I've been going back and forth with a fella on hotcopper about Alcidion and I thought the discussion was worth sharing my fellow Strawmen.

*Me* - Complains about the low growth in the SQ

*Hotcopper postee*

"The nature of dealing with the NHS is that you will always have a big increase in spending commitments running up to the end of the fiscal year ending 5th April, use or lose it."

*Me*

Your comment implies that the lack of growth that has occurred in the Q1 just released is something that occurs annually, every year because of the NHS's funding commitments.

Based on the following, your comment doesn't seem to hold true.

Compare how the SQ has grown for Alcidion in terms of top line growth over time.

The business's growth needs to really be considered at all points in time, not just the seasonal periods.

Because as I'm sure you're aware, the business has operating costs that fall due in all quarters and hence needs to develop to a point to which cashflow can be generated on a sustainable basis all year round.

The real reason I brought up Alcidion's valuation is because the company trades on a price to sales multiple of >11x.

It needs to growth it's operating cash flows at a steep rate to justify that valuation. It becomes harder to see how the business is going to do that when the costs are growing at 31% PcP and receipts only at 2%...

I always hate owning stocks that are popular because it can cause cognitive bias when it comes to investing. I have spent a long time thinking about whether this applies to me with Alcidion.

In the end I decided that I will keep a holding in company (small % of my IRL portfolio). I sold 1/3 of my holdings at 42 cents earlier in the year.

I can see causeway for Alcidion to continue evolving into a ~$1bn company and this implies a 2.5x uplift on the current EV. It will take a lot of execution to reach this goal but I believe the business holds the potential to do so (In the most bullish of my imaginative cases)

In reality:

After having a little time to reflect on the quarter for Alcidion: It's a pretty below-par performance for a company is that valued so optimistically.

I spoke with Kate towards the end of FY21 and she spent a lot of time elucidating that the company were to undertake significant investments in its operational capacity throughout FY22 and thus implying that this year was a "Break-even" year for the company. FY23 was the aim for maiden operating profits.

Thus this 4C result in terms of operating and free cash flows was perhaps to be expected.

The cost base rose 22% from 8.1m to 9.9m QoQ whilst receipts only rose 2% on PcP. (The cost base rose 31% PcP).

I do understand there is significant seasonality when it comes to ALC's operating performance. (See below).

In saying that, I expected >2% top line growth.

The reason for the growth or lack thereof is as follows:

So on this basis, if the next 6 months do not bring some fairly sizeable contract wins then I believe shareholders have a problem on their hands.

The macroeconomic tailwind towards digitising the healthcare space is what keeps me an Alcidion shareholder today (With reference to below).

Otherwise I own part of a business that seems very promising and is priced as such by the market thus putting me in a situation whereby

a) They execute and I sort of win (Because most of the success is already priced in)

b) They fail to execute and I lose, a lot.

For context, here are the results in terms of receipts & operating cash flows:

Attached is my note on ALC's FY21Q4 update.

Brief notes on;

• Seasonaility
• Sustained free cash flows
• & Valuation.

My notes attached on the QnA for Alcidion.

Given that this is one of my key holdings, I put a fair bit of time into prepation and took plenty away from this call.

Also, @G3xu8 - "There is $12.5M of cash on hand but I have to consider that there is still a possibility of another capital raising being needed before ALC gets to profitability."

I'm not sure how you can conclude ALC will need to capital raise again considering how close they are to the inflexion point. Even given that they currently cash flow negative, the amount of cash burned is very low (2.9m in the entire of FY20, and will be less than that in FY21 given my calculations). Unless things go horribly wrong for management and new sales, I can't see them coming anywhere near a cap raise in the future. (apart from an M&A deal or something similar).

Alcidion H1, 21 results are out - see @ Strawman's post.

The link to the webinar & presentation can be found here - https://www.alcidion.com/wp-content/uploads/2021/02/Alcidion-Half-Year-Results-and-Investor-Webcast-Notification.pdf

Given that ALC are currently unprofitable, they still report under the 4C requirements dictated by the ASX. With this knowledge the results out today have already been flagged to market when the Q2 results were released on the 29th of Jan, 2021.

