justworks IPO: Targeting Multibillion-Dollar Valuation

Justworks IPO Filing: A Valuation Deep Dive

Justworks has recently published an amended IPO filing, revealing updated financial data and offering insights into the company’s potential valuation upon its public debut.

A preliminary valuation estimate, based on current share projections, suggests Justworks could exceed a $2 billion market capitalization at the higher end of its anticipated price range.

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Valuation Analysis

However, a single figure doesn't provide a complete picture. Therefore, today’s analysis will detail the company’s simple and fully diluted valuation metrics.

We will also apply relevant multiples based on its latest quarterly performance and benchmark these figures against the company’s most recent private valuation.

Originally, a 2022 IPO overview, including discussions of the Reddit and Via IPOs, was planned. However, the details within the Justworks S-1/A filing necessitate immediate attention.

Focus on SMB HR Software

This analysis centers on the realm of HR software specifically designed for small and medium-sized businesses (SMBs).

The filing provides a comprehensive look at Justworks’ financial health and market positioning within this competitive landscape.

Understanding these details is crucial for assessing the company’s potential as a publicly traded entity.

Justworks’ Recent Financial Performance

For those unfamiliar with Justworks, a brief overview is in order. The company operates with a dual-pronged business model, centered around two primary revenue streams.

The first is a subscription service, providing customers access to a suite of tools and expertise. This includes HR guidance, compliance with employment and benefits legislation, and a range of other human resources-related services, as detailed in their filings.

The second, and currently larger, revenue component is derived from “benefits and insurance-related revenue.” While the subscription model boasts higher profit margins, the latter is comparatively less profitable.

Below is a summary of the company’s performance during the quarter ending November 30, 2021:

As illustrated, Justworks demonstrated substantial year-over-year growth, with even more significant improvements in gross profit. The relatively modest gross profit figure, when compared to overall revenues, is attributable to the inclusion of lower-margin “benefits and insurance-related revenue.”

Essentially, the company functions within the small and medium-sized business (SMB) HR sector. Consequently, its software facilitates customer activity that doesn’t yield the typical high margins associated with pure Software-as-a-Service (SaaS) models.

Despite this, the company’s overall results showcase growth alongside limited financial losses. It’s important to acknowledge that Justworks’ revenue structure differs from that of many software companies, without making negative assessments.

The following growth percentages were calculated by the company for its latest quarter:

• Revenue experienced a growth rate of 42.4%.
• Cost of revenue increased by 39.9%.
• Gross profit saw a growth rate of 65.6%.

These figures are interconnected. Because the company’s revenue growth outpaced the growth of its cost of revenue, a significant positive impact on gross profit was anticipated. This is reflected in the highest growth rate among the three metrics.

The company’s overall gross margin is projected to fall between 11.3% and 11.4% on a blended basis, representing a close alignment between the two estimates.

Justworks achieved a higher rate of revenue growth in the November quarter compared to the August quarter. Coupled with the substantial improvement in gross profit, this positions the company to minimize losses as it continues to expand. The most recent quarter can be characterized as particularly successful.

Evaluating Justworks’ IPO Valuation

Now that Justworks has announced its initial public offering (IPO) price range, a clearer picture of the company’s worth is emerging.

Justworks is projecting a share price between $29 and $32 during its IPO. Upon completion of the offering, the total number of shares outstanding is expected to be 62,427,380. This suggests a company valuation ranging from $1.81 billion to $2.00 billion, based on the proposed share count.

Including the 1,050,000 shares allocated to underwriters, the potential valuation increases to between $1.84 billion and $2.03 billion.

This IPO will establish Justworks as a double unicorn – a privately held company valued at over $2 billion. Furthermore, the valuation expands when considering unexercised shares, such as vested options and warrants.

Renaissance Capital estimates the company’s fully diluted valuation, calculated at the midpoint of the proposed price range, to be $2.2 billion. At the higher end of the range, $32 per share, this figure climbs to approximately $2.3 billion.

Are these valuations favorable? Indeed, they are. This is largely due to the significant increase from Justworks’ previous private valuation.

Data from PitchBook indicates Justworks’ last private valuation in January 2020 was $590 million (post-money). Therefore, the IPO represents a roughly 4x increase over its final private valuation. Such substantial gains over a relatively short timeframe are highly attractive to investors.

It is crucial that the company’s investment bankers accurately price the shares in this upcoming transaction. A potential undervaluation, similar to what appears to have occurred during the 2020 Series E funding round, should be avoided.

Key Takeaways

• IPO Price Range: $29 - $32 per share
• Shares Outstanding: 62,427,380
• Estimated Valuation: $1.81 billion - $2.03 billion
• Fully Diluted Valuation (Midpoint): $2.2 billion
• Previous Private Valuation (Jan 2020): $590 million

The anticipated growth from the last private valuation to the IPO valuation is a strong indicator of investor confidence in Justworks.

Evaluating Justworks' Financial Metrics

Initially, the figures may seem questionable. Justworks reported a maximum revenue of $321 million for the latest quarter. This results in a revenue multiple of approximately 1.9x when annualized.

However, is this assessment accurate? Possibly not. A deeper understanding of Justworks’ dual business structure is crucial. Without recognizing the presence of both a substantial, low-margin operation and a smaller, high-margin segment, the IPO valuation could be misinterpreted.

Considering the composition of the company’s revenue streams, the numbers become more logical.

Understanding the Two-Part Model

Justworks operates with a blended revenue model. A significant portion of its income is generated from a high-volume, lower-margin service.

Conversely, a smaller segment focuses on delivering services with increased profitability, contributing to a higher margin.

This combination impacts the overall revenue multiple and requires careful analysis.

IPO Valuation and Future Prospects

Further insights into the Justworks IPO range will emerge if the company decides to increase it. The final pricing will also provide additional clarity.

Ongoing performance after the public offering will continue to shape perceptions of the company’s value. Currently, Justworks appears poised for a successful debut, with the potential to increase its valuation.

This positive outlook is a favorable indicator for investors.

• Revenue Multiple: Currently around 1.9x.
• Business Structure: Composed of high-volume, low-margin and smaller, high-margin segments.
• Future Outlook: Positive, with potential for valuation growth.

Ultimately, a comprehensive understanding of Justworks’ business model is essential for accurately interpreting its financial performance and assessing its long-term potential.