January 25, 2008, 10:27 am

RMG - RiskMetrics

RiskMetrics ipo'd this morning. following is our full pre-ipo analysis piece. This was available to http://www.tradingipos.com subscribers on January 15th.

Disclosure: Tradingipos.com does have a position in RMG.

RMG - RiskMetrics

RMG - RiskMetrics Group plans on offering 16.1 million shares(assuming over-allotments) at a range of $17-$19. Insiders are selling 4 million shares in the deal. Credit Suisse, Goldman Sachs and BofA are leading the deal, Citi, Merrill Lynch and Morgan Stanley are co-managing. Post-ipo RMG will have 59.9 million shares outstanding for a market cap of $1.078 billion on a pricing of $18. The bulk of ipo proceeds will go to repay debt.

General Atlantic Partners will own 22% of RMG post-ipo.

From the prospectus:

'We are a leading provider of risk management and corporate governance products and services to participants in the global financial markets. We enable clients to better understand and manage the risks associated with their financial holdings, provide greater transparency to their internal and external constituencies, satisfy regulatory and reporting requirements and make more informed investment decisions.'

RMG operates under two segments, risk management(RickMetrics) and corporate governance(ISS). RMG acquired their corporate governance segment ISS in January 2007 for $542 million in total consideration. RMG has 3,500 clients in 55 countries. Clients include asset managers, hedge funds, pension funds, banks, insurance companies, financial advisers and corporations. Among clients are 70 of the 100 largest investment managers, 34 of the 50 largest mutual fund companies, 41 of the 50 largest hedge funds and each of the 10 largest global investment banks.

RMG is a play on the growth of managed assets globally coupled with the ever increasing complication and intertwining of securities and derivatives.

RiskMetrics - Multi-asset, position-based risk and wealth management products and services. What does that mean? RMG's products help investment managers quantify portfolio risk across a broad range of security products, geographies and markets. Interestingly RMG utilizes transparent processes and algorithms to model risk and portfolio positions. RMG first published their processes in 1994 and continuously updates. Customers subscribe to RMG's applications, interactive analytics and risk reports based on consistently-modeled market data that are integrated with their holdings. RMG's database includes over four million active global securities across 150,000 issuers, spanning 200 countries, 220 exchanges, 11,000 global benchmarks updated daily. RMG believes their dbase covers nearly all equity, fixed income and derivatives in clients portfolios.

RMG's risk management products allow customers to:

1) measure their trading, credit and counterparty risk;

2) monitor and comply with internal or external exposure and risk limits;

3) deploy and optimize their use of capital;

4) communicate risk in a transparent fashion to regulators, investors, clients and creditors;

ISS - RMG's corporate governance segment acquired in January 2007. RMG offers an outsourced proxy research, voting and vote reporting service to assist companies with their proxy voting responsibilities. RMG's web based product offers a full proxy voting solution, from policy creation to comprehensive research, vote recommendations, reliable vote execution, post-vote disclosure and reporting and analytical tools. ISS growth in recent years has been derived from the increase in corporate regulatory oversight. In 2006 ISS provided proxy research and vote recommendations for more than 38,000 shareholder meetings across approximately 100 countries and voted approximately 7.6 million ballots on behalf of clients, representing almost 700 billion shares.

Revenues are derived primarily on an annual subscription basis. through the first nine months of 2007 93% of revenues were derived from annual subscriptions with a strong renewal rate of 91%. The high renewal rate leads to strong recurring revenues annually.

Customers breakdown is as follows: 35% investment managers; 21% alternative investment managers; 15% banking and trading; 6% mutual funds; 6% pension funds; 5% corporate; 5% custodians; 4% insurance and 3% other.

63% of revenues is US, 37% international.


In addition to the acquisition of ISS, RMG also recently acquired CFRA. To fund these acquisitions RMG took on debt. Post-ipo, RMF will have approximately $314 million in debt on the books.

RMG does not plan on paying dividends.

Revenues from both segments(RiskMetrics/ISS) are roughly equal. The bottom line in 2007 has really been negatively impacted from the ISS acquisition due to increased debt servicing and amortization costs. The acquisition doubled RMG's total revenue stream and in the long run should be beneficial. However as far as GAAP earnings go, the ISS acquisition will really put a damper on the bottom line in 2007 and beyond.

