR is not the platform themselves, they provide the platform software to the market maker. They are competing with Accenture or CGI, or large health plans themselves, but as a somewhat more pure software play.
- These can be big, services-heavy deployments. CNXR revenue is 28% services revenue for the latest nine months reported.
- Even though the number of individuals on exchanges will grow nicely over the next five years, the number of state exchanges and BlueCross/BlueShields plans is limited. (Ten customers account for 60% of revenue.) In other words, these are big, binary decisions.
- It’s not clear that Connecture captures much of the upside as consumer enrollment in the marketplace grows as it is expected to. As a result, the ultimate Total Available Market (TAM) may be limited. For instance, if CNXR platforms have 20 million shoppers already and the eventual market is 100 million shoppers (according to the prospectus), how big can CNXR really get? $200 million in revenue?
CNXR hopes to upsell their existing customers, whom they figure buy less than half of what CNXR has to offer and hopes to move the business to more software subscription revenue and away from services. This is a pretty common theme for companies that want to move their margins and valuations up!
The insurance marketplaces are a part of the solution for meeting consumer needs. Call centers, advisors, etc. and other services provided by the states, brokers, or exchange providers round out the offering. I wonder if some day CGI, Accenture or others will gobble something like this up? It does seem like the kind of business IBM would love.
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