Steve,
I just read this report and was wondering what you thought.
Thank you
09:35am EST 5-Jan-00 Robertson Stephens EBNX
EBNX: Initiating Coverage with a Buy Rating With A $60 Near-Te... (Page 1 of 3)
January 5, 2000
E B E N X , I N C O R P O R A T E D
EBNX: Initiating Coverage with a Buy Rating With A $60 Near-Term
Price Target.
Sheryl R. Skolnick, Ph.D.
Robertson Stephens
eBenX EBNX $ 42.13 1/5/00
Industry: eHealth
Change: Yes/No Was Is Sheryl R. Skolnick, Ph.D.
Rating: New Buy Chantelle Streete
EPS 1999E: New ($0.44)
EPS 2000E: New ($0.27) FY DEC 1999E 2000E 2001E
EPS 2001E: New $0.05 EPS*: 1Q ($0.04) A ($0.07) ($0.01)
52-Week Range: 54-34 2Q ($0.07) A ($0.09) ($0.01)
F.D. Shares Outstanding (MM): 16.8 3Q ($0.16) A ($0.06) $0.01
Market Cap ($mm) $708 4Q ($0.19) ($0.04) $0.06
Avg Daily Volume (000): 204 Year ($0.44) ($0.27) $0.05
9/99 Proforma Bk Value/Sh: $6.16 P/E NMF NMF NMF
9/99 Proforma Tot Debt/Tot Cap 0% Revs($B): 1999E 2000E 2001E
2000E ROAE NMF 1Q $3.3 A $5.2 $8.42
Price/Book Value: 1.9x 2Q $3.8 A $5.5 $8.92
2000E EBITDA/Sh: ($0.55) 3Q $4.6 A $6.5 $10.20
Dividend/Yield: $0.00/ nil 4Q $5.2 $7.6 $11.90
3-Yr Sec Growth Rt: 50% Year $16.9 $24.8 $39.4
*EPS are all pre-charges & one time iteEqtyMktVl/Rev 28.6x 17.9x
Includes green shoe, offering on 12/1/99 of 5mm shares
Key Points:
** eBenX provides B2B eCommerce solutions by facilitating the flow of
eligibility and financial data between purchasers of group health insurance
benefits and health plans. We are initiating coverage with a Buy rating as
we believe the company is positioned to benefit from the following:
** First Mover with Scale, Real Revenues and High Barriers to Entry: eBenX
boasts the only Web-enabled exchange, with a complex rules engine that
took 6 years and $17 million to build. The company generates real
revenue from its 300 customers and 2 million lives, which includes
Fortune 1000 companies like Bell Atlantic, Pepsi, GE Capital and
Readers' Digest. eBenX is connected to health plans serving 85% of the
nation's managed care population.
** Rapid, Visible Growth: We estimate that eBenX is poised to grow revenue
66.8% in 1999 and nearly 50% in 2000 and 2001. As of today, we have
visibility on $22 mm of the $24.7 mm projected for 2000E revenue. In our
view, payment on a Per Employee, Per Month (PEPM) basis presents a
measurable, understandable and defensible revenue and business model
that increases with the number of employees.
** Highly Recurring Revenue Stream: Contracts are usually three or more
years in length and terminations rarely occur.
** 12 Month Price Target of $60: We believe eBenX is solidly positioned to
capture 30% of the market in five years, which would make it a billion
dollar revenue company. Assuming a 10% net after tax profit margin and
a 30% discount rate and that revenue stream would be worth $27 million
today. Applying a 36.9x multiple, reasonable in our view considering the
growth potential here, yields a target market value of $1.008B or $60
per share in the near term.
**
SUMMARY:
eBenX is the first and only B2B eCommerce eligibility exchange for group health
insurance, a $600 billion marketplace with $20 billion in transaction costs.
The company serves as the online procurement, eligibility and payment exchange
between companies who purchase health insurance for their employees and
dependents and those who supply health insurance.
It is our view that eBenX's services could face explosive demand from employers
seeking to dramatically reduce the administrative costs associated with
procuring group health insurance. Why?
1. Premiums are rising as health plans try to offset years of margin pressure.
Fortune 1000, multi-site, multi-state employers may deal with as many as 150
health plans (health care is LOCAL, not national)
2. Simultaneously, employees are demanding more choice and more benefits from
their employers and health plans.
3. Full-employment/scarce technically adept employees can successfully make
such demands on employers as health insurance programs can be a key factor
in retention/turnover of such employees.
