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One Medicals IPO will test the value of tech-enabled startups

Hello and welcome back to our regular moning look at private companies, public markets and the gray space in between.
Today were digging into the One Medial S-1 IPO filing. The company, popular in Silicon Valley and known for an investment from Alphabet, intends to debut this year on the Nasdaq under the ticker symbol ONEM. The companys filing notes a $100 million IPO raise, a placeholder figure designed to indicate to investors the rough scale of its impending offering.
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.
Well start by exploring the trusses and underpinnings of its business before turning to the question of how to value yet another tech-enabled business with lower gross margins than what tech companies tend to sport. One Medicals valuation picture is also complicated by slow, if accelerating growth, rising unprofitability on a GAAP and adjusted basis and rising operating cash burn.

Facts and figures


Before digging into the numerical stuff were going to pause and quote the companys introductory information. Normally we skip the stuff, but here are the two key sentences from the document (emphasis mine):



Our mission is to transform health care for all through our human-centered, technology-powered model.




We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live and click.



Translating a bit, those statements read like One Medical saying that its a technology company with recurring, subscription-style revenues. Every company wants to be a SaaS business the industry enjoys sky-high revenue multiples making the phrasing from One Medical unsurprising.
One Medical charges a yearly membership revenue fee to customers, providing it with eight-figure subscription revenues; the companys membership revenue has convinced some in conversation that its SaaS-ish elements will be richly valued. While I doubt that anyone views One Medical as a SaaS business, the question remains how similar to one if might appear once we dig into its financial results. (The closer to SaaS it can appear, the more One Medical may be worth.)
To spoil whats to come, it looks very little like a subscription-first business.

Its not a SaaS business


One Medicals membership business is sizable, but doesnt appear to generate the majority of the companys revenues (just $38.0 million in membership revenue out of $198.9 million in total top line during the first three quarters of 2019). And, One Medicals gross margins are far below what we tend to see with software-subscription companies.
What is One Medical, then? The company is a healthcare provider with a technology and subscription twist, it appears.
The firm does have some attractive elements, however, including:



Accelerating revenue growth: Revenue grew from $154.6 million in the first nine months of 2018 to $198.9 million in the first nine months of 2019, representing growth of 28.6%. Thats faster than its 2018 full-year growth result of 20.3%.




Improving gross margins: The companys gross margins (not including depreciation and amortization costs) rose from 35% in the first three quarters of 2018 to 40% in the first three quarters of 2019. Inclusive of excluded costs, the figures were 30% and 35%, respectively.



While those are bright spots for One Medical, each represents improvement from a lackluster base. The companys revenue growth rate is improving, but the company still theoretically hitting its growth curve. (The company doubled its sales and marketing spend in 2019 to juice growth, mind.)
And, the firms margins are improving, but are not where wed expect for a company with its implied revenue multiple.
Turning to One Medicals issues:



Rising operating and net losses:The companys operating loss grew from $25.1 million in the first nine months of 2018 to $35.2 million in the first nine months of 2019. Its net loss similarly rose from $26.9 million to $34.2 million.




Rising adjusted losses: One Medicals adjusted losses (adjusted EBITDA) rose from $7.1 million in the first three quarters of 2018 to $15.6 million over the same period of 2019. Thats more than double.




Rising CAC: Using a crude bit of math, One Medical spent about $565 in sales and marketing costs per new member (net) in the first three quarters of 2019. That figure was about $348 in calendar 2018.




Low gross margins: Reporting 40% gross margins while stripping out some costs (following how the S-1 is worded) is pretty good for most industries. For venture-backed companies that raised hundreds of millions, its a slightly stunted figure.




Rising operating cash burn: One Medicals operations consumed $11.4 million in cash during the first three quarters of 2018. That rose to $24.1 million over the same period of 2019.



How do we value the company? Thats hard. But we can use some old marks to get some numbers.


Whats it worth?
See also:
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