Some comments and observations based on discussions I have had with Alcidion in relation to the recent performance and capital raise.

Following that discussion and subsequent follow ups, Alcidion, to its credit, did improve and provided a greater transparency in its AGM webinar. But then... the extension of the SPP deadline had me dumbfounded...

Capital raise

Optics wise, the capital raise looked rushed and not well thought through. I was comforted by the level of due diligence Alcidion went into to explore other funding options. At the end of the day, it all comes down to which option was the cheapest.

Company is also not budgeting in the $1M from SPP. That entitlement was included to provide equal opportunity to retail shareholders. Company does not expect to use much, if any, of the other $5M, more like an insurance policy if situation does not improve.

Company also initiated preliminary discussion with major shareholders prior to the capital raise being announced and there was support from major shareholders. It was also an opportunity to bring new institutional investors on board. It is important to note that the company has no control over what the small institutional investors might choose to do with their shares if they have a very short term focus.

Cost base

When this question (which obviously was on everyone’s mind) was asked at the webinar, I felt it was a missed opportunity to articulate what other options they have considered, including what levers they could pull.

Perception wise, it came across that the company is still stubbornly electing not cut staff numbers in the hope that things would turn around soon. I know this is not the case, but what Kate could have done is to take the question head on and inspire confidence that the company is proactively seeking out ways to conserve cash. Potential options include:

·        Encouraging under-utilised staff (if any) to use their leave entitlements (including unpaid leave)

·        Exploring other employment options (e.g. contractor arrangements to provide the company with more flexibility)

·        Undertaking a review to extract further efficiency gains and savings

As the old saying goes.... "Never let a serious crisis go to waste".

These potential options are not mutually exclusive, nor does it mean that Alcidion has to deviate from its current course.

My understanding is that the company is not envisaging to use the $5M (or $6M) raised for operational purposes. But if things do not improve, company has contingency plan on other levels to pull, including reducing underlying cost base.

At this stage, company is still expecting a stronger second half and remains confident of EBITDA and operating cashflow positive result for FY24. I suggested withdrawing this guidance given all the uncertainties, but company remains confident.

Corporate strategy

I questioned if the current high risk strategy of running a cash burning company is still sustainable, one that is largely based on hoping to win some (but considerably delayed contacts) is still suitable for current circumstances. Shouldn’t company simply bunker down, work towards sustainability asap and wait out any further delays with the procurement process without raising capital?

Company remains committed to current strategy and believes it is temporary. If uncertainties persist, company will then react accordingly and pull other levers.

Public perception and investors’ confidence

Company agreed that it wasn’t a good look to delay the quarterly webinar, release the 4C after market and announcing a capital raise on the last quarterly reporting day. Many things were happening at once and many discussions were held over different matters over a longer period. Nevertheless, company will look to improve its performance in this area.

For obvious reasons, the market reaction has highlighted both the board (led by Rebecca Wilson) and Kate’s diminishing credibility. It is imperative that steps are taken to restore market confidence.

As investors, we now need a clear line of sight of how the board and Kate intends to steer Alcidion out of this situation and emerge stronger. It is comforting to know from my discussion that the company does indeed have contingency plans if things don’t turnaround in subsequent quarters. However, this point was not made but should have been articulated at the webinar.

Greater care also needs to be taken regarding the language used in further webinars. Lines such as "It became obvious during the last few weeks" does not inspire confidence that both the board and management are keeping their fingers on the pulse of the business or even (I hope not) suggests a disconnect between CFO with the CEO/Board.

Dual role of chairperson

I expressed my concerns with Rebecca Wilson’s involvement as chairperson with both Alcidion and LBT Innovations on the basis that would this divert her time, attention etc between one another. Have received assurances that this would not occur. I will continue to hold the company and her accountable on that front.

Just me trying to provide a balanced view to facilitate a more robust discussion, not ramping nor down ramping Alcidion.

The Q2FY23 was a combination of hits and misses to me for the following reasons:

MISSES

1) I felt Alcidion was trying to divert attention from the disappointing numbers using using the $5.2M figure to explain the lower cash receipt. As the CFO has clarified in the webinar, only around $2.6M can be attributed to the delayed payments. The remaining $2.6M is correctly attributed to Q2FY23 and has no bearing on the lower than expected cash receipts in Q1FY23.

How it has been worded has had the unintended/intended consequence of making some shareholders think that Alcidion would have been cashflow positive in Q2FY23 if the whole $5.2M was entirely attributed to Q1FY23.

2) Rightly or wrongly, I was personally expecting a better 4C for Q2FY23 going by previous comments made by the CEO. Because we had a modest negative operating cashflow 4C in Q1FY23 and a positive operating cashflow of $1.5M in Q2FY22, I was therefore not expecting an underlying -$1.8M operating cashflow in Q2FY23 (after accounting for the $2.6M in delayed payments). To be fair, I might also have misinterpreted some of the context underpinning the comments.

3) Having watching the webinar a second time, I also picked up that Kate has added a disclaimer to her usual guidance that the company remains on track to achieve a positive underlying EBITDA and cashflow in FY23. It now assumes 'continued momentum in the UK', bearing in mind that the political uncertainty in Alcidion's biggest market has had an adverse impact in CY22.

4) Alcidion has also stop reporting the recurring and non-recurring split in its entirely, only disclosing this split for new sales. Looks the same to most people but mean differently in practice.

For example, this spilt was previously disclosed as

Now we only get this from Q1FY23:

5) The lumpiness in Alcidion's cash receipts profile is inherently lumpy, as evidenced from the chart below. Q1 and Q2 will continue to underperform relative to the second half of the financial year. Nevertheless, the overall trend is still positive.

HITS

1) New sales and recognisable revenue continue to track upwards

2) Cash expense has stabilised and maybe (just maybe) the benefits of operating leverage would soon start to kick in. Management has indicated that the cost base has achieve stabilisation and is unlikely to fluctuate substantially moving forward..