4. The result: premium costs soar. Admin costs must be reduced and service to
employees enhanced. Employers look for ways to streamline the procurement
process, cut costs, improve cash flow and customer service.
The solution: eBenX's web-enabled procurement, eligibility and reconciliation
engine and services.
We believe that shares of eBenX represent a buying opportunity for the
following reasons:
** First Mover with Scale, Real Revenues and High Barriers to Entry:
** The only Web-enabled exchange, with a complex rules engine that took 6
years and $17 million to build.
** eBenX has 300 customers, including Fortune 1000 companies like Bell
Atlantic, Pepsi, GE Capital and Readers' Digest. In addition, the company
recently announced newly created client relationships with American
Medical Response, American Red Cross, Bass Hotels & Resorts, Chevron
Corp. Dayton-Hudson Corp, Georgia Pacific Corp, KPMG and the state of
Kansas. Nabisco, Inc and Federated Department Stores were announced as
consulting contracts, but cross-selling opportunities exist here for
procurement and exchange services.
** eBenX has 2 million lives served by its systems today.
** eBenX is connected to health plans serving 85% of the nation's managed
care population
** Highly Visible, Recurring Revenue Stream: Contracts are usually 3 or more
years in length and terminations rarely occur. Thus, for example, as of
today we have visibility on $22 mm of the $24.7 mm projected for 2000E
revenue.
** Payment on a Per Employee Per Month basis presents a measurable,
understandable and defensible revenue and business model, in our view.
** All Internal Growth: as employers add new employees and dependents, eBenX's
revenue should grow; as eBenX expands its sales efforts, new F1000 clients
are likely to be added (no new un-identified F1000 customers are in our
model for 2000E).
** New Markets: Bringing the Internet solution to mid-market employers. Using
its Internet platform, the company is selling its exchange services to
brokers handling the insurance needs of the mid-size employers (500-3000
employees) who buy group health insurance through brokers. eBenX is the
back-end technology for eligibility and data flows to the plans over the
Web.
** Internet Growth Rate: eBenX is poised to grow revenue 66.8% in 1999E and
nearly 50% in 2000E and 2001E, in our opinion. Keep in mind that our revenue
expectations could be conservative as it does not assume the rapid
penetration of the mid-market, an increase in price, an increase in the
number of employees in existing contracts or a faster penetration of the
Fortune 1000 than has been historically shown. Therefore, any results
contrary to these assumptions, could represent an outperformance relative to
our expectations.
** 12 Month Price Target of $60: We believe eBenX is solidly positioned to
capture 30% of the market in five years, which would make it a billion
dollar revenue company. Assuming a 10% net after tax profit margin and a 30%
discount rate and that revenue stream would be worth $27 million today. We
estimate that applying a 36.9x multiple, reasonable in our view considering
the growth potential here, yields a target market value of $1.008B or $60
per share in the near term.
The eBenX Growth Strategy
The company intends to use a straightforward growth strategy.
** Implement an end-to-end eCommerce solution.
** Increase penetration of the Fortune 1000.
** Expand service offerings to existing Fortune 1000 customers.
** Expand to the mid-sized employer market.
** Pursue key strategic relationships.
** Develop new products.
Sales and Earnings Model: Assumptions and Characteristics
Because of the rigid timing of the insurance procurement, purchasing an
enrollment process, the company typically has very high visibility on forward
period Fortune 1000 revenues. The selling season for eBenX begins in January
and February. All decisions are usually made by early June. Then the company
begins to perform consulting/procurement services for some clients, but usually
implementation fees do not begin to roll in on new contracts until the fourth
quarter.
The Time Line:
January-March: eBenX bids for new business with Fortune 1000 customers
April-May: Customers award new business to eBenX
June-September: Consulting fees may be earned by eBenX from procurement process
September-Dec: Implementation, open enrollment, implementation fees earned
Source: Company reports.
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For example, for 2000E, we have very high visibility on approximately $22
million of the $24.7 mm in revenue forecasted in our model.
For the mid-sized employer market, we anticipate revenues flowing in a more
even pattern as the decisions made in this segment may not follow this rigid
seasonal structure. The companies may be willing to make shifts to the eBenX
platform within the year, i.e., we could see conversions at any time.