I've attached a screenshot of my financial model for ALC's quarterly reports to market dating back to 2016 for anyone that is interested. **

I'm looking forward to asking Kate some questions and will provide my views to Strawman @ a later date.

** I tried to attach my excel file but noted that Strawman does not allow for the attachment of excel workbork files. Is there any chance for us to change this, so i can share some of my financial models....?

*I'd like to start off by saying I do own some ALC shares and the purpose of this straw is to play devil's adovcate and highlight some risks.

On the back of the Q1FY2021 result, we can see that there was a net cash outflow for the quarter of $1.2m. Given the incoming receipts of $6.4m, this implies a cash burn of $7.6m p.q

Extending this to a yearly basis gives a cash burn of of ~$30m indicating they should hit profitability around revenues exceed $30.4m (which is a lot higher than the current $18.61m), given that the cost base stabilises which is what management have mentioned they expect in FY21.

Given the current rate of receipts of $6.4m per quarter, they will reach ~$25m in revenue by year end if NO NEW CONTRACTED REVENUE IS SIGNED. I approximate in my head this figure will be closer to $26m given that the last quarter of each FY has tended to have higher receipts.

Given that last JH20 had a negative NPAT of ~$2m, i expect that the EPS/NPAT this FY will be further negative unless more sales are brought in this year. Given that the Murrimbidgee site is only a 12-month contract, we must hope that ALC are able to renew this. (I did ask Kate during the Q1 Presentation this week and she told me "they are in talks over renewal" which is somewhat positive".

Given the number crunching, i put a lot of thought into the sales pipeline for ALC. COVID has obviously made this process harder, but hospitals in general are extremely slow-moving when it comes to embracing change. To supplement this, there is plenty of commentary regarding the lack of change in hospitals from posters on Strawman (@Chagsy wrote a straw I believe). 

The sales pipeline in the UK is more difficult than that in Aus due to the need for a tendering process and all the political/legal crap that is involved with this. In saying that, the industry & ALC still face a tailwind moving forward - the digitisation of the medical industry but I think it is further in the future than we imagine and I believe Alcidion's sales plan is lofty.

**I have taken for of an opinionated view of the Q1 report  to differentiate my straw to @GetSmart's

October 27th, 2020 – Q1 FY2021

Headlines

·         Q1 revenue at $4.8m (30% versus sequential and 92% on pcp)

o   This reflects the new contracts signed over the past 12 months. (NHS, Murrumbidgee..)

·         Total contracted (pre-sold) revenue for FY2021 is at $14.7m (14% increase pcp)

o   Though last year, the pre-sold revenue for FY2020 was $12.9m (which was a 16% increase from that of FY2019)

o   Hence the rate of change in growth has slowed (2%) – i.e the second derivative of revenue growth has become negative (thanks high school maths)

·         Cash outflow for Q1 of ($1.2M)

o   We know ALC have dipped back into cash flow negative as the cost base has been rising

o   This cost base expected to flatten out over this current FY2021

·         Cash receipts @ $6.4m

·         Reclassification of non-recurring revenues as recurring revenues

o   Product license fees that were previously recognized as non-recurring as now counted as recurring. This results in a $269k or 3% increase.

o   These license fees “nearly always continue” hence the reclassification

·         Presold revenue

o   $32.8m revenue sold out over the next 5 years, equating to ¬$6.5m per year presold.

My thoughts

·         Rather in line with expectations, slight changes to accounting and classification for revenues make may things look attractive, but these results are in line with previous expectations

·         The announcement mentions a new NHSX ‘Clinical Communications Procurement’ that ALC are involved in where the NHS is turning to tech for its health departments, but no details provided regarding revenues etc…

·         Cash reserves at $14.7m, which gives them around 5-6 quarters of continued cash outflows before they need to tap up shareholders for capital again

·         The recent announcement of employee incentives was not a good look, as these incentives become activated if ALC manages to outperform the market between now and FY2023

o   6.5m performance rights given that TSR is positive and/or greater than the market (S&P/200) by JH23, which is not an overly ambitious goal in my view.

