The Good:

• Fourth quarter of positive operating cash flow. As it is unlikely that VHT will increase operating expenses too much further in H2, Volpara should be able to maintain this for the remainder of the year and report a profit for FY24.

• Not in the report but @mikebrisy e reported NRR is at 112% which is up on 111% in Q1
• Increases to CARR (4.4% QoQ), ARR (4.7% QoQ) & APRA (3.5%)

• Cash levels now at $NZ 13.2m

The Not So Good:

• CARR to ARR gap is continuing to widen as go live looks to be limited by resources. Volpara may have to watch this as potential extended timelines may be negatives for some customers? The difference may also highlight potential money still sitting on the table.

Watch Status:

What To Watch:

• BreastScreen Australia position on density reporting
• Outcome of BreastScreen QLD density reporting trials. Looks like the trial will end around March 24 (Carried over).

https://www.sunshinecoast.health.qld.gov.au/about-us/news/breast-density-notification-now-being-trialled-on-the-sunshine-coast

•  BAC detection model progress (Carried Over)
• Quiver update at RSNA in November (Carried Over). Due out in CY25.
• Estimating ~ NZ$40m of revenue for FY24 (My current forecast based on CARR). This would be a reduction to ~14% growth (constant currency) vs the 20% for FY23. (Carried Over)

Another delayed update.

The Good:

• Third consecutive quarter of positive operating cash flow (just $9k), even after foreshadowing by management in Q4FY23 that Q1 would not be positive due to staff expenses. Staff expense did increase but were still below FY23. This has led management to bring forward the full year cash flow positive target to FY24.

• NRR up to 111% vs 107% at the end of FY23. This is a positive indicator of ongoing satisfaction with the Volpara product suite.

• ARR continues to grow, however it was only ~3%  increase over the prior quarter

• APRA also is growing QoQ. t\This too has slowed, increasing ~4% over Q4FY23

The Not So Good:

• Slight decrease in cash position to $12.1m, mostly driven by IP expenses. These have remained fairly constant over the last 18+ months, however may start increasing with the new product lines in the works.

• From the CARR to ARR chart it looks as though it is taking around 18 months on average for contracts to become live, however this does provide a bit of an indication of future revenue forecasts. Note: Not new to this quarter. I've noted it to watch for improvements. While new customers are continued to be onboarded, this lag is likely to remain.

Watch Status:

What To Watch:

• Post update announced that VHT have sold down their interest in RevealDX, citing a focus on products with clearer synergies. Potentially this could lead to divestment of MRS Systems? Excerpt from the strategy update announcement.

• Outcome of BreastScreenQLD density reporting trials
• If NRR is announced regularly and where it is sitting.
• Ongoing reporting of the “Elephant” market segment

• Progress in growth strategy - new customer types,
•  BAC detection model validation

• Quiver update at RSNA in November and any updates from Terri’s Europe trip over September (Thanks @mikebrisy)
• Progress towards my estimate of NZ$40m of revenue for FY24 (Forecast based on CARR). This would be a reduction to ~14% growth (constant currency) vs the 20% for FY23. Cash receipts of $11m for Q1 put them on target.

Q3FY23 Quarterly Report

The Good

• Positive free cash flow for the quarter of NZ$1.3m which is the first for the company which looks to be driven mostly from higher cash receipts as there hasn’t been any substantial operating cost reductions, more of a levelling out. 

• I think the cash receipts are more of a product of the billing cycle and catch up of late payments from the wording in the update that suggests Q4 receipts won’t be as good, however the positive quarter shows signs that the profitability targets are within reach.

• Increase in cash balance to NZ$12m. Increase in cash position helps reduce the likelihood of a future capital raise at the reduced share price.
• CRA payments completed
• Starting the year with several large contracts as per previous announcement

The Bad

• No updates on wider product lines or future opportunities

What To Watch / Targets:

• Level of cash receipts for Q4 and if it falls back to the NZ$8m mark
• MQSA ruling still pending

The Good

• Report maintains a strong focus on achieving cash flow positive position



The Bad

• Cash receipts levelling out on a quarterly basis which make the forecast cash break even looking difficult to achieve in the near term
• 
  

What To Watch / Targets:

• Free cash flow for Q3 expected to be around -$2.3m. This is around 1 year of runway with cash and with $10m in credit facilities.
• MQSA ruling expected in the next 2 quarters, which would mandate a higher level of density reporting in the US.
• Noted strong pipeline of customers that were unsigned during Q2 that are likely to be awarded in H2FY23. Conversion of these will help to validate Terri's strategy.

