The IPO market is set to significantly pick up the pace this week with as many as eleven IPOs potentially pricing. That would make it the busiest week for the IPO market this year. Considering how many IPOs have been pricing above expectations lately, it comes as no surprise that more companies are lining up to launch deals. Additionally, this period between now and the holiday season is traditionally the busiest time of the year for IPOs as companies and investment banks look to get deals out the door before year end.

Looking at this week's list of deals, there is a wide variety of companies going public. While none of them are blockbusters, per se, there are a number of interesting ones. A couple that standout to us are a leading game and toy maker, and, Argentina's largest cement producer.

Co-Managers: Piper Jaffray, Jefferies, Stifel, BMO Capital, SunTrust Robinson Humphrey 

• FNKO describes itself as a leading pop culture consumer products company. Its business is built on the principle that almost everyone is a fan of something and the evolution of pop culture is leading to increasing opportunities for fan loyalty. It infuses distinct designs and aesthetic sensibility into one of the industry’s largest portfolios of licensed content over a wide variety of product categories, including figures, plush, accessories, apparel and homewares.

• The company has licensing relationships with many established content providers, such as Disney, HBO, LucasFilm, Marvel, the National Football League and Warner Brothers. FNKO strives to license every pop culture property that it believes is relevant to consumers. FNKO currently has licensed over 1,000 properties, which it believes represents one of the largest portfolios in the industry, and from which it can create multiple products based on each character within those properties.

• FNKO sells its products through a diverse network of retail customers across multiple retail channels, including specialty retailers, mass-market retailers and e-commerce sites. It can provide its retail customers a customized product mix designed to appeal to their particular customer bases. Its current retail customers include Amazon, Barnes & Noble, Entertainment Earth, GameStop, Hot Topic, Target and Walmart in the United States, and Smyths Toys and Tesco internationally.

• The company uses a nimble and low-fixed cost production model. The strength of its in-house creative team and relationships with content providers, retailers and third-party manufacturers allows it to move from product concept to pre-selling a new product in as few as 24 hours. Also, it typically has a new figure on the store shelf between 110 and 200 days and can have it on the shelf in as few as 70 days. As a result, FNKO can dynamically manage its business to balance current content releases and pop culture trends with content based on classic evergreen properties, such as Mickey Mouse or classic Batman

• FNKO intends to continue to increase sales by expanding shelf space and deepening relationships with retail customers. Its products have driven traffic to its retail customers’ previously less productive square footage, which has resulted in increased shelf space for its products.

• Also, regularly evaluates and adds new retail customers as it believes consumers demand Funko products regardless of the retail channel through which they purchase them. While the company believes it has opportunities to add new specialty and mass-market retailers, it also plans to selectively target new or underdeveloped sales channels, such as dollar, drug, grocery and convenience stores.
  
  

Financials

Taking a look at the financials, revenue was up 16% to $203.8 million for the six months ended June 30, 2017. Sales increased mainly as a result of the continued expansion of products and properties in its portfolio. FNKO had an average of $0.6 million net sales per active property. This was a 19% decrease compared to its average net sales per active property for the year ago period. This decline in average net sales per active property was more than offset by an increase in total active properties.

Gross margin was 36.2% for the six months ended June 30, 2017, an increase of 7.6 percentage points, compared to 28.6% for the year ago period. Gross margin was positively impacted primarily by the absence of recording of inventory at estimated fair value in connection with the ACON Acquisition and, to a lesser extent, a decrease in the weighted average royalty rate due to property mix.

Selling, General & Administrative costs climbed by 37% year/year to $50.9 million. However, due to the revenue growth and sharp increase in gross margin, operating income spiked by 193% year/year to $5.4 million. 

FNKO generated a solid $15.8 million in cash flow for the period. However, the company does have a substantial amount of debt on the books due to it be purchased in a LBO by private equity firm ACON Investments in 2015.

Finally, looking at valuation, FKNO's P/S would be about 0.9x annualized FY17 sales.

Briefing.com Grade: B

*Six months ended June 30, 2017

Altair Engineering (ALTR), a provider of enterprise-class engineering software, is set to price its 12 mln share IPO next week in the $11-13 range. Of the 12 mln shares, approximately 8.07 mln are being sold by Altair while the remaining 3.93 mln shares are being offered by selling stockholders.