Given that the company is paid on a per employee per month basis, revenues
ultimately depend upon the numbers of employees. In modeling likely future
performance of the company it is useful to have a notion of both the likely
number of employees for which the company is paid and the price paid per
employee per month. But, we as analysts can not predict with any reasonable
accuracy the exact price or number of employees that the company will have on a
given date. That is, we believe that it is virtually certain that any estimate
we make will be wrong---either on price or on units. What is important, in our
view, is that the company is viewed as making our estimates if:
1. Revenues meet expectations
2. Number of employees for which the company is paid during the period is
within the range estimated by analysts
3. Average price per employee per month (PEPM) is in the range.
That is, we do not think that the stock should negatively react if we happen to
be off by 5,000 employees on a base of 500,000 and $0.10 on a base of $3.00
PEPM, but the company exceeds revenue expectations. Thus, our model only
includes ranges for number of ending paid-for employees in each year and the
average PEPM for the year.
We believe that it is important to note that the company is not paid explicitly
for dependents: the cost of providing its services to dependents is built into
the PEPM price. The company has experienced growth in all but one of its
Fortune 1000 clients' employee bases. (Kellogg's decided to move to a
community-wide health initiative as part of its good citizenship efforts. Our
Q1'00E revenue estimate reflects the move by Kellogg's.)
Thus, the growth that we anticipate seeing in 2000E is largely based on an
existing book of business that is currently either in operation or in
implementation. Upside to our estimates could come from the penetration of the
mid-sized employer market which, as noted above, tends not to have a rigid open
enrollment season. In addition, we have been extremely conservative in our
growth assumptions for all existing clients. For example, our model carries the
current employee base through 1999E and 2000E for existing customers that are
beyond the ramp up phase. We do not allow for new employee additions within
that existing customer base.
Note also that our model does not include acquisition or strategic alliances
that could lead to increased market share for eBenX.
For 2001E, we carry forward the contracted book of business for 2000E and add
several Fortune 1000 and mid-market clients. The company has initiated
discussions with some of these entities already. Visibility on 2001E estimates
should increase steadily in the first half of 2000E because of the seasonality
of the large employer process (see discussion above). Furthermore, because of
the company's relationship with over 25 Blue Cross/Blue Shield plans (in which
it is the exchange provider), the company continues to add to its employee
lives as BC/BS markets its own services to the mid-size and large employer
market. We include some benefit for these efforts in our 2001E estimates. We
estimate that the company will generate $39.4 mm in 2001E revenue.
On the expense side, we note that the seasonal pattern of implementation in Q3
and Q4 of the year preceding the start of providing exchange services for new
Fortune 1000 clients creates downward pressures on gross margins in the Fortune
1000 sector in the fourth quarter of each year. The company provides the
services and, depending on the contract terms, may not be compensated until the
system is up and running. Revenue is recorded only when the company is allowed
(contractually) to bill the client. However, our model reflects an overall
increase in gross margin during 2000E and 2001E as a result of the increasing
contribution from cross-selling services to existing customers and the
anticipated growth in Internet-based services, which carry a significantly
higher gross margin than the rest of the business.
Our model further reflects a significant increase in sales and marketing
spending throughout the next two years. As a private company of more limited
means until just recently, the sales and marketing spending levels and head
count had been constrained. The company expects to add headcount in this area
with the proceeds of the IPO.
The impact of the offering is first seen in the model in Q4' 99E, with interest
income increasing somewhat during that period. Considering that the IPO was
priced at an 18% premium over the high end of the expected range, the company
was able to raise more funds than expected. Therefore, our model anticipates
that the company is able to generate interest income in the $3 -$5 million
range through F2001.
While the company is expected to show losses on the operating line for both
2000E and 2001E, the higher than expected interest income could drive
profitability on the net income line by the latter part of F2001. In addition
any upside to our revenue estimate for 2001E could quickly put the company in
the black on the operating line. Earnings per share are estimated at ($0.27)
for 2000E and $0.01 for 2001E.
Valuation
In our view, the company is squarely within the eHealth B2B space, although we
note that there are no direct comparables in the employer-health plan market
place. In some respects, the exchange services offered by eBenX are similar to
those offered by Ariba and the payment exchange solutions companies. However,
the company's services reach a more specialized and potentially unchallenged
market than those companies.
Thus, we include in our comparable universe the eHealth B2B companies:
CareInsite (CARI $77.63), Chemdex (CMDX $110.25, Buy), Cybear (CYBA $7.63) and
Healtheon (HLTH $36.88, Buy). We also include payment solutions exchange
providers such as Bottom Line (EPAY $34.44, Long-term Attractive), Checkfree
(CKFR $94.25), Fundtech (FNDT $24.00, Long-term Attractive) and Security First
Technologies (SONE $74.88). Finally, we include Ariba (ARBA $185.00) and Insweb
(INSW $21.94, Buy), a vendor of insurance over the Internet.