...the opening of the revenue-cost jaw.

I have had the opportunity to further discuss the acquisition and capital raise with the company. Below is a summary based on my recollection of the discussion. You may want to verify the information directly with the company yourselves.

Therefore, please take the information below with a grain of salt.

Price of capital raise

My query to the company was along the lines of making clear my disappointment with the discount offered due to dilution, retail oversubscription of the previous capital raise at a much higher share price, transfer of potential wealth to new shareholders etc.

My understanding is that negotiations for the acquisition of SIlverlink have been happening for months prior the formal announcement. Back then, the prevailing share price was higher (around high 30s). Since then, the market has taken a negative turn. Because there was an urgent need to compete the acquisition before the end of the year, the company felt it had little alternative but to proceed with the capital raise even at lower prices if it want the acquisition to be completed. Not doing so would more than likely mean the whole deal falling over.

Raising a huge capital raise relative to their market capitalisation at this time of the year was also not ideal in hindsight because many institutional investors have started to wind down things in the lead up the the festive season. Hence, only offering a substantial discount was the only way to firm up funding commitments quickly.

I am not involved in the finance industry so I cannot verify the reasonableness of the response provided to my queries. But the sense of urgency was clear.

I was also made aware that the decision was taken with the support of existing large shareholders. I take this to include three of our biggest shareholders, namely Malcolm, Ray and Kate. I just cannot see it proceeding without support from the three of them, two of whom are sitting on the current board, because it would hurt them the most. The underlying messaging is that they were prepared for the short term pain for potential long term gain.

Funding of the acquisition

I also queried about the funding model for the acquisition. For example, could it not be structured differently to include a script component similar to the previous MKM Health acquisition.

My understanding is that the majority shareholder of Silverlink who is no longer part of the operations (presumably because he is retired?) would only entertained a all cash offer. The company had explored other financing model but an all cash offer was the only viable option to complete the acquisition.

Because the required financing cash is also considered large relative to the company's market capitalisation and previous capital raise, it is also considered to be high risk. Hence, a substantial discount to provide a margin of safety for participants.

Again, I do not have the background to form a view on the reasonableness of the response provided but it makes some sense.

-------------------

My reflections

My reflections of the discussion are that the company is aware of how much it is asking out of retail shareholders through this acquisition and capital raise. Asking us to back the board and management in the strategic direction and evolution of the company, their judgement that this short term pain is necessary and to remember that our interest (retail shareholders and board/management) are still very much aligned.

I am left in no doubt by the company that not only it is committed to increasing long term shareholders value but this acquisition is very much a necessity. It is obvious that the financials for Silverlink is not exactly mind blowing but the PAS is what Alcidion urgently needs to capitalise on the structural tailwinds and market opportunity. The only alternative to this is to partner up with another PAS provider to bid on NHS tenders and the company made it clear that this is not an attractive position as it wants to retain control.

I also understand that both the chairperson and managing director agonised a lot in the lead up to the decision to press the proceed button. We can disagree with them but this was not a decision that they took lightly.

Although I left them in no doubt about my continual sense of disappointment with recent developments and that their credibility(at least in my eyes) is at risk, I am prepared to give them the benefit of the doubt. Hopefully, they will prove me wrong and the number of sizeable opportunities that the company has been publicly stating would come to fruition.

Hence, my willingness to back them one more time for this acquisition and capital raise on the basis of their past record in integrating acquisition, execution and delivering on what they said they would do.

What is Alcidion asking of retail shareholders?

In essence, Alcidion is asking us to have confidence in its strategy and execution. This is all that it comes down to.

In my opinion, Alcidion has done a pretty good job articulating the rationale for the acquisition and accompanying capital raise (albeit there remains a level of disappointment). We know there are structural tailwinds backed by funding commitment (a very important distinction) in our biggest market.

To capitalise on the market opportunity, Alcidion can either deliver what their customers are telling them they need or stand still and hope that customers change their mind and accept what Alcidion is currently delivering. The answer is obvious. Hence, kudos to Alcidion for having a real go at this.

What do insiders think of the acquisition and Alcidion’s future moving forward?

In asking for our support, Alcidion has also announced that:

Kate Quirke, Alcidion Managing Director, has subscribed for 1,000,000 shares ($250,000) in the

Institutional Entitlement Offer. Alcidion Non-Executive Directors, Rebecca Wilson, Daniel Sharp and Simon Chamberlain intend to subscribe for their full entitlement in the Retail Entitlement Offer.

The table below (based on information contained in the FY21 Annual Report) summarises the level of commitment

Individual

Obviously, the level of commitment from Kate is the key point for me here is assessing the level of confidence that the board/management has in the acquisition. She is the key personnel is how Alcidion performs moving forward.

The table below gives further context in the level of confidence that I believe Kate has in Alcidion and how much there is at stake for her personally. Need I say more…

Dat

Is the capital raise fair to retail shareholders?

In announcing the acquisition of Silverlink, Alcidion announced an accompanying capital raise. The retail component of the capital raise consists of a 1:10.5 rights entitlement offer at $0.25. The offer price priced at a 21.9% discount to the previous close price of $0.32.

My first reaction is one of great disappointment, largely due to the level of discount. On further reflection (particularly so after watching the webinar), I can appreciate the urgency of the capital raise (to get things moving quickly), size of the raise and the unfortunate timing of it (given the board cannot control general market sentiment). The correct question is therefore has Alcidion looked after retail shareholders’ interests, particularly those whom have stuck by the company during the many low times. In my opinion, the answer is yes.

This is because all existing retail shareholders are offered the same opportunity as institutional investors - same price and same rights entitlement ratio. The retail component does not preclude anyone or disadvantaged anyone.