At the mid-point of the expected pricing, that computes to a market cap of approximately $725 mln, so this is a fairly small offering. Altair has no plans to pay a dividend for the foreseeable future. Lead underwriters for this IPO are JP Morgan, RBC, and Deutsche Bank. Wm Blair and Canaccord Genuity are also involved.

Altair has two classes of common stock, Class A and Class B. The rights of the holders of Class A stock and Class B stock are identical, except with respect to voting and conversion rights. Each share of Class A is entitled to one vote per share. Each share of Class B stock is entitled to ten votes per share and is convertible into one share of Class A stock. The holders of Class B stock will hold approximately 94% of the voting power. This IPO is for the Class A shares.

Understanding Altair Engineering:

Altair Engineering is a provider of a suite of engineering software which uses a simulation-driven approach powered by its broad portfolio of physics solvers. Its software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal management, electromagnetics, system modeling, and embedded systems, while also providing data analytics and true-to-life visualization and rendering.

The engineering software industry is challenged by increasingly sophisticated design requirements. New manufacturing methods such as 3D printing and new materials such as composites are expanding the application of simulation across many industry verticals. The Internet of Things (IoT) is also changing engineering by broadening the scope of Product Lifecycle Management, or PLM. The computer-aided engineering (CAE) market is expected to be one of the more rapidly growing segments within the tools sector of PLM over the next five years.

Altair's engineering and design platform offers a wide range of multi-disciplinary CAE applications. In fact, the company thinks it's one of the most innovative and comprehensive offerings available in the market. Altair participates in five software categories related to CAE and high performance computing, or HPC:

• Solvers & Optimization: Solvers are mathematical software "engines" that use advanced computational algorithms to predict physical performance. Optimization leverages solvers to derive the most efficient solutions to meet desired complex multi-objective requirements.
• Modeling & Visualization: Tools that allow advanced physics attributes to be modeled and rendered on top of object geometry in high fidelity. These tools are becoming more design-centric and relevant earlier in the development process.
• Industrial & Concept Design: Tools that generate early concepts to address requirements for ergonomics, aesthetics, performance, and manufacturing feasibility. These tools are simulation-driven and they are emerging as a market force eclipsing traditional computer-aided design, or CAD.
• IoT: Tools to develop new IoT enabled products, including device and data management, system level and full 3D digital twin simulation, and exploration, predictive analysis, optimization, and visualization of in-service performance.
• HPC: Software applications that streamline the workflow management of compute-intensive tasks including solvers, optimization, modeling, visualization, and analytics in fields such as PLM, weather modeling, bio-informatics and electronic design analysis.

In simple terms, Altair says its software enables customers to enhance product performance, compress development time, and reduce costs. Its goal is to solve some of the most challenging design problems faced by engineers and scientists. Altair believes it's unique in the industry for the depth and breadth of its engineering application software offerings.

Customers: Its primary users are highly educated and technical engineers, commonly referred to as simulation specialists, in areas such as automotive, aerospace, heavy machinery, rail and ship design. Altair also makes its physics solvers accessible to designers who may be less technical and not expert in simulation, by wrapping them in powerful, yet simple interfaces. Altair is also increasing its use of indirect channels to more efficiently address a broader set of customers in consumer products, electronics, energy and other industries.

Primary Competitors include Dassault Systemes, Siemens, Ansys and MSC Software. Dassault and Siemens are large public companies, which have historically focused on CAD and product data management. More recently, these two companies have been investing in simulation software through acquisitions. Ansys and MSC are focused on CAE.

In terms of its breakdown by geography: in 1H17, Altair generated 34%, 33% and 33% of its total billings from customers in the Americas, from Asia-Pacific (APAC), and from the Europe, Middle East and Africa region (EMEA), respectively. In 2016, it was 38%, 32% and 30%, respectively.

