SelectQuote (SLQT) has filed to raise $100 million in a U.S. IPO, per an S-1 registration statement.

The company has developed an online service that enables insurance carriers to bid for customers seeking senior health, life, automobile, and home insurance coverage.

SLQT has grown quickly and is producing positive earnings, so is a significant competitor to Everquote (EVER) - Get Report.

Overland Park, Kansas-based SelectQuote was created to provide insurance companies of many types with leads for consumers interested in purchasing various types of insurance coverage.

The company generates revenue primarily through commissions through first year and renewal commission agreements with insurance carrier

Management is led by Chief Executive Officer Mr. Tim Danker, who has been with the firm since 2012 and was previously Chief Executive Officer of Spring Venture Group, a senior healthcare insurance distribution site.

Below is a brief customer testimonial:

Source: SelectQuote Insurance

SelectQuote has received at least $85 million from investors including Brookside Equity Partners, a middle market private equity firm.

The company markets its online service via online and offline marketing channels primarily in a direct-to-consumer [DTC] approach.

Its primary marketing channels include television, radio, third-party marketing services and search engine placement.

Marketing & advertising expenses as a percentage of total revenue have been dropping as revenues have increased, from 35.1% in FYE 2018 to 31.9% in the most recent partial reporting period.

The marketing & advertising efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of marketing & advertising spend, was stable at 0.9x in the most recent reporting period.

Per a 2018 market research report by IBISWorld, the market for online insurance brokering in the U.S. is estimated to rise to $18.1 billion by 2024.

This represents a forecast 9.3% CAGR (Compound Annual Growth Rate) from 2019 to 2024.

The main drivers for this expected growth are improvement in online-based lead generation, capitalization and risk management technologies.

Additionally, disposable income growth is also expected to add to consumer demand as will increased awareness of efficiencies to be gained by buyers and sellers operating in an online environment.

SelectQuote’s recent financial results can be summarized as follows:

  • Growing topline revenue, although at a decelerating rate
  • Increased gross profit and uneven gross margin
  • Growing operating profit but uneven operating margin
  • A swing to sharply negative cash flow from operations

Below are the firm’s financial results for the past two and ½ years. (Full years PCAOB)

Source: SelectQuote S-1 Filing

Source: SelectQuote S-1 Filing

As of December 31, 2019, SelectQuote had $77.9 million in cash and $577.9 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was a negative ($49.1 million).

SelectQuote intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may be as high as $250 million.

Management says it will use the net proceeds from the IPO to pay down debt from its Senior Secured Credit Facilities.

Listed bookrunners of the IPO are Credit Suisse, Morgan Stanley, Evercore ISI, RBC Capital Markets, Barclays, Citigroup, Jefferies, Cantor, Keefe Bruyette & Woods, Piper Sandler and Drexel Hamilton.

Commentary

SelectQuote is seeking public investment capital firstly to pay down debt.

The company’s financials indicate strong revenue growth although decelerating more recently.

SLQT is producing earnings but has swung heavily to negative cash flow from operations in the most recent period.

The firm is private equity-owned and has significant debt which is typical of such companies, as they usually pay large dividends to their private equity investors by issuing debt.

I generally don’t favor private equity-owned firms at IPO as they are loaded down with debt and typically are slower growing companies post-IPO.

Marketing & advertising expenses are dropping as revenue has increased; its marketing & advertising efficiency rate has been stable at 0.9x.

The market opportunity for providing insurance coverage online is large and forecast to grow at a 9.4% annual CAGR through 2024, a reasonably strong growth rate.

With a successful IPO, SelectQuote will have the ability to bring more competition to sites such as Everquote  (EVER) - Get Report, which is currently trading at a Price / Sales multiple of around 5.5x.

When we learn management’s assumptions about price and valuation, I’ll provide a final opinion.

(I have no positions 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. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)