IPO Preview: Duck Creek Technologies Files For $200 Million IPO

IPOStreet

Duck Creek Technologies (DCT) has filed to raise $200 million in an IPO of its common stock, according to an S-1 registration statement.

The company provides property and casualty (P&C) insurance firms with a range of SaaS software solutions.

DCT has generated good growth in revenues and appears to be making a turn towards operating breakeven. The prospects for growth in the industry are significant.

Boston, Massachusetts-based Duck Creek, was founded to develop an online platform that offers software for P&C insurance providers to enhance their policy administration, claims processing and billing functions operational efficiencies.

Management is headed by Mr. Michael Jackowski, Chief Executive Officer, who has been with the company since August 2016 and was previously a managing partner at Accenture and held various roles at The Allstate Companies (ALL) insurance carrier.

Below is a brief video description of the use of AI in claims decisions:

Source: Duck Creek Technologies

Large customers at Duck Creek include:

  • Progressive
  • Liberty Mutual
  • AIG Inc.
  • The Hartford
  • Berkshire Hathaway Specialty Insurance
  • GEICO
  • Munich RE Specialty Insurance

The firm claims it has over 150 insurance firms as its clients worldwide, 'including the top five North American insurers.'

The firm 's primary offerings include:

  • Duck Creek Policy
  • Duck Creek Billing
  • Duck Creek Claims

Duck Creek has received at least $397 million from investors including private equity firm Apax, Accenture and Kayne Anderson Rudnick.

The firm obtains new insurance carrier clients through dedicated sales and marketing teams along with technical teams, since P&C carriers typically have fairly complex back office processes.

Almost all of the firm 's new bookings come from SaaS subscriptions to its Duck Creek OnDemand.

DCT also offers related professional services primarily for implementation aspects of the firm's software suite.

Sales and marketing expenses as a percentage of total revenues fluctuated as revenues rose.

In the most recent reporting period, the sales and marketing efficiency rate, defined as how many dollars of additional new revenues are produced for each dollar of sales and marketing expenditure, rose to 0.9x.

The rule of 40 is a thumb rule for the software industry that says the company is on an appropriate growth trajectory as long as the combined sales growth rate and EBITDA percentage rate is equal to or above 40 percent. The latest estimate by DCT was 20 per cent of the nine months ended May 31 , 2020, so the organization has some work to do in this regard.

The firm 's net dollar retention rate was 118% and 113% for the nine months ended May 31, 2019 and 2020, respectively.

A figure above 100 per cent is considered optimistic because it means that the company produces more sales from the same consumer pool, i.e. negative net churn.

The global demand for Insurtech products and services is projected to rise from $5.5 billion in 2019 to $10.14 billion in 2025 according to a 2019 market analysis study by Mordor Intelligence.

This reflects a 10.8 per cent CAGR projection between 2019 and 2025.

The key drivers for this anticipated growth are the need to increase efficiencies, along with enhanced technical offerings, through automation.

In addition, since 2014 the sector has seen an almost constant rise in investment as shown in the chart below:

duckcreekinvestment

Significant players in the industry or related sectors include:

  • Lemonade (LMND)
  • Zhong An
  • Guidewire (GWRE)
  • Insurity
  • Majesco
  • Sapiens

Duck Creek's recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increased gross profit
  • Reduced gross margin
  • Fluctuating operating results
  • Variable cash flow from operations

Related financial statements from the company's registration statement are below:

duckpl

Source: Company registration statement

As of May 31 , 2020, Duck Creek had $19.2 million in cash and $100 million in total liabilities.

Free cash flow was $18.7 million over the twelve months ended May 31 , 2020

Duck Creek intends to raise $200 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

The management says the net proceeds from the IPO will be used as follows:

(i) redeem up to [an as-yet-unrevealed amount] of outstanding LP Units of the Operating Partnership held by certain of the Existing Holders immediately prior to the completion of this offer, at a redemption price per LP Unit equal to the initial public offering price of that offer after deduction of unde

(ii) pay [an as-yet-undisclosed amount] to Apax, representing the cash portion of the merger consideration in the Reorg Merger.

[an as-yet-undisclosed amount] of the net proceeds that we receive in this offering will be paid to Accenture to redeem the outstanding LP Units owned by Accenture that are not contributed to the Company in the Reorganization Transactions.

The presentation of the company roadshow by the Management is not available.

Goldman Sachs, J.P. Morgan, BofA Securities, Barclays, RBC Capital Markets, JMP Securities, Needham & Company, Stifel, William Blair, D.A. Davidson & Co, Raymond James and Loop Capital Markets are the listed bookrunners for the IPO.

Commentary

Duck Creek is seeking public investment capital to buy units in the underlying operating company and pay its private equity firm shareholder Apax consideration.

The financials of the company indicate good growth in sales, improved gross margin and decreased negative operating losses.

Sales and Marketing expenses have varied as revenues have increased, while its Sales and Marketing efficiency rate has improved markedly in the most recent reporting period.

It is estimated that the business potential to provide software to traditional insurance companies will double in the coming years, thereby providing Duck Creek and its peers with a good growth backdrop for the industry.

For the most recent nine-month span, DCT posted a net dollar retention rate of 113 percent, a strong result suggesting negative net churn and good service market fit.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 82.2% since their IPO. This is a top-tier performance for all major underwriters during the period.

Duck Creek appears to be making a turn towards operating breakeven while growth in sales was impressive.

I look forward to learning more from management on the pricing and valuation expectations of the IPO.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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