Industry Background

CAE software is essential to innovation. Physical prototypes and testing have been largely supplanted by CAE for design validation over the last 25 years. This process continues unabated. Manual drawing and drafting were also replaced by 3D CAD during the same time period. More recently, CAE is emerging in a conceptualization process called simulation-driven design where new design tools are beginning to replace traditional 3D CAD.

CAE software allows engineers to simulate, predict, and optimize how physical products will perform in the real world under a range of operating conditions. CAE applications can accurately solve complex physical interactions through mathematical methods such as finite element analysis, simulate an extensive set of material types, and generate high-fidelity outputs that are realistic virtual representations.

Modern CAE software can rapidly solve a wide range of complex physics, including structural, fluid, thermal, electromagnetic, system modeling, and embedded system design. Beyond just simulating physical behavior, CAE can now solve multi-disciplinary optimization problems to numerically optimize parameters and achieve design objectives such as to minimize weight or cost.

Growth Drivers

Simulation models continue to grow in size, complexity, and range of physics, driving demand for additional computational power and algorithms, more powerful modeling and visualization tools and more advanced multi-physics solvers. Advances in computing infrastructure have kept pace over time, drastically reducing the time it takes to perform complex simulations and solve large-scale problems such as automotive crash simulation, fluid-structure interaction of subsea oil pipelines and detailed composite simulation of full aircraft structures.

The nature of modern manufactured products is rapidly evolving toward intelligent, connected systems. Once composed solely of mechanical parts, products have become complex systems often combining mechanical hardware, electronics, sensors, controls, software, and communications in myriad ways. This complex interplay across domains is forcing engineers to take a systems-level approach to design, and in turn to rely on advanced computer-aided systems simulation as a necessity in product design.

Simulation is now driving design innovation, rather than following design. The product development process of recent decades involved creation of a product concept followed by development of a detailed design using 3D CAD. The designs were then passed along to engineering teams to refine, test and optimize. CAE was often too late or too slow to impact the rapid decisions required to correct flawed product designs. Democratization of CAE offers product designers easy access to a user-friendly subset of simulation tools to take into account product performance objectives and manufacturability early in the design process. This is driving a positive movement toward simulation-driven design processes.

Financials

Altair uses a units-based subscription licensing model for its software which means customers pay on a per user basis. This lowers barriers to adoption as you can buy just a handful if you want. Altair benefits from a high amount of recurring revenue as its recurring software license rate was an average of approximately 88% over the past five years. Usage of its software tends to grow at its customer locations. Each year approximately 60% of new software revenue comes from expansion within existing customers.

Altair also provides client engineering services, or CES, to support its customers with long-term ongoing product design and development expertise. This has the benefit of embedding Altair within its customer locations, deepening its understanding of their processes, and allowing Altair to more quickly perceive trends in the overall market.

Taking a look at the numbers, the company was profitable in 2016 but reported a loss in 1H17. This appears mostly due to Altair's decision to boost R&D spending and hire new employees. Revenue growth has been pretty modest. Altair posted 2015 revenue of $294.1 mln and that grew 6% in 2016 to $313.2 mln. Revenue in 1H17 grew 4% YoY to $158.5 mln.

In terms of margins, gross margin has consistently stayed in the 66-67% range while operating margin has mostly been in the mid-single digits although it did turn negative in 1H17 for the reasons mentioned above. Adjusted EBITDA margin has generally held in the high single digits but that fell to 4.5% in 1H17.

Overall, the financials are decent but not great. They do have a history of profitability before 2017 which is good, but the operating margins are generally pretty thin and the top line growth is steady but pretty tepid. We would have hoped for better margins in light of the fact that they have a pretty sizable revenue base.

Conclusion & Briefing.com Grade: B-

Altair Engineering is in an attractive sector as a provider of a engineering software that uses a simulation-driven approach. As products and devices get more complex, the ability to quickly run more robust simulations and to run them earlier in the development process makes software like that from Altair extremely valuable. In fact, simulation is now driving design innovation, rather than following design.

We also like Altair's strategy of making CAE technology more accessible through simplified user interfaces and new cloud offerings. This will help it expand to more designers, engineers and architects at larger companies as well as at small and medium companies.