With the share price falling to 2017 levels there has been some on market purchases by VHT directors recently

Paul Reid - $66,958

John Diddams $30,218

While not massive sums hopefully this is a sign that management have conviction in the future of the company and they are not just trying to halt the current share price free fall.

@Rick has provided a good summary of the announcement so I will only add my notes.

The Good

• Improvement in operating cash outflow to -$2.5m which is now sitting around the R&D spend for the quarter ($2.45m). The improvement is mostly due to the increase in cash receipts not due to any significant changes in costs. It would be nice to see the improvement continuing for several quarters in a row as this tends to fluctuate in line with staff expenses each quarter.

• International deals in Italy and Abu Dhabi,  which could open up further deals in these markets. For me a key driver for continued growth for Volpara is expansion beyond the US.

The Bad

• Reported growth figures against pcp are a little skewed due to the CRA acquisition in Q4FY21 and put a bit more of a positive spin on the figures.
• Market share & ARPU growth also aren’t setting the world on fire, but both are continuing to move in the right direction

• Overall growth in ARR has slowed which means looking forward will likely only expect revenue growth of ~ 15% for FY23 if there are no significant changes in the business. 

Q4 FY20 ARR - $18m vs  FY21 Cash Receipts - $19.7m

Q4 FY21 ARR - $27.9m vs FY22 Cash Receipts - $28.5m

Q4 FY22 ARR - $31.8m => FY23 Estimated ~$33m

Without major cuts to spending, VHT likely needs quarterly cash receipts of ~ 12m to reach breakeven (assuming product manufacturing and operating costs remain ~25%) This annualises to $48m which is still a long way off (~ end of FY24 if quarterly ARR growth of 5% is continued)

What To Watch / Targets:

• With a change in CEO from Dr Ralph Highnam to Teri Thomas there may be some changes in the way VHT operates with a focus on profitability. There was definitely a tone of controlling the cash burn in the report and this will be a key item on my watchlist going forward. As one of the founders, it is good that Ralph has maintained a position within the company and will continue to contribute to the product development.
• FY23 Guidance numbers. Typically VHT is fairly conservative in their guidance to the market, so it will be telling on the company's vision once this has been released.
• Updates on Volpara Lung expansion. There hasn’t been much detail on this since the H1 report.
• Continued ARPU growth, slowdown in this area will be a warning sign.
• Cash position. This is ok for now, but as @Seymourbutts stated there is likely to be another capital raise on the cards.
• European expansion following the DENSE trial recommendations.

Volpara recently announced The European Society of Breast Imaging has released a recommendation for regular density based screening following the completion of the DENSE study. Given that VolparaDensity software was used for the basis of the study, if public screening programs start to implement these recommendations, it puts Volpara in a good position for potential future expansion in Europe.

Looking at the H1 results, currently Europe only contributes a fraction of the company's total revenue, so this represents an area of growth beyond expansion of ARPU.

Currently screening in Europe is a much smaller market than the U.S, however market share will be increasingly difficult to secure given the increase from 27% to 35% over the past year. 

Volpara released a fairly solid Q2 report this week announcing record revenues up 11% on previous quarter to NZ$7.1m along with improvements across other metrics.

Takeaways as follows:

Current revenues are on track to exceed previous forecast FY22 Revenue target of NZ$25m

Although revenues have increased, expenditure has also increased over the prior quarter. VHT has a pretty hefty cashburn rate, losing NZ$3m on NZ$7m in cash receipts, so this is one area to keep an eye on as it has been increasing the last two quarters.

There is enough cash on hand for 2 years of operation, but it wouldn’t surprise me if Volpara was looking at coming back to the market next year for further capital, maybe tied to an acquisition.

Steady growth in ARR to US$20.4m

Minor improvements of ARPU to US$1.46, with around 30% of customers still on contracts of less than $1 / user, VHT still has a lot of work to do to get to the previously touted target of $10. Continual improvement is being made in this area but I think its going to take some step changes in the companies offering to get there.

All in all positive news, but nothing too new in there.

