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Financial Engines (FNGN) priced at $12, trades Tuesday, March 16, 2010
IPOreport adjusted for IPO price,
Compare FNGN to Morningstar (MORN) notice that
. FNGN's quarterly top line revenue growth rate for the last five quarters is higher than MORN's and
. Their price to sales ratio are the same, 4.9 when the last two quarter’s are annualized. |
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OVERVIEW |
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Showing very good momentum over the past four quarters, especially the last two |
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Focused on an underserved financial advisory niche |
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Gross margins comparable to Morningstar (MORN), a direct competitor and Factset Research (FDS), which provides analytics to financials professionals and is in same sector broadly defined. Recent revenue and profit growth for FNGN are higher than for MORN and FDS. |
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Relatively high P/E multiple based on profitable, recurring subscription revenue |
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FNGN could be a good way for investors to participate in the expected (hoped for) economic growth cycle |
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BUSINESS |
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Independent investment advice |
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Believes its advice technology platform allows them to cost-effectively service the needs of individual investors with low asset balances, many of whom are underserved by the financial services industry |
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Also believes shifting retirement industry trends present them with an opportunity to provide independent portfolio management services, investment advice and retirement help to retirement plan participants who previously did not have access to these services. |
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RECURRING REVENUE |
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Revenue from subscription contracts in place as of December 31, 2008 accounted for 99% of total revenue for the year ended December 31, 2009. |
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TARGET MARKETS |
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Targets three key constituencies in the retirement plan market: plan participants, plan sponsors and plan providers. |
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PROVIDES |
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Independent, technology-enabled portfolio management, investment advice and retirement help to participants in employer-sponsored defined contribution retirement plans, such as 401(k) plans. |
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Uses its proprietary advice technology platform to provide services to millions of retirement plan participants on a cost-efficient basis. |
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Business model is based on workplace delivery of services. |
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REACH |
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as of December 31, 2009 |
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Had signed contracts to make services available through 116 Fortune 500 companies and eight Fortune 20 companies. |
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Under contract to provide either the full suite of services, including Professional Management, Online Advice and Retirement Evaluation, or Online Advice service only, through more than 760 plan sponsors with approximately 7.4 million plan participants whose retirement savings represented more than $500 billion in assets. Within this group, FNGN provides a full suite of services to 354 plan sponsors representing approximately 3.9 million participants and approximately $269 billion in Assets Under Contract, or AUC. |
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Had $25.7 billion in Assets Under Management, or AUM, and managed the accounts of 391,000 members who have delegated investment decision-making authority to FNGN |
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HISTORY |
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Co-founded in 1996 by Professor William F. Sharpe, a recipient of the 1990 Nobel Prize in Economic Sciences for his pioneering work on the theory of financial economics, including how prices of financial assets are determined and the link between risk and return, Professor Joseph A. Grundfest, a former SEC commissioner and a professor of law at Stanford Law School, and the late Craig Johnson, then Chairman of the Venture Law Group. |
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COMPETITION |
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Direct competitors that offer independent portfolio management and investment advisory services to plan participants in the workplace include Morningstar (MORN), GuidedChoice and ProManage LLC. |
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Direct competitors who offer independent portfolio management and investment advisory services to plan participants in the workplace include Morningstar, GuidedChoice and ProManage. Plan providers that offer directly competing portfolio management and investment advisory services to investors in the workplace include Fidelity and Merrill Lynch. |
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FNGN currently has a relationship with Fidelity that allows FNGN to provide services to plan sponsors, for whom Fidelity is the plan provider, who elect to hire FNGN. |
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Also faces indirect competition from products that could potentially be substitutes for FNGN’s portfolio management services, investment advice and retirement help, most notably target-date retirement funds. Target-date funds are offered by multiple financial institutions, such as BlackRock (formerly Barclays Global Investors), Fidelity and Vanguard. These funds provide generic asset allocation based solely on the investment horizon of the investor. Among the plan sponsors to which FNGN offers its Professional Management service and that offer lifecycle funds, approximately 80% offer retail-priced target-date retirement funds. Target-date funds, managed account and balance funds have been granted QDIA status by the Department of Labor. |
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USE OF IPO PROCEEDS |
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$52mm from sale of 5.9mm shares
shareholders intend to sell 4.7mm shares |
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General corporate purposes, including working capital and capital expenditures. |
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Financial Engines |
FNGN, C+, 7 |
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Post-IPO shares: 39.5mm |
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Investment Advice |
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Palo Alto, CA |
2006 |
2007 |
2008 |
2009 |
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IPO Mkt |
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Revenue ($mm) |
$48 |
$63 |
$71 |
$85 |
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Cap (mm) |
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Gross profit % |
68% |
68% |
61% |
65% |
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$474 |
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Profit (loss) |
-$8 |
-$2 |
-$4 |
$6 |
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@$12 |
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Profit (loss) % of revenue |
-17% |
-3% |
-5% |
7% |
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VALUATION RATIOS |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
% offered |
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annualizing recent 6 mos |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
in IPO |
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Financial Eng (FNGN) |
$395 |
4.1 |
33 |
5.2 |
6.2 |
27% |
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SCORECARD |
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Mgt |
Market |
Market Do- |
Proprie- |
Total |
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1-5, 5 is high |
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Growth |
mination |
tary |
rating |
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20 is perfect |
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2 |
2 |
2 |
1 |
7 |
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Compare & Contrast |
Mrkt |
Price / |
Price / |
Price / |
Price / |
Price |
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annualizing recent 6 mos |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
March 11 |
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Financial Eng (FNGN) |
$474 |
4.9 |
40 |
6.2 |
6.2 |
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Morningstar (MORN) |
$2,390 |
4.9 |
32 |
3.5 |
8.2 |
$49.11 |
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FactSet Research (FDS) |
$3,410 |
5.5 |
24 |
6.5 |
11.4 |
$71.41 |
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COMPARE quaterly growth rates to MORN |
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Notice that FNGN's quarterly top line revenue growth rate for the last five quarter's is higher than MORN's |
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Quarterly progression |
Sept '08 |
Dec '08 |
March '09 |
June '09 |
Sept '09 |
Dec '09 |
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Revenue |
$18 |
$19 |
$17 |
$19 |
$22 |
$26 |
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Gross profit % |
59% |
63% |
62% |
64% |
66% |
67% |
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Profit (loss) |
$0 |
-$2 |
$1 |
$0 |
$2 |
$4 |
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Profit (loss) % of revenue |
-1% |
-11% |
4% |
2% |
9% |
15% |
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Compare to Morningstar |
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Morn qtrly progession |
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Dec '08 |
March '09 |
June '09 |
Sept '09 |
Dec '09 |
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Revenue |
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$119 |
$117 |
$120 |
$120 |
$123 |
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Gross profit % |
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74% |
74% |
74% |
73% |
71% |
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Profit (loss) |
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$19 |
$25 |
$21 |
$23 |
$14 |
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Profit (loss) % of revenue |
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16% |
21% |
17% |
19% |
12% |