On the negative side, the financials are a bit underwhelming. The company was profitable in 2016 but a ramp up in R&D and hiring employees caused Altair to report a loss in 1H17. For a company generating sales above $300 mln, it's a little disappointing that they have not been profitable in 2017. It's more understandable for smaller companies to not be profitable, but Altair's revenue base is sufficiently large that they should be profitable. Also, its revenue growth is pretty disappointing as 2016 revenue was up just 6% and 1H17 revenue was up on 4%.

Overall, we are lukewarm on Altair and would probably see how it trades initially before buying it. With that said, there is a decent chance this IPO offering will generate a good amount of buzz when it makes its debut next week. The combination of a small deal size (12 mln shares) and quality underwriters (JP Morgan, RBC, and Deutsche Bank) often results in good early trading activity. Also, it's in the technology space which should help add some excitement. Also, with an expected market cap of $725 mln and revenue of $313 mln last year, that computes to a rough price/sales ratio of just 2.3x, which is pretty cheap for a tech IPO.

*9-Months Ended June 30, 2017

Business Overview

Based in Pittsburgh, Evoqua Water Technologies (AQUA) is North America’s largest provider of water treatment solutions. The company manufactures filtration products that remove impurities from water for a wide range of customers.

The company is upbeat about its future as a publicly-traded entity, evidenced by its rejection of an acquisition offer that was reportedly made by Xylem (XYL). The rejected offer valued Evoqua at about $2.50 billion, including debt.

The company, which has operated for more than 100 years, has made over 200,000 installations worldwide and has more than 38,000 customer contracts. Evoqua has 86 branches in North America, putting the company’s service teams within a two-hour drive of more than 90% of its customer sites. The company believes that maintaining strong relationships with customers represents a competitive advantage.

Evoqua’s vision calls for the company “to be the world’s first choice in water solutions.” The company boasts more than 1,250 granted or pending patents. The company’s technology is focused on removing impurities from water instead of neutralizing them by adding chemicals.

Evoqua’s system provides treatment across the entire water cycle. Water that is sourced from oceans, rivers, lakes, and other sources is first treated for use in industrial, commercial, and municipal applications. Commercial applications include laboratory testing while municipal applications include treatment to produce safe drinking water and wastewater that is compliant with regulations. The company’s system also treats effluent, or used, water. Once impurities are removed on the way out, water is discharged into the environment or reused for industrial, commercial, or municipal applications.

Systems provided by Evoqua are customized to meet the needs of customers, resulting in installation costs that range from few thousand dollars to a few million dollars. The company markets industrial offerings through its direct sales force, which is complemented by an inside sales force, field sales engineers, and a growing e-commerce platform.

The company believes its future growth will hinge on its ability to develop and acquire products, services, and solutions while adapting to shifting demand or changing regulations.


Use of Proceeds

The company plans to use the bulk of IPO proceeds to repay debt of approximately $100.50 million, which is held under the company’s Term Loan Facility. The remaining proceeds will be used for general corporate purposes.


Financials & Distribution 

During fiscal year 2016, the company generated 86.0% of its revenue in North America.

Revenue for fiscal year 2016 increased 7.2% year-over-year to $1.14 billion. Gross margin improved to 29.29% from 27.56% one year ago. The company reported earnings of $0.11 per share, up from a loss of $0.85 per share for fiscal year 2015. However, net cash from operations declined to $31.92 million in fiscal year 2016 from $41.94 million in fiscal year 2015.

For the nine-month period that ended on June 30, 2017, the company’s revenue totaled $890.92 million, up 8.9% year-over-year. The company reported a loss of $0.08 per share, down from earnings of $0.11 per share for the nine months ended June 30, 2016. Net cash from operations increased 48.1% year-over-year to $15.79 million at the end of June 30, 2017 from $10.66 million in 2016.

Looking at the segment breakdown for fiscal year 2016, Industrial revenue made up 53% of total revenue while Municipal revenue and Products revenue represented 24% and 23% of total sales, respectively. Evoqua does not expect to pay any cash dividends for the foreseeable future.