The only issue is whether existing shareholders have the financial capacity to participate in the capital raise. If one cannot, there is the transfer of potential wealth to those who can. To get around this, retail shareholders can sell some of their existing holders and buy back in. Unless the share price drops below $0.25, one would end up with more shares.

The only downside I see is that some new institutional investors are afforded the advantage of buying in at such a bargain price. This will have some dilution impacts on retail shareholders even if they take up their full rights entitlement.

Did Alcidion pay a reasonable price for Silverlink?

The acquisition price paid by Alcidion consists of $55.5M in cash, with a further $5.6M subject to conditions being met.

On the face of it, Alcidion has overpaid for a business that is not growing a lot going by the numbers. This suggests either the product offering is not compelling enough to sustain high growth rates, deficiency in its sales and marketing capabilities or some other problems. These are the main concern I have with the acquisition of Silverlink

However, I think back of the acquisition of MKM Health by Alcidion. Both MKM Health and Silverlink share the same similarities:

• Proven product offering,
• Offer Alcidion access to new customers within the same customer base,
• EBITDA positive with high gross margins,
• Steady business but needed something like Miya Precision to take them to the next level,
• Offering Alcidion a complementary product offering allowing expansion into upstream and/or downstream markets
• Cash generative businesses.

Perhaps it is really a case 1+1 = 3

Going by the numbers provided by Silverlink, the next question is therefore what impact would the acquisition have on Alcidion’s financials in FY22 and beyond?

Prior to the acquisition, Alcidion’s guidance was for FY22 to be breakeven and profitability in FY23. My view is that Silverlink would contribute approximately $2.5M of EBITDA to FY22 for Alcidion and fast track Alcidion achieving underlying operational profitability in FY22. But, obviously, there would be some costs involved with the acquisition.

Moving forward, my thinking is that both the MKM Health and Silverlink business segments would generate the operational cashflow required by Alcidion to increased uptake of the Miya Precision and other high valued product offering.

What is the strategic rationale for the Silverlink acquisition?

I would strongly encourage all shareholders to watch the webinar to gain an appreciation of the acquisition.

As I understand things:

•  New and existing customers have approached Alcidion regarding a larger EPR offering leveraging Miya as the core architecture
• Alcidion was precluded from participating in some tenders because those tenders require a Patient Administrative System
• Silverlink also has one of the remaining few Patient Administrative System which allows 2-way integration. This fits in perfectly with the architecture of the Miya Precision platform.
• Customers (particularly those in UK) are increasingly moving towards a modular systems platform. Again, this is consistent with the ‘best in breed’ approach that Kate has touched on multiple times as customers try to reduce reliance on large integrated systems.

I remain optimistic on Alcidion's future and continue to hold the management and board in high regard... but this acquisition and capital raise announcement is asking a lot out of long-term shareholders.

The investment thesis remains largely intact but the risk-reward proposition has definitely changed given the size and discount of the capital raise.

Some of my questions and concerns were largely addressed by Kate in yesterday's webinar. From what I understand, discussions have been happening for quite some time but the finalising of the deal came at an unfortunate time when the market is a little volatile and when SaaS businesses are getting sold off. It seems time is also of essence in finalising this acquisition given ongoing discussions with existing and new customers.

All in all, I can appreciate the strategic rationale for the acquisition... but... I still can't help but feel as if existing shareholders (particularly those whom strongly supported Alcidion in the last capital raising) have been let down in some ways. In essence, the board is really asking us to back the management and the company's execution.

Positives

• Alcidion can now truly deliver on an end to end modular solutions to meet customer needs
• Possibility of potential material increase in contract value (moving from $6M-$10M to $20M-$40M)
• Capitalising on the tailwinds in UK and the government's funding commitment for healthcare digitisation
• Broaden customer case and cash generating capacity (off EBITDA of $4.5M in FY21)
• Expanded ICS presence (moving beyond at hospital settings to community and social care etc)
• Announcement of a 1 for 10.5 retail entitlement offer

Negatives

• Seems a high multiple to pay for a business that does not appear to be growing a lot based on the financials
• Transfer of potential wealth from existing shareholders without financial capacity to participate in the capital raise to those who can
• Substantial capital raise discount of 21.9% to the last prevailing closing share price of $0.32. This is made worse by the fact that the last capital raise at $0.32 was heavily subscribed and had to be scaled back
• No mention of whether directors intend to participate in the latest capital raise or are they precluded from doing so

Definitely lots to ponder on regarding the acquisition and capital raise. Take my thoughts with a grain of salt as I have been steadily averaging down from $0.41 and has also taken a few bites over the past few days in the low 30s... so plenty of mixed feelings towards the announcement.

My view is that perhaps most commentators and analysts are limiting themselves to extrapolating Alcidion's penetration of the NHS Trusts in their assessment. Nothing wrong with that but the recent webinar has clearly shown that Alcidion has set their sights much higher and there are many developments most investors might have forgotten, including:

• development of a health data 'ecosystem'
• penetration of the private sector (anyone remember Calvary and Healthscope?) The work that Alcidion had been commissioned to do are the first step to much a deeper potential involvement

Other known knowns include:

• Structural shifts in healthcare funding which would provide the impetus for change (e.g. hospitals being financially penalised for avoidable mistakes rather than being given more money to rectify the mistake)
• Continual rise of big data in healthcare delivery and predictive healthcare
• Acceleration in the digitisation rate as goverments are forced to manage the rise in healthcare costs, including avoiding large costly capex in building hospitals and beds (where possible) and disproportionate staffing-patients levels

Other known unknowns include:

• Consolidation of all the DHBs in NZ with a National Health Agency (result of the Simpson review). It will have a very strong focus on effective use of medical data and evidence based research. Patentrack holds the dominant position in the market
• Increased compliance requirements flowing through from the Aged Care Royal Commission. $18 billions will flow through into the sector and some areas that Alcidion potentially could be involved in a number of areas, including monitoring of patients via wearable medical devices 

Other unknown unknowns include:

• Structural shifts in how health insurance premiums are calculated, including more targeted pricing and providing insurance incentives. Higher-risked customers can potentially reduce their insurance premiums and excess by participating in targeted innovative insurance programs in the form of wearable medical devices to monitor patient's health data in real time (e.g. exercise trackers and heart rate sensors) and take preventative care.

