Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of 'B+' for Imprivata, Inc.
The Rating Outlook is Stable. Fitch has also affirmed the 'BB'/'RR2' rating for Imprivata's $40 million secured revolving credit facility (RCF) and $745 million first-lien secured term loan.
The ratings and Stable Outlook are supported by Imprivata's strong market position within identity governance and multi-factor authentication (MFA) for health care providers as well as secular growth trends for data security and access management within a complex regulatory environment. At the IT security industry level, Fitch believes the heightened awareness of IT security risks arising from high profile security breaches in recent years provides support for the secular growth of the industry.
Key Rating Drivers
Sizeable and Growing Market Opportunity: Digitization of care delivery, proliferation of health care systems and devices, pivoting to telehealth, increased cybersecurity threats, HIPAA requirements and increased regulation of licensed prescribers are all driving the demand for identity governance, MFA and endpoint security. Additionally, awareness of cyber security is accelerating, given the breach of 32 million patient records in the first half of 2019 alone. Finally, Imprivata has strong market share amongst U.S. hospitals that deploy a digital identity solution, with significant greenfield opportunities as only a third of U.S. based hospital systems have adopted an SSO solution thus far.
Diversified Customer Base with High Retention Rates: Imprivata serves over 3,000 customers including 400 non-health care customers, with over eight million providers on its platform across 39 geographies. No customer accounts for more than 10% of revenues. Additionally, over 50% of the company's revenue stream is recurring, and it enjoys a high-90s gross customer retention rate amongst its health care customers and has a strong track record of expanding its share of wallet over time. While licenses renew annually, they are secured under longer-term multi-year agreements providing strong revenue visibility.
Strong Use Case Supports Long-Term Growth: Imprivata's solutions are purpose-built for the health care industry, in compliance with regulatory requirements, and integrated with hospitals legacy on-prem solutions and with the largest electronic health record (EHR) providers and diagnostic systems. Estimates suggest that the implementation of virtual desktop access and a single sign-on solution saves roughly 10,300 to 13,250 hours annually across a hospital system, driving efficiencies and improved margins for the providers. The efficacy of Imprivata's solutions is reflected in its expanding share-of-wallet with its customers. Additionally, Imprivata's solutions minimize liability arising from unauthorized access and inadequate license authentication and reimbursement losses due to poor patient verification.
Attractive Margin and FCF Profile: Despite Imprivata's limited scale, its margin profile is in line with best in class software peers. Imprivata's EBITDA margin profile also compares favorably to its horizontal peers like Okta and Sailpoint. Minimal capex and working capital requirements result in FCF margins in the high teens, despite the interest burden.
Niche Player with Limited Scale: While Imprivata occupies a leading market position within the health care vertical, its ratings are limited by its scale and lack of end-market diversification. Imprivata's purpose-built software product has gained some traction in non-health care settings, but it competes with horizontal peers like Okta and SailPoint, which have much larger scale, sizeable installed base and more established cloud offerings.
Moderate Financial Leverage: Fitch estimates gross leverage to be near 4.6x in fiscal 2022. Given the scale and the private equity ownership of the company, Fitch believes the company is likely to optimize ROE through acquisitions to accelerate growth or dividends to the owners with financial leverage remaining at moderate levels.
Derivation Summary
Imprivata's industry expertise, revenue scale, profitability and leverage profile are consistent with the 'B' rating category. The company has a smaller revenue scale as a result of its narrow end-market focus relative to its larger and more diversified horizontal peers like Okta and Sailpoint. Imprivata also competes with Identity Automation, which is vertically focused on the health care segment, albeit smaller in scale and with a narrower service offering.
Imprivata has market leading EBITDA and FCF margins, well in excess of its larger peers, demonstrating its superior value proposition. Imprivata's operating profile benefits from its deep integration with other health care IT providers, its comprehensive product offering, as well as the growing cyber security threats faced by the health care industry.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Organic revenue growth in the low-single digits;
EBITDA margins expected to sustain above 40%;
Normalized FCF in the mid-teens;
Aggregate $250 million acquisition through 2024;
No dividend payment to shareholders through 2024.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes a going concern EBITDA that is in line with pro forma LTM Sept. 30, 2021 EBITDA. Fitch applies a 6.5x multiple to arrive at an enterprise value (EV) of $661 million. The multiple is higher than the median Telecom, Media and Technology EV multiple but is in line with other similar companies that exhibit strong FCF characteristics.
In Fitch's Bankruptcy Enterprise Values and Creditor Recoveries case studies, Fitch noted nine past reorganizations in the Technology sector with recovery multiples ranging from 2.6x to 10.8x. Of these companies, only three were in the software sector: Allen Systems Group, Inc.; Avaya, Inc.; and Aspect Software Parent, Inc., which received recovery multiples of 8.4x, 8.1x and 5.5x, respectively. The 6.5x multiple reflects the niche nature of Imprivata's offering, its strong FCF profile and highly recurring revenue base. Median trading multiples for the sector are in the double-digit range.
Fitch assumes a fully drawn revolver in its recovery analysis since credit revolvers are tapped as companies are under distress. Fitch assumes a full draw on Imprivata's $40 million revolver;
Fitch estimates strong recovery prospects for the senior secured credit facilities and rates them 'BB'/'RR2', or two notches above Imprivata's 'B+' IDR.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upward rating momentum is unlikely given the company's narrow product focus and limited scale. However, Fitch would consider a positive rating action in the event that the company expands product offerings to improve its market position within the larger IT security industry while maintaining credit metrics that are consistent with the rating category including the following:
Fitch's expectation of gross leverage (total debt with equity credit/operating EBITDA) sustaining below 4.0x;
--(Cash flow from operations [CFO] - capex)/total debt with equity credit ratio sustaining near 10%;
End-market or product diversification.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of gross leverage sustaining above 5.5x;
--(CFO - capex)/total debt with equity credit ratio sustaining below 7.5%;
FFO interest coverage ratio sustained below 2.5x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Fitch projects that Imprivata's liquidity will be adequate, supported by its FCF generation and an undrawn $40 million RCF as of September 2021 and by readily available cash and cash equivalents. Fitch expects Imprivata's cash flow to be supported by normalized EBTIDA margins in the low- to mid-40% range.
Debt Structure: Imprivata has $745 million of secured first-lien debt due 2027. Given the recurring revenue nature of the business and adequate liquidity, Fitch believes Imprivata will be able to make its required debt payments.
Issuer Profile
Imprivata, Inc. is a provider of digital identity solutions to the health care industry, enabling providers to securely access multiple health care applications through a secure single sign on application. Across its multiple products, Imprivata provides access management, mobile provisioning, authentication, identity governance, and patient identification solutions, directly integrating with partners across the technology and health care ecosystem. Imprivata distinguishes itself from other IGA vendors as it is purpose built for the health care vertical, is HIPAA compliant and offers solutions that integrate seamlessly with leading EHR providers.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
Entity / Debt
Rating
Recovery
Prior
Imprivata Inc.
LT IDR
B+
Affirmed
B+
senior secured
LT
BB
Affirmed
RR2
BB
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SAILPOINT TECHNOLOGIES HOLDINGS, INC. 