Disclosure: Held

In preparation for the upcoming FY21 results I thought I would revisit Volpara Health Technologies (VHT) and given I currently don’t have any free capital for any new positions it would be a worthwhile exercise to review this holding in my portfolio. (I bought VHT in August 2020 mostly based on an analyst recommendation rather than my own research)

What does Volpara do?

Volpara Health Technologies Limited (VHT) is a MedTech SaaS company that was founded in 2009. Volpara’s clinical functions for screening clinics provide feedback on breast density, compression, dose and image quality. The Enterprise software management helps practices with productivity, compliance, reimbursement and patient tracking. VHT listed on the ASX in 2016 aligning with the commercialisation of VolparaEnterprise.

Company Performance

Since listing VHT has experienced a high rate of organic growth in the US, as the value in their breast density screening tools has been validated through published studies and industry reputation. Further to this the company has been adding to the value proposition of their software through two acquisitions. 

MRS Systems was acquired in May 2019 which helped boost the FY20 market share target from 10% to 27% of women. Since the MRS acquisition overall market share in the US has remained around 27%, however Average Revenue Per User (ARPU) has increased around 5% per quarter which has helped increase overall Annual Recurring Revenue (ARR) growth.

Cancer risk company CRA Health was acquired in February 2021. The CRA acquisition adds around $6,200,000 of ARR plus potential additional high value contracts. (Contract for US$400,000 ARR was signed in March 21). The integration of the CRA platform allows for expansion of the risk assessment process and inbuilt integration with major genetics companies. 

VHT is yet to return a profit, with a negative cash flow of around $10.3 million at the end of Q3FY21.The company is moving closer to being cash flow positive with the ongoing increase in revenue and steady continued reduction in negative cash outflows each quarter. (Q3FY21 -$3,070,000)

Management

The Volpara board has a strong background in breast health, imaging and software companies which aligns well with the VHT business. The CEO Ralph Hingham who is one of the co-founders, has around a 6.5% holding in the company which can be a good indication of share-holder alignment.

Valuation

As VHT is a SaaS company, Annual Recurring Revenue (ARR) can be used as an indication for valuation compared to other companies operating in the same segment. At Q3FY21 ARR was reported at NZ$20,700,000. Estimating a Q4 ARR of NZ$28,500,000 (5% growth + new CRA contracts). At the current share price of $1.44,  The market cap is A$360 million which gives a Price to Sales of ~ 13.7 (After converting ARR to AUD). This indicates that VHT may be slightly undervalued compared with other SaaS companies. 

Volpara also holds NZ$35,000,000 in cash after the CRA Health acquisition.

Opportunities

There are several opportunities that I can see that may present as catalysts for further future growth of the company.

The first is that the company typically signs 5 Year contracts. Many contracts that were signed since IPO will be coming up for renewal. This gives VHT an opportunity to re-sign these customers onto the new Volpara Breast Health Platform. Previous company reports indicate that these contracts are for ARPU of > $1.75 which is a 25% premium on current ARPU of $1.40. VHT has an ongoing long term target for ARPU of $10

The addition of the new CRA Health platform allows for integration of genetic risk factors to the platform. There is an opportunity for upsells across existing user base.

At FY20 94% of company revenue was generated from US contracts. Growth into European and Asian markets has been put on hold due to Covid impacts globally, however as vaccine roll-outs help medical systems return to normal, there is an opportunity for the company to refocus on these markets. Approximately 92 million breast screens are carried out globally each year, with ~39 million occurring in the U.S.

Risks

Volpara, although having a proven product, isn’t the only provider of integrated screening platforms. There are several competitors in the U.S that have a similar offering which integrate A.I and genetic risk. This means VHT need to maintain a high rate of R&D to continually improve their product suite to ensure growth and further uptake. They have noted in previous reports that the industry is quite sticky and hard to change users from existing platforms. This may be both a positive and a negative for the company and hints of this may be seen with the stagnation at 27% market share since 2020. 

Final Thoughts

After my review of VHT, I am currently positive on the outlook for the company, with the several opportunities I mentioned earlier likely to contribute to near term growth. It will definitely be a case of wait and see with the further penetration into the U.S. The current valuation is pricing in strong continued growth, so my outlook will need to be reviewed if there are signs that this is slowing. I will continue to hold my position in VHT.

Disclosure: Hold