If I understand things correctly, we will have a good 4C either Q2FY21 or, more likely, Q3FY21. This would be mainly driven by the recent $9.5M South Tees' contract for the following reasons:
 

• The £28 million Digital Aspirant programme is only available for the first year
• The programme was announced by the UK Health Secretary in December 2019, but the 23 selected NHS Trusts were only confirmed by NHSX in March 2020.
• In the UK the financial year began on 1 April 2020, and runs until 31 March 2021, for the purposes of government working out their finances and budgets
• There is an emphasis on the selected NHS Trusts to utilise their grant funding in the financial year to which the funds are granted, as reiterated by Kate in the webinar

Because the South Tees contract is structured in such a way that it is heavily front loaded with approximately $5.48M of the total contract value is planned to be recognised as revenue in FY2021 (subject to milestone achievement), I suspect there is a sense of urgency in dispensing the grant funding as soon as practicable before the end of the UK financial year and therefore potentially boosting the cash inflow in either Q2 or Q3 of FY21. However, there can be a small difference in the timing of the cash inflow and revenue recognition.

Key takeaways for me are:
 

• Profitability - first time (I believe) this has been publicly stated. I still believe FY21 to be a year of accelerated revenue growth and that just maybe, profitability in FY22.
• Revenue growth - question is how many more contracts can they win and how high can the total FY21 revenue figure be? As at 19 November 2020, Alcidion is expected to recognised $20.2M of revenues in FY21, with seven more months to go. Management has repeatedly stated that they expect accelerated revenue growth for 2HFY21
• Operating leverage - cost base expected to stabilise at 1HFY21 levels. In my view, the key revenue threshold is around $30M. Once revenue exceeds this figure (assuming all else being equal), operating leverage will kick in and the majority of any new revenues will flow straight down to the bottom line. To be sure, Alcidion has a highly scale-able business model and is easily capable of generating sales in the several tens of millions of dollars with just a few NHS contracts.
• Regulatory tailwinds - still intact and accelerating. Traction in key markets such as NZ (Simpson Review) and UK (Digital Aspirant program). Important to note that for some such as the latter, the funding is there - £28M in the first year and further funding to be provided over the next four years.
• Progress on GP and community system - interesting developments taking place in this space. For context:

Key players from the NHS, big tech and pharmaceutical companies have been in discussions over the potential to commercialise 65 million NHS medical records, valued at up to £10B a year. Plans are for a “single, standardised, event-based, longitudinal patient record” pulled together from GPs, hospitals, mental health professionals, demographics registers, prescription records as well as information from the private health sector, with the aim of improving improve outcomes for clinical trials, drug discovery and medical technology.
 

• Growth strategy - Alcidion's success in the short to medium term will continue to be heavily reliant on the UK market. Current growth strategy in that market of focusing on early adopters and digital exemplars to establish reference sites and leveraging off the NHSX Clinical Communications Procurement Framework makes sense to me.
• Near term catalysts - Management noted the strong potential to expand scope of initial customer contracts signed in Australian market. My guess is that there have been discussions with some health districts in NSW in particular. Also, do not discount the potential for some catalysts from NZ. Remote patient monitoring will also will also be increasingly be a new market.

Separately, my understanding is that there have been some movements in the share register:
 

• Cyan Investment has increased its holdings
• Two nominees (Citicorp and JP Morgan) have also been buying. Question is for whom? Also, I wouldn't be surprised if they are not behind the repeatedly 1 share after market trade (as have yet happened again today!)
• Donald K has sold down some of his holdings via (presumably) an arranged trade with Kate
• Found of Patientrack (Michael Buist) has sold down some of this holdings. Good on him, he deserves a nice payoff.

Like some other posters, the results were largely in line with expectations.

Key takeaways

• Reasonably well-managed company with its growth path underpinned by structural tailwinds. Hospitals and trusts have platforms/systems that will eventually need to be digitalised/automated
• Key target markets appear to be delaying its decision points (for good reason) but the required changes are a necessity and not optional. Normality has resumed in some markets.
• Contract with Murrumbidgee LHD runs out in December. Negotiations over an extension has already commenced - possibly an impending catalyst?
• Alcidion is one of only two supplier to the Victorian health incident management system under option 2. Under option 1, the 86 public health services can elect to remain with their current vendor (if they can provide the service to meet the prescribed requirements). If not, it is either Alcidion or Dialog Information Technology
• Managing Director noted that acquisition remains a possibility, particularly referencing the UK market
• Managing Director seems confident over sales pipeline, as evidenced by the forward-looking contracted revenue pipeline. She also noted there are already some progress from the scaled up sales and marketing team. Cash receipts from customers in Q1 FY21 is also looking strong, compared to previous corresponding periods