As ISS wasn't acquired until 1/07, we have to combine the two entities for historical revenues. Total revenues were $177 million in 2005, $205 million for 2006 and through the first nine months of 2007 on pace for $235-$240 million.

2007. Revenues are on pace for $235-$240 million, a 15% increase over combined pro-forma 2006 revenues. *Note that the expense numbers that follow take into account the removal of one-time acquisition expenses as well as debt paid of on ipo. Gross margins are a solid 66%. Operating expense ratio should be 38%, putting operating margins at 28%. So far, so good. the issue here is the debt laid on to acquire ISS and the amortization charges. Amortization charges(which do not impact cash flows) should eat up 1/4 of operating margins and debt servicing(which does impact cash flows) should eat up 1/3 of operating margins. Net margins after taxes then should be 7%. Earnings per share should be $0.25-$0.30. On a pricing of $18, RMG would trade 65 X's 2007 earnings. Removing the amortization charges related to the ISS acquisition would mean RMG would net between $0.45-$0.50 per share. In my opinion this second number is more indicative of RMG's cash flows and real earnings.

2008 - Both RMG's segments have a proven track record of 10%-15% organic growth and there is every indication that should continue into 2008. Risk management assessment and corporate governance are two segments that should not be negatively impacted by a slowdown in the financials or the worldwide economy. RMG's subscription fees are not based on assets under management. Assuming a 10%-15% revenues increase in 2008 to $270 million, RMG should be able to put $0.40 on the GAAP bottom line. RMG will continue to carry acquisition amortization expenses through 2008, folding those out would bring $0.60 on the bottom line.

Conclusion - RMG has 'GAAP handicap' due to the acquisition of ISS. The $300 million in debt-post ipo is a very real earnings drag here, however this debt was brought on to double RMG's revenues and bring in a new segment, corporate governance. As mutual and investment funds utilize both RMG's risk management products as well as corporate governance proxy services, the acquisition was a good fit overall for RMG. It does however negatively impact the bottom line. As separate entities, RMG/ISS would earn a combined $0.75-$0.80 in 2007. Together with the added debt/amortization, that number drops to $0.25-$0.30. The bottom line here doesn't really indicate the nice niche and strong underlying business of RMG. Based on the organic strength of each underlying segment and the estimated 2008 cash flows, RMG is a recommend in range. Keep in mind RMG will look expensive on a PE level over the next 2-3 years which in this environment is probably reason enough not to pay up here. However I like both segments here quite a bit and even with the debt on hand post-ipo this is a recommend in range. The two parts here are greater than the sum on ipo....I suspect eventually the 'sum' will catch up.

January 13, 2008, 11:17 am

VRAD - Virtual Radiologic

The 2008 ipo calendar kicks off this week with three new deals. As we've been doing annually, tradingipos.com will have full analysis pieces on every deal available to subscribers pre-ipo again in 2008. Wish everyone a profitable '08.

this week's free blog piece is an interesting medical ipo thst debuted bacin in November, VRAD. As has been the custom, we'll post 10-20 free analysis pieces on this blog post-ipo in 2008, while every analysis piece on every deal is available to subscribers pre-ipo. we also have a number of professional traders posting on our subscriber forum daily as well.


VRAD - Virtual Radiologic

VRAD - Virtual Radiologic plans on offering 4.6 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs is leading the deal, Merrill Lynch and William Blair co-managing. Post-ipo VRAD will have 16.4 million shares outstanding for a market cap of $279 million on a pricing of $17. Approximately 50% of ipo proceeds will be used to redeem debt, the remainder for general corporate purposes.

President and CEO Sean Casey will own 25% of VRAD post ipo.

From the prospectus:

'We believe we are one of the leading providers of remote diagnostic image interpretation, or teleradiology, services in the United States. According to Frost & Sullivan, we are the second largest provider of teleradiology services in the United States.'

The leader in this space is 2006 ipo NHWK, Nighthawk.

VRAD provides remote diagnostic image interpretations, or reads, 24 hours a day, seven days a week, 365 days a year. Customers include radiology practices, hospitals, clinics and diagnostic imaging centers. The differentiator with VRAD compared to NHWK appears to be that VRAD's radiologists can work remotely from anywhere in the US, while NHWK's US staff is all located at their facility in Idaho.

