IPO Update: Duck Creek Technologies Proposes IPO Terms (Pending:DCT)


Quick Take

Duck Creek Technologies (DCT) has filed to raise $300 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company provides property & casualty insurance companies with improved policy, billing and claims software workflows.

DCT is producing accelerating growth, positive operational cash flow, has strong interest from investors and a reasonable IPO price, so the IPO is worth a close look.

Company & Technology

Boston, Massachusetts-based Duck Creek was founded to develop an online platform that provides P&C insurance carriers with software to improve their operational efficiencies for policy administration, claims management and billing functions.

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

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

Source: Duck Creek Technologies

Duck Creek’s major customers include:

The company says it has more than 150 insurance companies worldwide as customers, ‘including the top five North American carriers.’

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.

Customer Acquisition

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 system.

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 revenue have been fluctuating as revenues have increased, as the figures below indicate:

Sales and Marketing

Expenses vs. Revenue

Period

Percentage

Nine Mos. Ended May 31, 2020

21.9%

FYE Ended Aug 31, 2019

23.5%

FYE Ended Aug 31, 2018

21.4%

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, rose to 0.9x in the most recent reporting period, as shown in the table below:

Sales and Marketing

Efficiency Rate

Period

Multiple

Nine Mos. Ended May 31, 2020

0.9

FYE Ended Aug 31, 2019

0.3

Source: Company registration statement

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory. DCT’s most recent calculation was 20% as of the nine months ended May 31, 2020, so the firm 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% is considered positive as it indicates the firm is generating more revenue from the same cohort of customers, i.e, negative net churn.

Market & Competition

According to a 2019 market research report by Mordor Intelligence, the global market for Insurtech software and services is expected to grow from $5.5 billion in 2019 to $10.14 billion in 2025.

This represents a forecast CAGR of 10.8% from 2019 to 2025.

The main drivers for this expected growth are the need to increase efficiencies through automation along with improved technological offerings.

Also, the sector has seen an almost continuous increase in investment since 2014, as the chart shows below:

Major competitive or other industry participants include:

  • Lemonade (LMND)

  • Zhong An

  • Guidewire (GWRE)

  • Insurity

  • Majesco

  • Sapiens

Financial Performance

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

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Nine Mos. Ended May 31, 2020

$ 153,350,000

24.3%

FYE Ended Aug 31, 2019

$ 171,273,000

7.3%

FYE Ended Aug 31, 2018

$ 159,669,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Nine Mos. Ended May 31, 2020

$ 85,818,000

20.2%

FYE Ended Aug 31, 2019

$ 99,095,000

3.9%

FYE Ended Aug 31, 2018

$ 95,337,000

Gross Margin

Period

Gross Margin

Nine Mos. Ended May 31, 2020

55.96%

FYE Ended Aug 31, 2019

57.86%

FYE Ended Aug 31, 2018

59.71%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Nine Mos. Ended May 31, 2020

$ (7,082,000)

-4.6%

FYE Ended Aug 31, 2019

$ (14,151,000)

-8.3%

FYE Ended Aug 31, 2018

$ (6,348,000)

-4.0%

Net Income (Loss)

Period

Net Income (Loss)

Nine Mos. Ended May 31, 2020

$ (8,453,000)

FYE Ended Aug 31, 2019

$ (16,896,000)

FYE Ended Aug 31, 2018

$ (7,802,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Nine Mos. Ended May 31, 2020

$ 8,247,000

FYE Ended Aug 31, 2019

$ 14,833,000

FYE Ended Aug 31, 2018

$ 11,833,000

(Glossary Of Terms)

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 during the twelve months ended May 31, 2020, was $18.7 million.

IPO Details

DCT intends to sell 15 million shares of common stock at a midpoint price of $20.00 per share for gross proceeds of approximately $300 million, not including the sale of customary underwriter options.

Certain entities have indicated an interest to purchase shares of up to a total of $100 million at the IPO price. This is an unusually strong investor interest in the IPO and is a positive signal to potential IPO investors.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $2.5 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 11.68%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We intend to use [i] $30.2 million of the net proceeds that we receive from this offering to redeem all of the outstanding LP Units of the Operating Partnership retained by certain of the Existing Holders, after giving effect to the contributions that are part of the Reorganization Transactions, which includes $30.2 million paid to Accenture, as described under “Organizational Structure,” at a redemption price per LP Unit equal to the initial public offering price of this offering after deducting underwriting discounts and commissions payable by us, [ii] $45.4 million of the net proceeds that we receive from this offering to repurchase from Apax a portion of the shares of common stock received by Apax as merger consideration in the Reorg Merger at a repurchase price per share equal to the initial public offering price of this offering after deducting underwriting discounts and commissions payable by us and [iii] $4.7 million of net proceeds that we receive from this offering to cash settle outstanding equity awards of certain international employees.

Management’s presentation of the company roadshow isn’t available.

Listed underwriters of the IPO are 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.

Commentary

Duck Creek is seeking to go public to pay off certain obligations and provide most of the proceeds for future expansion plans.

The firm’s financials indicate accelerating revenue growth, uneven operating losses but increasing cash flow from operations. DCT is comfortably free cash flow positive.

Sales and marketing expenses as a percentage of total revenue have fluctuated but its efficiency has improved markedly in the most recent reporting period.

The market opportunity for providing improved software functionalities to P&C insurers is substantial as the insurtech software & services market is expected to grow markedly in the years through 2025.

As a comparable-based valuation to direct competitor Guidewire, the IPO appears similarly valued in terms of Price/Sales and EV/revenue multiples.

DCT appears to be well positioned to take advantage of the strong industry growth prospects in its favor.

The firm’s accelerating growth, positive operational cash flow, strong interest from investors and reasonable IPO price mean the IPO is worth considering.

Expected IPO Pricing Date: August 13, 2020.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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