My thoughts

• Normality should resumed soon to the business administration side of the public healthcare system now that they better understand what they need to do on the front/last line. Perhaps, things should pick up from here on. Personally, I expect at least one more announcement before end of year and would be somewhat disappointed if we don't get it!
• Recent expenditure to scale up sales and marketing capability is expected to slow down and stablise over the next few quarters. I expect the cost base to stabilise around the $4.75M per quarter mark. Give or take, all else being equal, Alcidion needs consistent cash receipts of approximately +$7.6M to achieve positive cashflow. Based on the Q1 FY21 cash receipts, we are approximately 85% of the target figure
• Going by the above rough numbers, Alcidion will probably hit profitability when revenue exceeds >$30M. Like all SaaS companies, profitability will really accelerate when recurring revenues inched closer to the cost base.Given the FY20 revenue figure of $18.6M, profitability is still some time away even if I apply various revenue growth rate for FY21. This is why FY22 is the main game for me - possibly make or break of my investment thesis on Alcidion
• Although the 4C reads okay to me, I still expect the share price to face downward pressure despite any short term bounce for two reasons: (1) there appears to be a party still drip selling; (2) the 'huge' opportunity cost of holding on to ALC in the current relatively bullish market
• To break the current downward trend, we need a catalyst (and a damn good one!) to provide the liquidity for the seller(s) (including frustrated retail holders) to exit. For example, an integrated product offering for a trust over 5-years around the $7M to $8M range. In the absence of any 'news' to break the current cycle, the share price will continue to drift in no man's land, particularly with so many stocks running hard in the technology (e.g. cyber security and gaming) and commodities sector which are capturing the market's attention. To be honest, the medical technology sector is not exactly 'sexy' to the average punter at the moment
• Because what Alcidion is offering to the healthcare market is revolutionary in some sense (e.g. AI via Miya), it is going to take ongoing time and effort to educate the healthcare professionals and administrators. The big positive for Alcidion is that it now has the reference sites plus PoC from the Murrumbidgee LHD and that the networks it could leverage off recent hires (for example, Alcidion's General Manager of Business Development in Australia and New Zealand (Steve Lutz) previously worked with eHealth NSW on the statewide community health and outpatient care (CHOC) and electronic medications management (eMeds) programs
• Pure speculation on my part regarding the NSW Single Digital Patient Record, it is almost certain Alcidion would partner up with another party to go for that contract, against the traditional big boys such as Epic and Allscript. Check out the background of our executives and then check out which EMR that Miya has already been successfully proven to work alongside with - join the dots. On its own, Alcidion will have no chance as it would be deemed too small and risky. But together with this partner, they can offer a very 'compelling proposition' via a locally proven evidence-based proposal

Alcidion's full year result pretty much came in as expected.

Ongoing investment in sales and marketing capabilities continue to delay cash flow break even. But this is a necessity to capitalise on the market opportunity. In fact, I think the structural shifts that were occurring prior to Covid19 and subsequently accelerated by the pandemic makes first mover advantage in the emerging land grab more the important.

Increased cost base is expected to stablise in FY21. Colin mentioned in the previous 4C webinar that he expects costs to stabilise around the $4.75M per quarter mark. Give or take, all else being equal, Alcidion really needs consistent cash receipts of approximately +$7.6M to achieve positive cashflow.

Going by the above rough numbers, Alcidion will probably hit profitability when revenue exceeds >$30M. This probably means profitability is still a few years away given the FY20 revenue figure of $18.6M. Like all SaaS companies, profitability will really accelerate when recurring revenues inched closer to the cost base.

Having said that, the timeline will be dramatically shorten IF Alcidion manages to secure a major contract. the Managing Director mentioned that she envisaged a integrated product offering for a trust over 5-years would be around the $7M to $8M range. Obviously the actual number might differ depending on the number of individual hospitals and beds involved, but it still provides a useful reference on the size of contract that could potentially eventuate.

The Managing Director also kinda hinted that she expects revenues to accelerate in the second half of FY21. All the necessary building blocks are slowly being placed in position to facilitate the emerging market opportunity. It all comes down to execution now.

The only bit of the webinar that I had me a little concerned is the CFO's explanation for cost of sale of goods and services, in response to Alcidion's low gross profit.

In the FY19 Annual Report, Alcidion stated the following:

NOTE: The Cost of Sale of Goods and Services for 2019 and 2018 differs from that presented in the unaudited Preliminary Financial Statements which followed the presentation used in the 2018 Annual Report, which deducted only the cost of third party product and hardware (i.e. cost of sale of goods only) from revenue to determine Gross Profit. This was inconsistent with how Gross Profit was presented in the 2019 Half Year Review where the cost of direct labour used to deliver services and develop, maintain and support product was also included in the Cost of Sale of Goods and Services. Accordingly, the cost of direct labour has been reclassified from the total Directors and Employee Benefits Expense amounts shown above to Cost of Sale of Goods and Services and the calculation of Gross Profit reflects this

I previously queried Alcidion on this change and their response is pretty much that it was permitted by standards, auditor did not raise concerns and that it was more reflective of the nature of their business.

In yesterday's webinar, the CFO acknowledged that their approach has made the result look much worse that it actually is, compared to if the direct cost of labour (which is quite significantly) was to be put below the top line. He further flagged the possibility of taking those costs out next year to boost the gross profit margin figure.

I am not implying something dodgy is going on and is convinced every adjustment will be done in accordance to accounting standards etc, BUT can anyone with an accounting background explain this discretion for companies to change their reporting methodology as they see fit?

To promote a healthy discussion, below are my thoughts around key reasons on why the share price has been drifting down. I welcome ideas from both sides and agreeing/disagreeing in a constructive manner.

Revenues are not growing quickly enough

The market might be expecting stronger revenue growth that the 9% uplift in FY20 revenue (using lower end of FY20 guidance, $18.3M vs $16.9M in FY19).

As mentioned in my previous posts, there are many factors contributing to this with the most obvious being Brexit (government in care taker mode and a new government being formed) and Covid19. Not only have these occurred during what would usually be the busiest period for Alcidion, it has also obscure the view of what would have been the first 'clean' full year (post integration etc) of the new Alcidion (old Alcidion + MKM Health). Because of this, the market does not have full visibility of the revenue generating profile of Alcidion in a typical year.

Nevertheless, I still think for Alcidion to be able to achieve revenue growth and beat revenue guidance in these difficult circumstances is a good effort.