Digital diagnostic imaging is expected to grow 15% annually over the next three years. 500 million procedures are expected by 2009. Sector is being driven by an aging population, advances in diagnostic imaging technologies and the growing availability of imaging equipment in hospitals and clinics, as well as by more frequent physician referrals for diagnostic imaging. However the projected number of radiologists is expected to grow just 2% annually in the US. The slower pace of radiologist growth coupled with the 24/7 365 demand has pushed hospitals/clinics to outsource some of their radiologist needs.

VRAD has affiliations with 121 radiologists. Reads include computed tomography, or CT scans, magnetic resonance imaging, or MRI, and ultrasound. VRAD is compensated directly by their customers and does not directly depend on third party reimbursement. VRAD has provided services to 457 customers serving 787 medical facilities, which includes 736 hospitals, representing approximately 13% of hospitals in the United States. 98% of contracts up for renewal have been renewed.

Same site sales growth has been strong indication that once VRAD sells in their remote radiology services, the revenue stream per location grows. Same site growth for 2005 was 24%, 2006 was 20% and through first nine months of 2007 17%.

Legal - In 7/07 Merge eMed filed a patent infringement suit against VRAD. The suit claims VRAD infringed on Merge eMed's teleradiology patent. Case is in a very stage currently.


$2 per share in cash post-ipo, no debt.

Revenues have grown swiftly as VRAD has added new radiologists, sites and grown revenues in existing sites. Revenues in 2005 were $27 million, doubling to $54 million in 2006 and through first nine months of 2007 on pace for $90 million.

Eight straight quarters of sequential revenue growth. VRAD shifted into profitability in 2006.

2007 - Note that due directly to the fast rise in fair value of VRAD, they've booked pretty hefty stock compensation expenses in 2006/2007. VRAD does not have excessive options and this line will fall significantly post-ipo. I've smoothed out stock compensation expense a bit for 2007 numbers as if they were a public company at IPO price for all of 2007. Revenues on track for $90 million, a 67% increase over 2006. The largest expense line is physician cash expenses at 45%. As this is an operation that depends entirely on their physician radiologists, this expense line will always be significant at the 45% level of revenues. Operating margins which have been increasing annually should be 14%. Net margins should be 9%. Earnings per share of approximately $0.50. On a pricing of $17, VRAD would trade 34 X's 2007 earnings.

2008 - VRAD has shown an ability to grow revenues sequentially, I don't see why that should halt in 2008. If we assume conservative sequential quarterly growth through 2008, I would not be surprised to see VRAD hit $120-$125 million in revenues. This would be a 36% increase over 2007 and might be a tad conservative as VRAD has increased revenues 100% and 67% in '06 and '07 respectively. Still, I'd rather be conservative when forecasting. Operating margins should improve a bit as VRAD gets some economies of scale on SGA if not on physician radiologist cash expenses. At 16% operating margins, VRAD should earn $0.75 - $0.80. On a pricing of $17, VRAD would trade 22 X's 2008 estimates.

A quick look at NHWK and VRAD

NHWK - $664 million market cap. Trading 4.3 X's '07 revenues and 23 X's 2007 earnings with a 67% revenues growth rate in 2007. NHWK currently expecting a 40% growth rate in 2008 and trades 17 X's 2008 earnings.

VRAD - $279 million market cap at $17. Would trade 3 X's '07 revenues and 34 X's '07 earnings with a 67% revenue growth rate in 2007. VRAD conservatively should have a 36% revenue increase in 2008 and would trade 22 X's conservative 2008 estimates.

VRAD should book $125 in 2008 revenues compared to NHWK's $215. Both are solid operations filling an obviously desired/needed niche. I write obviously as the revenue growth for each has been been quick and fast. NHWK ipo'd in 2/06 at a $387 million market cap with an expected $0.50 in earnings and $90 million in revenues, exactly what VRAD will hit in 2007. VRAD is a recommend here. IPO here looks like a 'junior NHWK' except at a $100 million lower market cap in range than NHWK priced 18 months ago. I'd expect VRAD to follow a very similar path as NHWK and grow market cap into the $600 million range two years after ipo. Solid recommend in range.

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