{I hold ALC shares, though I have lost some confidence on the back of some of the latest decisions by management as well as some of the reports from some healthcare workers here on Strawman}

Alcidion Group Limited (ALC) are a healthcare technology-based firm that engage in the development of software products to be used in hospitals, with the overall aim of improving systems deployed in hospitals and ultimately saving lives. They are based out of South Australia but sell products in Australia, NZ & the UK.

Most recent contract wins (most are recurring revenues)

·         Townsville hospital

·         NHS Fife (UK)

·         Murrumbidgee LHD

Products they offer

Patientrack – tracks patient status and uses predictive and recursive algorithms to support time-critical care.

MIYA Precision – combines AI-based Predictive analytics and a Clinical Decision Support (CDS) to create a dashboard for hospital staff. Used for decision making, patient flow monitoring and track patient deterioration risk using data.

MIYA MEMRE – Creation of a mobile platform for MIYA precision, allows for a mobile patient record.

(I hold)

9th September 2020 – FY20 Results Presentation

Headlines

·         $18.6m revenue – 10% gain on FY19

·         $12.8m presold revenue to recognised in FY21 – (this is 9% more than presold revenue from FY19 recognised in FY20)

·         Cash reserves currently at $15.9m (cash burn has been estimated at $2m p/a so it gives them some time to get CF positive)

P&L highlights

·         Recurring revenues as a % of total sales has risen from 46% to 56% - This is a positive sign for me as that switch to a SaaS model and that revenues are ‘locked in’ for future periods

·         Cost of Sales has risen with highlights in the following

o   Sales/staff & commissions up 48%

o   Product development costs actually DECREASED

o   Salaries/wages for staff up 56%

o   Marketing costs DECREASED

o   Operations admin costs DOUBLED

So breaking down these highlights, the market knew ALC was pushing back the expected date for cashflow breakeven and these results mostly reflect that. I don’t see the massive drive in operating costs over FY20 as bad as it sounds, I believe it is a necessary cost that helps build the footing for the company in the future. We could compare it to the 1991 Paul Keating quote “the recession Australia had to have”. The notion here being that ALC needed to bolster its sales staff & operating spending for the business for any success to be achievable in the future.

I found it surprising marketing costs were slightly down though, but I’m not 100% sure of the tender process ALC go through in winning new contracts and what role marketing plays in this.

Overall, an expected result as indicated by Kate & co through previous announcements. FY21 is a key year for these operating costs to flatten out and management begin to execute their plan and get some contracts on the board!

Execution from management...?

This ABC article points out the major need for SaaS products such as that offered by Alcidion.

Winning contracts in the next 12-18 months is a MUST for the long term success of this company. When else is a major opportunity such as COVID going to present itself.

Kate & her team need to position the business in the best position to get contracts over the line rather than revenue going to competitors

Really nice to see ALC winning a contract domestically(allbeit fairly small).

My investment thesis when i purchased ALC shares was on the basis that they can use COVID as a performance booster to nail down some contracts and boost sales growth.

This new annoucement with hospitals in Sydney (Concord etc) shows a foot in the door, and gives potential for further contract winnings. - very pleased

ALC have generated a strong array of products/services that are unique to the healthcare/technology sector, especially the MIYA MEMRE product. This allows for patients to be monitored at home.

On the back of COVID we will expect to see a lot of funding driven into patient management, not necessarily to deal with another pandemic, but to better improve the healthcare system and management of patients by hospitals. This will be particularly focused on the UK, with NHS massively struggling with the COVID outbreak. (still applies in Australia, not as strong as a case however). The overall hope here is that there is a great demand for electronical medical records (EMR’s) on the back on this pandemic and that ALC management are able to execute a plan that sees large revenue growth in the coming years.

They have been winning a fair number of contracts and have performed very strongly in the first half of FY20 respective of FY19. Currently ALC only operate in the UK, AUS & NZ as far as I am aware. This leaves the US market (amongst others) completely[at1]  untapped, which leaves room for great potential in the future.

In terms of financial metrics, they have no debt and cash reserves of $17.2 million. (due to cap raise) in H12020. Overall revenue in h1 FY2020 grew by 12.3%, and hopefully we can see continued growth down the line.

 [at1]