It is also important note that the healthcare industry is a very slow moving beast, particularly so in the public system where the biggest proportion of Alcidion business reside. Customers are sticky, contracts are typically between 3 and 5 years, long winded procurement process, risk avoidance trumping innovation aka inertia etc. Consequently, things take a much longer time than many anticipate - for example:

• customers would let their existing contract (if with a different provider) run down before they invest in a new system
• the tendency to go with big multinationals as they are perceived to be lower risk
• no one wants to be the first with an innovative product, safer to be follower than a leader (the concept of first movers advantage does not apply here!)
• contract negotiations take a bloody long time (the MidCentral DHB contract took around 2.5 years to negotiate and execute, based on my previous discussion with the ex-CFO and ex-Chairman)
• time lag between the scaling up of sales and marketing capability and growth

Alcidion has experienced the short term pain in Brexit and Covid19, but I think there would be some long-term gain. There will be an acceleration in the digitisation, data analytics and artificial intelligence because of regulatory compliance, demand for greater efficiency gains, capacity constraints etc.

Misinterpretation of contracted revenue figures

26% fall in FY21 contracted revenue of $12.8M vs. $17.2M in FY20 and also the perceived fall in recurring proportion of the contracted revenues

It is my belief that some market participants might have interpreted the 'contracted revenue' reported in the 4C of Q4 FY20. The contracted value relates solely to the start point of FY21. Without reading carefully the chart headings, some might assume there was actually a decline in contracted revenue performance.

However, if you compare it to the corresponding start point for FY20 (which was reported in the 4C of Q4 FY19, there is actually a 9% uplift. Not only is this a healthy starting point for FY21, there is also an increase in both the proportion of recurring revenue (up from $7.7M to $9.7M) and product revenues (up from $7.1M to $9.7M). Alcidion earns higher margins in revenues derived from recurring activities and products.

It can also be observed that the contracted revenue pipeline also gradually increase throughout the course of the financial year.

Growth in operating expenses has continued to outstrip growth in both revenues and cash receipts

Growth in Cost of Sale of Goods and Services is expected to outstrip revenue growth

In my view, Alcidion has been upfront in explaining this to the market for some time now. The focus is to increase top line revenue in the three key geographical markets, noting that the 'old Alcidion' pretty much did not have a sales and marketing team. The 'new Alcidion' therefore has to improve and enlarge its sales an marketing team and capability to cross and up sell the additional products and services.

As mentioned above, there is a time lag between the scaling up of sales and marketing capability and when growth actually flows through.

One of the key takeaway from the recent webinar is that the COO/CFO expects headcount to still increase but with the costs to stabilise around the $4.75M per quarter mark. Give or take, all else being equal, Alcidion really needs consistent cash receipts of approximately +$7.6M to achieve positive cashflow.

One might reasonably ask why is this important. Again, based on my previous discussion with the management, it is my understanding that some of the institutional investors that they have engaged with had given the feedback that Alcidion needs to achieve 'consistent' positive quarterly cashflow before they would consider investing, mainly due to risk management and their investment mandate.

A lot of optimism or expectations were baked into the market capitalisation

At market valuation >$120M, the market was valuing Alcidion as a typical SaaS business and expecting strong revenue growth and quicker execution of contracts. The current trajectory does not match this profile.

As mentioned above, the public segment of the healthcare sector that Alcidion is focusing on is notoriously slow. Perhaps I also have been previously guilty of valuing Alcidion as a typical SaaS business and using peer comparison without fully appreciating how slowly things can move.

I was quietly impressed with Alcidion's performance in FY20 despite the headwinds. But obviously the market holds a different view, partly explaining the recent share price decline following the release of the 4C of Q4 FY20.

But then market sentiment can change quickly - for better or worse. Hopefully, it will turn for the better as management continues to execute and hit some sixes for us.

Some additional thoughts from me for discussion...

Snapshots based on 4C from Q4 FY20

Pretty evident that:

• there is still an element of lumpiness in Alcidion's revenue profile but aggregated revenues have continued to trend upwards
• continual shift towards recurring revenues (approximately 76% of total revenues based on latest 4C, highest to date)
• revenues from products also make up approximately 76% of total revenues based on latest 4C, also highest to date)

For context on the upward trend in staffing course, listen back to the explanations from Kate and Colin in today's webinar once it gets uploaded onto Alcidion's website. From memory, Colin did mention that he expects staffing costs to stabilise at around +4M per quarter moving forward (can't recall the exact figure)

Valuation using a multiple approach

• Market cap/Revenue: approximately 8x sales (using today's closing price of 15 cents and lower end of revenue guidance for FY20)
• Enterprise value/Revenue: approximately 7x sales (using today's closing price of 15 cents and lower end of revenue guidance for FY20)

Latest 4C stated that Alcidion enters FY21 with a healthy sold revenue pipeline with $12.8M contracted to be recognisedin FY2021. Previously, Alcidion added $6.8M to FY20's starting position. Remember, we had Brexit and Covid19 which impacted what would ordinarily be Alcidion's strongest performing quarters.

Deferrals in projects, structural tailwinds etc should drive continue revenue growth. Applying a top line revenue growth of 20% to the lower end of FY20 revenue guidance (which I think is achievable given Alcidion did achieve (9% revenue growth in FY20 despite difficult circumstances) gives us a full year FY21 revenue of approximately $22.1M, of which 58% or $12.8M is already contracted.

Using an EV-R multiple of 7, FY21 revenue figure of $22.1M and reverse engineering, we get a FY21 share price $0.17. Discount it by 10%, we get a share price of 16 cents for FY20.

This suggests that the current share price/enterprise value is just about right, give or take.

For comparison purposes, the same approach using different multiples would give us the following implied share price for FY20:

• EV-R multiple of 8: 18 cents
• EV-R multiple of 9: 20 cents
• EV-R multiple of 10: 22 cents

I thought the quarterly reads okay to me. In fact, it has given me extra confidence that management is continuing to execute on their strategy, despite the current difficult times.

