February 13, 2012, 1:44 pm

EPAM - EPAM Systems

2012-02-02
EPAM - EPAM Systems

EPAM - EPAM Systems plans on offering 8.5 million shares at $16-$18. Insiders will be selling 5.9 million shares in the deal. Citi, UBS, Barclays and RenCap are leading the deal, Stifel and Cowen co-managing. Post-ipo EPAM will have 41.8 million shares outstanding for a market cap of $711 million on a pricing of $17. Ipo proceeds will be used for general corporate purposes.

Russia Partners will own 40% of EPAM post-ipo. Russia Partners is a Russian based private equity firm focusing on Russian and eastern European investments.
From the prospectus:
'We are a leading global IT services provider focused on complex software product development services, software engineering and vertically-oriented custom development solutions.'
IT outsourcing operations focused on software product development. Located in Belarus, Ukraine, Russia, Hungary, Kazakhstan and Poland.
Full lifecycle software development services which includes design and prototyping, product development and testing, component design and integration, product deployment, performance tuning, porting and cross-platform migration.
Top 30 clients include Barclays, Citigroup, The Coca-Cola Company, Expedia, Google, InterContinental Hotels Group, Kingfisher, MTV Networks, Oracle, Renaissance Capital, SAP, Sberbank, Thomson Reuters, UBS and Wolters Kluwer.
Reuters accounts for 10%+ of annual revenues.
53% of revenues from North America, 26% from Western Europe and 19% from Russia and Eastern Europe.
Longterm relationships as 93% of 2010 revenues were derived from clients of 2+ years.
Industry - worldwide offshore R&D/software development services spending is expected to grow 10%+ annually through 2014.
***Pretty easy to understand business model here: Offshore IT outsourcing based in Russia and Eastern Europe.
Sector is a low margin people intensive business. As of 9/11, EPAM had 6,554 IT employees. High attrition rate of 10% annually.
Competitors include offshore IT outsourcing companies in India and China.
Software development accounted for 65% of revenues, testing services 20%.
Financials
$2 per share in cash post-ipo, no debt.
Tax rate appears to be in the 20% range post-ipo.
2011 - Strong growth here past 1 1/2 years as EPAM has grown revenues nicely from existing customers. $325 million in revenues, 47% growth from 2010. 39% gross margins inline with prior periods. Operating margins of 17 1/4%. 13 1/4% net margins. EPS of $1.
2012 - EPAM does not break down numbers quarterly, plus we've yet to see the 4th Q 2011 results. If we plug in solid 15% 2012 revenue growth run we shouldn't see operating metrics change all that much. $375 million in revenues, 17 1/2% operating margins, 13 1/2% net margins. EPS of $1.20. On a pricing of $17, EPAM would trade 14 X's 2012 estimates.
Conclusion - Definitely not a high multiple sector here. I'd submit a PE of 20+ regardless of growth rate means the sector/stock has gotten ahead of itself. EPAM is on the more sophisticated services end of the outsourcing sector here. This is not a customer service outsourcing operation, EPAM is focused on software development and testing.
EPAM has shown very nice growth the 15 months prior to ipo. Margins are solid and multiple at 14 is reasonable. If priced right, the ipo should work short and mid-term. Generally not a fan of this sector, looks though that EPAM coming public quite reasonable. Not one to pay up for, but in range looks solid.

February 2, 2012, 10:22 am

GWAY - Greenway Medical Technologies

2012-01-28
GWAY - Greenway Medical Technologies

GWAY - Greenway Medical Technologies plans on offering 7.7 million shares at a range of $11-$13. Insiders will be selling 1.3 million shares in the deal. JP Morgan, Morgan Stanley, and Blair are leading the deal, Piper Jaffray and Raymond James are co-managing. Post-ipo GWAY will have 28.54 million shares outstanding for a market cap of $342 million on a pricing of $12. 1/3 of ipo proceeds will go to preferred shareholders, the remainder to build new facilities and general corporate purposes.

