LifeLock Unlocks Equity

By Gerelyn Terzo - September 11, 2012 | Tickers: CHKP, EFX | 0 Comments

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Proactive identity theft blocker LifeLock filed an S-1 with the SEC last month. We've all seen the commercials - CEO Todd Davis plasters his very own social security number across the side of an advertising truck and then proceeds to identify his association with the number to passers-by while distributing pamphlets with the same information.

Clearly, he's trying to make a point about how vulnerable individuals without LifeLock really are. To do this, he trumpets promises surrounding identity protection to potential LifeLock 'members,' as they're called. LifeLock not only detects fraud but also maintains records of each instance a member's personal data is accessed for services ranging from wireless to personal finance.

Now, Davis is once again putting his money where his mouth is as he and LifeLock prepare to issue some $175 million - the proposed maximum offering price used to calculate SEC filing fees - worth of shares in an IPO.

Theft is as old as time and Lifelock is among those that have learned a way to capitalize on that. With a straight forward business model, the identity theft preventer boasts in its prospectus of a "predictable subscription revenue model, a strong customer retention rate, and a scalable infrastructure to support our growth."

It's financial statement appears something like a race:  2011 revenues of $193.9 million, which the company appears on pace to exceed. In the first half of 2012 alone, revenues are $125.5 million. For a full year period, the company is still not profitable, though, and had a net loss of $4.3 million last year. In the first two quarters of 2012, LifeLock achieved net income of $11.6 million including a hefty tax benefit from its merger with ID Analytics.  Last year's cash flow from operations was $24.3 million and almost the same in the first half of 2012.

With some 2.3 million paying members as of the end of the 2Q 2012, 250 of which have attained enterprise status thanks to a recent acquisition of ID Analytics, Lifelock may be onto something.  Its annual member retention rate appears to be rising and stands at about 85%. The company also identifies a cumulative ending member base that grew some 21% in that period (calls to the company to shed more light on a cumulative ending member base went unanswered as I got tossed around some internal phone system.)

Included amongst LifeLock members are 'enterprise' customers, including half a dozen of the "top ten U.S. financial institutions," in addition to credit card providers and wireless companies, Lifelock's prospectus reads.

And the market for theft protection is huge. Identity theft cost individuals and enterprises some $18 billion in the US alone last year, according to research firm Javelin Strategy & Research cited in LifeLock's prospectus. Indeed, identity theft victimized nearly 5% of the US adult population in 2011.

From a marketing standpoint, LifeLock is doing things right. It plans to list shares on the big board under the convenient symbol 'LOCK'. It has lassoed top lead underwriters including Goldman Sachs, Bank of America Merrill Lynch and Deutsche Bank.

Competitive Landscape

So who are Lifelock's chief competitors? Interestingly, it names the likes of Equifax (NYSE:EFX) and Intersections (Nasdaq:INTX) as rivals. Credit bureaus, however, are there for third parties to access personal information on potential customers. Lifelock, on the other hand, seems built to protect any third parties from accessing data. So for me, there is a bit of a disconnect in the competitive landscape that Lifelock outlines, but nothing that couldn't be further explained. I would instinctively put them up against someone like a FreeCreditReport.com.

If LifeLock's stock follows in the path of competitors like Equifax, it may have a promising future. Equifax is included in the likes of one of John Hancock's top performing funds - the Disciplined Value Mid Cap Portfolio. That fund, which is managed by Steven Pollack, has outperformed midcap benchmark funds over the past five-and-ten year periods and exceeded performance in nearly all of the similar funds in this category, according to Morningstar cited in Barron's.

For its part, Equifax is trading pretty close to its 52 week high of $49.49. It's a dividend-paying stock with history of making consistent distributions over nearly a century.

Intersections (Nasdaq:INTX), another dividend stock, is similarly listed among LifeLock's competitors. The stock has pulled back about 38% from its 52-week high. Intersections is facing some headwinds in the intensifying regulatory environment for financial institutions. In its most recent quarter, the company attributed lower 2Q sales and fewer new subscriptions to those financial institutions adjusting to new regulation. Interestingly, LifeLock targets a similar demographic in its enterprise member base.

LifeLock has never made dividend distributions and doesn't appear ready to begin anytime soon. The company does, however, leave that decision to its board. Currently, an existing senior credit facility blocks the company from paying dividends.

Geographical Reach

At this point, Tempe, Arizona-based LifeLock's geographical push appears to be limited to the U.S. as the prospectus doesn't make much of a mention of other regions. Incidentally, exposure to Europe has hurt some other security providers, including Check Point Software Technologies (Nasdaq:CHKP), which shed 18% from its 52-week high. The company generates close to half of its revenues across the pond but anticipated economic recovery in that region should help that stock.

IPO Temperature

LifeLock joins an IPO pipeline that is filling, albeit slowly given persistent market uncertainty and a new wave of confidential filings, according to Ernst & Young.  Nonetheless, LifeLock has more than a couple of things working in its favor, not the least of which include a growing need to combat increasingly sophisticated and costly thievery in addition to what appears to be LifeLock's limited regional exposure and a seemingly sound member retention rate. I might recommend the stock once more details surface, however I would never recommend LifeLock CEO Davis' tactics to make a point.

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