Key highlights include:
 

• Positive net operating cashflow - plus for me, wasn't expecting this
• Uplift in FY20 revenue forecast - from $17.2M (as at end of Q3 FY20) to the range of $18.4M to $18.7M (as at end of Q4 FY20). Also uplift from FY19 revenue of $16.9M. Bloody impressive in the context of Brexit and Covid19, if you ask me for the reasons Kate mentioned about resources being diverted to the front/last line!
• Continuing uplift in operating expenses - within expectations given management has reiterated this multiple times that the increase in sales and marketing investment/expenditure is to drive top line revenue growth. You have to be either living in lala land or not bother carry out some basic research before posting any criticism

Additional highlights for me include:
 

• Very low customer churn rate - Kate mentioned that she cannot recall a contract not being renewed once the product is embedded into the customer's system
• The is a level of pent up demand that will flow through
• Recurring revenues will continue to increase as contracts gets renewed based on a subscription model
• Developments in NZ as a result of the Simpson review. Well worth a read as it touches on digital and virtual care. One recommendation in particular caught my attention: 'priority for digital investment shouldbe given to initiatives that will accelerate interoperability'
• Alcidion currently in active discussions with a number of parties about their products
• Structural tailwinds remain intact or might have even accelerate - e.g. virtual care settings and ongoing increased focus on digitalisation in UK and NZ.

If I remember correctly, Kate also hinted at an uptake of Patientrack in NZ.

Based on 'current' operational performance and valuation, Alcidion's current market cap is probably about right or a bit tad higher.

But for some of us, we are investing in what Alcidion could be in 4 or 5 years time. For things to play out as we think it should, it requires a combination of luck, good execution by management etc. Things may either play out exactly the way we believe it should or turn shit house - all part of investing.

Everyone's valuation of Alcidion will be dependent on a number of factors, including: your investment horizon, confidence in management execution, view of structural tailwinds or headwinds, sustainability of growth rates, capacity of Alcidion to upsell and cross sell its products, etc.... hence my previous comment of Alcidion probably being a case of 'averaging up'...

Comparing to the end of FY19 (30 June), we have seen positive developments on the following fronts:
 

• Share price - up 15% (28/07/20 closing share price of $0.15 vs. 30/06/19 closing share price of $0.13). This also ignores the extra shares issued as part of the capital raise)
• Market capitalisation - up 40% (28/07/20 closing value of $148.6m vs. 30/06/19 closing value of $106m)
• Enterprise value - up 29% (28/07/20 closing value of $132.7m vs. 30/06/19 closing value of $102.9m)
• Revenue growth - at the end of Q4, contracted revenue in the range of $18.3M - $18.7M in sold revenue set to be recognised in FY2020, exceeding FY2019 full yearrevenue of $16.9M
• On market purchase by Managing Director and Chairperson - the former to the tune to $137,000
• Partnership signed with Healthscope for data and analytics - contract with a big private hospital operator (approximately 43 hospitals). It wasn't so much the $2.1mil contract number as it is the potential that it unlock
• Patientrack renewals, extensions etc - for example, NHS Fife extends Patientrack across Board and renews for five years
• PoC - Murrumbidgee LHD to expand and extend use of Miya Precision and Miya MEMRe

I am certainly not suggesting that everything is rosy but credit should be given to the management for the achievements to date, bearing in mind that Brexit had slowed things in Q3 FY10. Covid19 further slowed things down as all available health resources were rightly diverted to the front line. Hence, procurement, sales and marketing etc has all taken a back seat. This delay is not specific to Alcidion but is consistent across the various health companies that I follow.

Based on current available information, the risk-reward proposition has definitely changed somewhat because of the following:
 

• some revenue recognition would be pushed back possibly into FY21 due to performance milestones being delayed at customers' request as they are focusing efforts on the covid19 front
• similarly, lengthening in the sales cycle for the above mentioned covid19 reason, cancellation of trade shows, restrictions in air travel etc
• growth in operational expenses exceeding revenue growth (due to Alcidion's expansion strategy and hence recent increased spending in new hires and boasting their sales and market capability)

But on the other hand, the current pandemic should also accelerate the structural tailwinds that were already in play, namely:

• increased uptake of technological solutions in the delivery of healthcare
• greater emphasis to maintain hospital capacity (via moving people out of the hospital system quicker where possible)
• focus on seeking greater operational efficiencies and/or effectiveness of healthcare delivery etc
• increased healthcare spending

At this point in time, Alcidion is probably a company that one should consider 'averaging up' as management further earn their stripes as opposed to 'averaging down'. I suspect this is probably the approach some smart investors are adopting in respect to Alcidion.

Some potential positive developments include:
 

• PoC results from the evaluation study and possibility of a statewide roll out (including remote monitoring). Also the possibility of accelerated growth in other states if PoC results are positive
• Accelerated revenue growth in FY21 or FY22 from resumption of procurement, purchasing etc
• Shorten sales cycle and greater uptake of the higher margin Miya platform business due to cross-selling and possibly lower customer acquisition costs
• Potential M&A (unlikely but I can't help but feel something is brewing in the background). My guess is that Alcidion growth would be driven by acquisitions, mergers and organically. I am thinking any acquisition (should there be one) would have to be around the >$30 million market to deliver a substantial impact
• Further developments on the Healthscope and Calvary fronts (remembering that the development of a data warehouse is always the first phase of a more substantive piece of work) and the private hospital segment
• Geographical expansion and/or announcement of distributors in new geographical markets

If one take a longer view (>5 years), I really think that Alcidion is at a sweet spot - intersection of technology and healthcare. It is more likely to be a 'growth at reasonable price' company rather than one that would experience explosive growth rates. I would be extremely happy to be wrong though!

Considering all things (Brexit and Covid19), it was a decent result.