Investor AB will own 25% of GWAY post-ipo.
From the prospectus:
'We are a leading provider of integrated information technology solutions and managed business services to ambulatory healthcare providers throughout the United States.'
Electronic healthcare records(EHR) company. Cloud based and/or location based. Core end markets include independent physician practices, multi-specialty group practices, hospital-affiliated and hospital-owned clinics and practices, retail clinics, employer clinics, university and academic health centers, federally-qualified health centers and community health centers.
GWAY's product(PrimeSUITE) integrates clinical, financial and administrative data in a single database to enable comprehensive views of the patient record. All solutions are based on a single integrated database that contains clinical, financial and administrative data and supports exceptional interoperability, data analytics and reporting.
In addition to EHR product, GWAY also offers managed services including including clinically-driven revenue cycle management ("RCM";) and EHR-enabled research services. 33,000 providers utilize GWAY's services. Providers include physicians, nurses, nurse poractitioners, physician assistants and other clinical staff.
***Very strong 95% customer retention rate.
Health sector has been a bit slow in converting systems to integrated electronic records. Reasons include providers’ resistance to making the required investment and concerns that creating and managing electronic records may disrupt clinical and administrative workflows. Government initiatives have recently provided financial incentive to converting from paper to all integrated electronic records. Recent legislation provides more than $19 billion of provider incentives through Medicare and Medicaid programs to encourage the adoption of certified EHR solutions. An eligible professional that qualifies for incentives can receive up to an aggregate of $44,000 from Medicare or $63,750 from Medicaid.
End market - GWAY believes total end market to be approximately $35 million with a potential customer base of 638,000 physicians at over 230,000 practices. GWAY's core market potential is $10 billion.
Recently finalized a software licensing agreement with Walgreens to utilize GWAY's EHR technology in all of their stores. Pretty significant deal and not yet reflected in revenues. Competition includes Allscripts(MDRX), AthenaHealth(ATHN), Cerner(CERN), eClinicalWorks, GE, Epic, and Vitera.
  Financials
$1.50 per share cash post-ipo, no debt.
Fiscal year ends 6/30 annually. FY '12 will end 6/30/12.
Seasonality - the 4th quarter of the fiscal year(6/30) is by far the strongest. This is due to timing of 6/30 fiscal year for Medicare/Medicaid and most medical operations.
Note that support and consulting services outpace actual systems sales annually. Not ideal here as the margins are much lower on support and consulting services than they are on the automated systems revenues. Gross margins here are much smaller than one would expect from an electronic records business plan. Gross margins in FY '11 were 55%, definitely not software or cloud type gross margins.
FY '11(ended 6/30/11) - $89.8 million in revenues, solid increase of 39% from FY '10. 55% gross margins, would like to see those higher. Operating expense ratio high at 51%. GWAY spent heavily on sales and marketing to grow the business. Operating expense ratio was 52% in FY '10 so only minimal improvement there. If GWAY plans on being a longer term successful public company that is the ratio that needs improvement. 4% operating margins 3% net margins. EPS of $0.09.
FY '12 - ****While GWAY did not see much margin improvement in FY '11, they did enjoy two very strong quarters pre-ipo. The 4th quarter of FY '11 say year over year revenues grow 45% while he 9/30/11 quarter grew 55% year over year. Those two back to back quarters pre-ipo are enough to give this one at least a 'speculative recommend' in range. We always like to see growth accelerating and we've that here in back to back quarters heading into ipo.
GWAY attributes this recent revenue surge to 'increased market share in a growing market'. If one simply owned ipos that were displaying this, one would do very well over the long run.
FY '12 revenue should grow 40%-45% based on the past two quarters. $130 million in revenues.
Margins are still the issue here. Nice growth, but still slim operating margins in FY '12, albeit with a bit more improvement over FY '11 Gross margins should remain around 55%. Operating expense ratio looks to decline to 47%(from 51% in FY '11) for 8% operating margins. Net margins of 5 1/4%. EPS of $0.24. On a pricing of $12, GWAY would trade 50 X's FY '12 eps.
Direct competitor ATHN has been one of the more successful overall ipos of the past decade. Ipo'ing at $18 in 9/07 right near the market top, ATHN has never been below ipo price. Recent close was $58.52.
ATHN. Note that heading into ipo, ATHN was showing very similar revenue acceleration, customer retention and gross & operating margins as GWAY. Almost a carbon copy actually. Currently ATHN has a $2.07 billion market cap trades 59 X's 2012 estimates with a 31% 2011/2012 combined revenue growth rate.
Conclusion - Margins have yet to catch up to recent revenue surge, so we can't get too excited here. However back to back 45% and 55% year over year quarterly revenue growth make this a 'recommend' in range. Market cap here is reasonable given the recent revenue surge. To be a successful public company, GWAY will have to keep revenue surging while also improving margins and the bottom line. Good niche and strong recent growth here, could be a nice sleeper ipo.

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