Allena Pharmaceuticals is a late-stage clinical biopharmaceutical company focused on rare and severe metabolic disorders that can cause kidney stones, damage the kidney, and potentially lead to chronic kidney disease (CKD) & end-stage renal disease (ESRD). The company’s lead product candidate, ALLN-177, is an oral enzyme therapeutic that is being developing for the treatment of hyperoxaluria, a metabolic disorder characterized by markedly elevated urinary oxalate levels and commonly associated with kidney stones, CKD and other serious kidney diseases.

ALLN-177, a crystalline formulation of the enzyme oxalate decarboxylase, was developed to specifically degrade oxalate within the GI tract, allowing for its removal from the body through the bowel. This mechanism of action reduces the accumulation of oxalate in the body and therefore limits the burden on the kidney to filter and then excrete it in the urine. Allena states that the data from its clinical trials and numerous academic studies suggest the potential for GI elimination of oxalate to reduce the chronic disease burden on the kidney and other organ systems.

In a Phase 2 trial, the company observed that ALLN-177 reduced 24-hour urinary oxalate excretion compared to placebo in patients with secondary hyperoxaluria, the overall population in Study 713. In this overall population, the magnitude of change did not reach statistical significance for the primary endpoint—reduction in urinary oxalate excretion from baseline to Week 4 of the trial. However, the data from pre-specified secondary endpoints and post-hoc analyses in the pre-specified subgroup of patients with enteric hyperoxaluria, which included 27% of the overall population (18/67) and 34% of the active treatment population (11/32) in Study 713, showed substantially greater reductions in urinary oxalate excretion in patients treated with ALLN-177 compared to placebo.

Allena says it is in discussions with the FDA to finalize the design of its planned pivotal Phase 3 program for ALLN-177 in adult patients with enteric hyperoxaluria. They expect that this pivotal program will consist of two clinical trials evaluating efficacy and safety, one conducted primarily in the United States, and the other in the United States, Canada, Europe and potentially other geographies. They believe that these clinical trials will be sufficient to support the planned biologic license application assuming favorable results.

Having already conducted three Phase 2 clinical trials for ALLN-177, the company expects to initiate the first of two planned pivotal Phase 3 clinical trials for ALLN-177 in the first quarter of 2018, with topline data anticipated in the second half of 2019.

There is no approved pharmacologic therapy for the reduction of urinary oxalate excretion in patients with hyperoxaluria, either primary or secondary. Existing treatment options for hyperoxaluria generally are non-specific and include high fluid intake to increase urine output to more than two to three liters per day, a diet low in salt and oxalate, oral citrate and/or calcium and/or magnesium supplementation and orthophosphate and Vitamin B6, exclusively for the specific subset of responsive patients with the most severe form of primary hyperoxaluria.

Allena is also exploring ALLN-177 in Systemic oxalosis (Phase 1), Primary hyperoxaluria (Phase 1), Pediatric hyperoxaluria (Phase 1), & ALLN-346 in Hyperuricemia and CKD (Pre-clinical). Allena estimates that there are approximately 200-250k patients in the United States with enteric hyperoxaluria and kidney stones.


Financials

For the six-month period ending June 30, the company reported a net loss of $10.3 mln vs. a net loss of $12.2 mln in the prior year period. As of June 30, the company had cash & cash equivalents of $37.96 mln. The company believes that the net proceeds from this offering, together with existing cash, cash equivalents and short-term investments, will allow them to fund their operating plan into 2020.


Offering

The company is planning to offer 5.33 mln shares at an expected price between $14.00-16.00. Certain existing stockholders, including certain affiliates of the company’s directors, have indicated an interest in purchasing an aggregate of approximately $25 mln of shares of common stock in this offering at the initial public offering price. At the midpoint, the company expects net proceeds of approximately $71.4 mln. Allena plans to use the majority of those funds, roughly $45 mln, for their planned pivotal Phase 3 clinical program of ALLN-177 for the treatment of patients with enteric hyperoxaluria.

At a share price of $15.00, the company would command a market cap of just over $300 mln.

The company has applied to list its common stock on The NASDAQ Global Market under the trading symbol “ALNA.”

In this section of our weekly column, we provide a rolling list of each IPO to price over the past few months. Additionally, performance measures will be included in the table, as well as our grade or sentiment reading, if applicable.