Let's talk about EBNX's potential for a moment. The company operates in the $20
billion market defined by the administrative cost of providing group health
benefits, part of the $600 billion overall health insurance market. Given that
in our view eBenX is the only provider of these highly efficient web-
enable/based exchange services in the space, we do not think it is unreasonable
to project that the company can be at least a billion-dollar company that
dominates its space in approximately five years. (This assumes 100-mm people at
$3 per person per month. The population of the US is 260 mm, approximately, but
not everyone is insured through their employers.) The Internet makes that
happen because it allows the company to efficiently and rapidly reach the small
and mid-sized employer market that employs more people as a whole than does the
large employer market
Let's assume a 10% after tax profit margin on our billion-dollar revenue
assumption five years from now. The net present value of that revenue stream
today, using a 30% discount rate, would be $27M. Applying a P/E ratio of 36.9x
yields a current market value target of $1.008B, or a near term target price
per share of $60.
Another valuation method that could be utilized is the comparison of current
revenue multiples method. First lets take a look at CareInsite, which
currently trades at 158.2x F2000 revenue estimates. In our view, the services
provided by eBenX are more mature, have a more measurable and realistic revenue
model and are in a less competitive space than CareInsite. But, we also
recognize that the "Marty Wygod" factor, an intangible, and the Medical Manager
relationship with more that 120,000 doctors, a tangible, has a lot to do
CareInsite's multiple. Second, let's look at Ariba, which trades at 99.8x
estimated F2000 revenue. Some would argue that Ariba is not in health care, a
space that is required to meet more privacy regulations than any other. Its
services are also offered to a broader eCommerce space than eBenX's. Taking
all this into account, we believe that a multiple for EBNX of 40x F2000 revenue
represents a sufficient enough discount to these monster Internet plays yet
takes into consideration the large growth potential here. Applying this
multiple to F2000 revenue yields a near-term price target of approximately $60
per diluted share.
We initiate coverage of eBenX with a Buy rating and a $60 near-term price
target.
Rated Now: Buy rated.
The Company: eBenX provides business-to-business eCommerce solutions to
employers, employees and health plans for the purchase, administration and
payment of group health insurance benefits. The plan information, data and
financial exchange requirements in this $600 billion market are extremely
complex. Through its proprietary and licensed technology, the Company
facilitates the flow of employee and dependent eligibility and financial data
between employers and purchasers of group health insurance benefits and health
plans. EBenX's proven Web-enabled services and high volume eligibility and
financial data pipelines provide the critical support needed for employers and
health plans to connect electronically.
Investment Thesis: It is our view that eBenX's services could face explosive
demand from employers seeking to dramatically reduce the administrative costs
associated with procuring group health insurance. We believe the company is
poised to generate a 66% revenue growth rate for F1999, and 50% in F2000 and
F2001. With its first mover advantage, highly visible recurring revenue stream
and high barriers to entry, we do not think it is unreasonable to project that
the company can be at least a billion-dollar company that dominates its space
in at least five years. A 40x multiple on F2000 revenue, which seems
appropriate given the large growth potential, yields a target price of $60 per
diluted share.
Investment Risks: Among the risks are that the Company has a history of
operating losses and may not achieve or maintain profitability in the future;
that the company relies significantly on a limited number of customers and that
a loss of any material customer could harm the business and operating results;
that the Company's success depends on industry acceptance its products and
services; that the Company faces intense competition in its industry and a lack
of success at competing could serious harm the business; failure to manage its
growth effectively will harm the business and operating results; unsuccessful
selling efforts or the incurrence of unanticipated expenses in selling products
and services could harm the business; future growth depends upon the
establishment and maintenance of successful relationships with strategic
partners; quarterly results will likely fluctuate (and reflect seasonality)
which may make the market price of the stock volatile; the company is dependent
on key employees and the retention of qualified technical personnel; the
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company could be subject to potential liability claims related to its products
and services; the company may need additional capital; and the business and
reputation of eBenX may be harmed if it is unable to protect the privacy of its
customer information. In addition, 3.083 mm shares will become available for
sale 180 days after the effective date.
Robertson Stephens maintains a market in the shares of eBenX, Chemdex,
Bottomline Technologies, CheckFree, FundTech Ltd,. Insweb and Healtheon/WebMD
and has been a managing or comanaging underwriter for or has privately placed
securities of Bottomline Technologies, CheckFree, Chemdex,, eBenX, FundTech
Ltd., Insweb and Healtheon/WebMD within the past three years.
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