Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Today we’re digging into One Medical’s updated IPO filing released this week. The document contains directional pricing information that will help us understand where the tech-enabled medical care startup expects the market to value itself and also details its Q4 2019 Preliminary Estimated Unaudited Financial Results, which gives us a fuller picture of its financial health.
As we’ll see, One Medical’s expected valuation matches secondary-market transactions in the firm’s equity, and, at the upper-end of its proposed IPO range, represents a solid boost to its final private valuation. Afterwards, we’ll dig back through the company’s numbers, figure out its implied revenue multiple and make a bullish and bearish argument for the company’s hoped-for IPO valuation.
It’s going to be fun! (For a general dive into the company’s IPO filing, head here.)
Prices, values
According to its S-1/A filing (an updated S-1 IPO filing), One Medical expects its shares to price between $14 and $16 apiece. The document indicates that the medical company will have 122.4 million shares outstanding after its IPO — or 125.0 million, if its underwriting banks exercise the right to buy 2.65 million more shares at its debut price.
Discounting the option, the proposed IPO price range values One Medical at $1.71 billion on the low-end and $1.96 billion at the top end of its interval. Those figures are not too surprising if you’ll recall our initial coverage of the company’s S-1 filing:
One Medical was valued at around $1.5 billion in its most recent, 2018-era fundraise according to CBNC, reporting that the company has since traded on the secondary markets for around $2 billion.
One Medical is shooting for a price that is, at minimum, a small bump from its final, formal private valuation, all the way up to its reported secondary-market price. (For fun, the company’s valuation rises to $1.75 billion to $2.00 billion if you include the underwriter’s option.)
Does that valuation make sense? It’s hard to say without a look at the company’s results. Let’s examine its Q4 2019 performance range, and figure it out.
Results, tallies
All our prior work regarding One Medical is now out of date, as the firm has provided a range of figures for its fourth quarter. Here’s what we need for our use today:
- Q4 2019 revenue: $76.5 million to $78.65 million, +32% and +35%, respectively
- Q4 2019 gross margin: 37% to 36%, at its lower and upper revenue range (figures exclusive of depreciation and amortization costs)
- Q4 2019 operating loss: $20.3 million to $17.3 million, at its lower and upper revenue range
Before we put the results into their full-year context, observe that the company expects its gross margin to fall if its revenue was higher in the quarter. For clarity, One Medical lists the inverse of gross margin in its S-1/A, sharing its “cost of care” figures, which work out to 63% and 64% at the low and high end of its Q4 revenue range. So, the more care that One Medical sold in the three-month period, the lower its margins were, it seems. That’s the opposite of leverage and doesn’t look great.
Perhaps things will look a bit better in their full-year context. Inclusive of its Q4 results, One Medical expects its 2019 tab to include:
- revenue of $275.4 million to $277.4 million, +29% and +30%, respectively
- gross margin of 40% to 39%, exclusive of depreciation and amortization costs
- operating losses of $55.5 million to $52.5 million, at the lower and upper ends of its revenue guidance
Those figures help us frame One Medical’s Q4 results. The company’s final three-month segment of 2019 featured a revenue growth acceleration (good), but lower gross margins (bad) and operating losses that are not falling enough to paint as short-term path to profitability (bad).
There’s more nuance to the results that we could bring up. One Medical, for example, notes that its Q4 revenue growth “of 32% to 35% is primarily attributable to membership growth of 22%,” the gap between filled by “an increase in net revenue per member.” You can read that two ways. The positive take would be that net revenue per subscriber is rising and the more negative view would be that the firm only managed to boost membership by 22% in a year, despite spending $28.8 million on marketing during the first nine months of the year. Your call.
With the firm’s Q4 ranges in hand, now we can talk valuations.
Valuations, hopes
Let’s explore the company’s resulting revenue multiples that occur when we compare its recent results against its targeted prices.
As we’ve calculated, One Medical is targeting a $1.71 billion to $1.96 billion valuation, not including its underwriter’s option. We’ll use these figures as they will give us slightly more conservative calculations, which works out to the company’s favor.
Recall that One Medical is not a SaaS company, and its membership revenue came to less than 20% of its top line during the first three quarters of 2019. So, we cannot calculate an annual recurring revenue (ARR) result for the firm, as its revenue is of a different sort. But we can calculate the company’s implied, hoped-for revenue multiple using its full year results and its Q4 annualized run rate.
Let’s do that, starting with the company’s lower Q4 revenue result ($76.5 million):
- trailing revenue multiple at $14 per share: 6.22x
- trailing revenue multiple at $16 per share: 7.11x
- revenue multiple using annualized Q4 result at $14 per share: 5.6x
- revenue multiple using annualized Q4 result at $16 per share: 6.4x
And, the same exercise but with the company’s higher Q4 revenue estimate ($78.5 million):
- trailing revenue multiple at $14 per share: 6.17x
- trailing revenue multiple at $16 per share: 7.06x
- revenue multiple using annualized Q4 result at $14 per share: 5.46x
- revenue multiple using annualized Q4 result at $16 per share: 6.23x
Now that we have our digit deluge, what to do? We can see that no matter how we put the numbers to work, One Medical is targeting a revenue multiple that it hopes will land around 6x under more conservative results and up to 7x with more aggressive pricing.
Do the company’s results support such revenue multiples? It’s hard to say, but my gut — nothing more, mind, we’re just chatting and this is not investment advice — says that 7x revenue is a bit high for One Medical. There are cash-generating SaaS companies that are growing only a bit more slowly that are trading for lower multiples. I cannot see what makes the company — an unprofitable, only moderately growing upstart with non-recurring revenue — worth a SaaS multiple. Especially as its gross margins aren’t great and aren’t improving.
The good news is that as One Medical has put up an IPO price range, it’s on a conveyor belt toward a debut. The next stop on which, of course, is whether the company raises or lowers its IPO price range. More soon!