Castlight

Key number in today's Castlight IPO filing

February 10, 2014: 11:43 AM ET

The secret to Castlight Health's future success may be in its backlog.

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FORTUNE -- Huh?

That was my initial reaction after skimming this morning's IPO filing from Castlight Health, developer of an online application that lets companies provide employees with personalized shopping tools for healthcare benefits. This is the company co-founded by Todd Park, the current U.S. chief technology officer whose last startup was the $6 billion+ Athenahealth (ATHN). The company that had raised $160 million over just two rounds of venture capital funding from such firms as Fidelity Investments and T. Rowe Price, and which had snared Facebook (FB) CFO David Ebersman to be on its board of directors. The company that we recently reported would be seeking a public market valuation of nearly $2 billion, with Goldman Sachs (GS) and Morgan Stanley (MS) atop the book-running line.

It also seems to be a company whose top-line financials are anemic.

Castlight reports a whopping $62 million net loss on less than $13 million in revenue for 2013. This compares to a $35 million net loss on around $4 million in revenue for 2012.

I understand that SaaS multiples remain stratospheric and that growth is valued over profitability, but this seems to be pushing the bubble's bounds.

The key to reconciling the Castlight disconnect may be on page 60 of its filing, during a discussion of "backlog."

The amount of our total backlog for subscription and professional services contracts, which we define as including both cancellable and non-cancellable portions of our customer agreements that we have not yet billed, was approximately $44.0 million as of December 31, 2012 and $108.7 million as of December 31, 2013.

Of that $108.7 million backlog, just under half is "non-cancellable."

To be sure, future invoices are not the same as already-recognized revenue. But $51 million of the backlog is non-cancellable, which means the company's marketing burn should pay off much better than it may appear at first glance. Moreover, it suddenly makes the company's dreams of a $2 billion public valuation a bit more understandable.

Tableau Software (DATA), for example, was valued at more than $2 billion after pricing its IPO last May, with $127 million in prior year revenue (albeit at a slight profit). Since then its revenue growth has slowed a bit -- from 105% to 82% -- but its market cap has climbed to over $5.3 billion. Or what about life sciences-focused Veeva Systems, which went public last October with $129 million in revenue for its most recent fiscal year? It garnered a $2.9 billion market cap in its IPO, and currently is valued at more than $3.8 billion.

So expect potential investors in Castlight's IPO to ask lots of questions about this backlog, and also to closely monitor how it progresses as the company gets closer to pricing. It may be the silver lining to the company's dark top-line clouds.

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