My takeaways from the conference call on the 4C are:

Areas of interest

• Alcidion appears to have a strong working relationship with eHealth NSW due to its expanding role in the Child Digital Health Record PoC. Available information suggests that Alcidion is now involved in all four project initiatives, with the potential for the project to be rolled out nationally
• Currently building a data lake for Calvary to consolidate data from various clinical and non-clinical IT systems. Importantly, this is the important first step before data analytics and AI can be applied in the subsequent stage in a brand new world of prevention, new personalised models of care,intelligent decision support and business efficiency. I personally think that there is a strong likelihood for this contract/relationship to go further
• Huge validation of Miya MEMRe as Murrumbidgee has committed to an extended 12 month use across its hospitals even though the results of the PoC has not yet been published. Also involves extending the use to 300 additional clinicians and implementing a COVID-19 dashboard for remote monitoring
• Coivd19 has highlighted the reality of resource constraints, compelling hospitals to accelerate the movement of patients through the system and explore out-of-hospital care using technological solutions. Huge potential for remote solutions as, for example, chronic patients are still taking up a lot of hospital resources

Financial

• Revenues continue to be on a growth trajectory with strong structural tailwinds and the covid19 being an important catalyst when viewed over longer term

• Limited disruption due to, among other things, recurring nature of revenue profile, customer base (predominately public sector) and longer duration of contracts
• Continual shift towards a recurring revenue model with revenue smoothed over a 3-5 year period as opposed to a larger upfront revenue boost
• Some deferral in revenue recognition to FY21 as resources are redeployed to the front line

Corporate

• Alcidion has already scaled back on some spending (e.g. putting on hold geographical expansion into some areas, travelling etc) in response to the current uncertainties over covid19, without impacting immediate revenue growth.
• Strong balance sheet with sufficient capacity to further reduce operational spending if duration of pandemic becomes protracted
• Continuing to research new geographical opportunities, albeit constrained by travel restrictions
• Ongoing investment over the next few quarters, as per growth strategy

Sales and marketing

• Expects newly appointed GMs to leverage off their contacts and bring in some sales lead

• Newly staffed up uk team to follow up on leads generated by Malcolm recent visit to UK where he presented to several major NHS
• In active discussions with several new customers not only around their response to covid19 but also their broader needs
• Covid19 has the potential to fast track purchasing decisions over the longer term but also delays may be experienced in the procurement process in the near term as resources are redeployed to the front line

Curran & Co has slightly upgraded its 12-month price target for Alcidion to $0.30.

Main contributors to the higher price target include:

• a greater portion of revenue moving forward will be made up of higher margin product sales, rather then non recurring services.
• benefits from current investment in sales personnel etc will start to flow through in FY24 and beyond, with EBITDA lifting above its previous forecasts. However, EBITDA forecasts between FY20 & FY23 have been reduced to reflect the extra spending.

Below are some key observations from the Curran & Co research note.

As always, everyone should their your own research and be mindful of the fact that the entity was joint bookrunner in the recent capital raise, hence take some of their forecasts, valuation, methodology etc with a grain of salt.

12-month price target $0.29, upside of 38% from current share price of $0.21.

Valuation is derived using a hybrid of the Dividend Discount Model and Gordon Growth Model to derive the present value of dividends beyond FY25.

Uplift in revenue expectations beyond FY20 due to major capacity for growth in existing markets

Curran & Co is forecasting aggressive revenue growth, with 25% increase in FY20

Earnings growth will start to flow through in FY22

EBITDA forecast to reach $37 million by FY24

Profit growth in the near term will be constrained by extra costs associated with Alcidion’s expansion strategy

Massive opportunity for penetration into the EU and North American markets

Both markets collectively have approximately 1.1 million hospital beds

Alcidion may seek to enter both markets either by distributors or acquisitions

Validation of analytics capability from the recent Healthscope partnership

First major private hospital operator to utilise Alcidion’s services, paving the way for further penetration into the Australian private hospital segment

All in all, I was assured by the commentary and feeling confident of 2020. I think the number of near and medium term catalysts is still not thought through and well-appreciated by many investors.

Key points from the conference call:

PoC trial

• trial has concluded and evaluation report is being currently prepared by the evaluation panel.
• time extension has been sought by the panel
• evaluation report will be released by eHealth NSW and not Alcidion
• Alcidion expects evaluation to be released sometime in Q3
• health district has sought continual use of Miya Memory and Miya Precision at site (extending to more doctors) even though trial has concluded. This should be seen as a positive 
• evaluation results will potentially add to the evidence-base of benefits arising from use of Alcidion's product suite

Revenue

• as at end of Q2 19-20, recognised revenue is $15.4M (approximately 91% of the total recognised revenues for 2018-19). A further $2.1M is expected to be recognised in Q3 19-20 from new contracts sold in Q2 (once performance thresholds have been met). Factoring that, the 'known' recognised revenue would be $17.5M (approximately 103% of the total recognised revenues for 2018-19)

• recognised revenues included a number of successful small contracts that were not accounced to the ASX as they failed to meet the materiality threshold. Included in this category are the $160k contract with the Queen Victoria Hospital, which was won via a competitive tender

• Revenue was affected by the UK elections where things slowed down or came to a halt
• Positive correlation between sales staff and revenue (hopefiully). but there is a time lag as staff needs to be upskilled and etc
• Seasonality in revenue profile, expect a strong second half of 2019-20

Geographical expansion

• Alcidion is working with Austrade on this
• FDA/CE Mark approval is not a prerequisite although it would help with the marketing. What is more important is customer/user feedback and results from reference sites
• Key focus, however, will still be existing key markets of UK and Aust. Particularly so given the structural tailwinds in UK for NHS to achieve digital maturity

Corporate

• Alcidion is continually to grow, with the addition of new staff and more to come (3 more additional sales staff being recruited and one GM of sales and marketing for Aust/NZ)
• Growth trajectory is positive
• Planned marketing campaign in the UK in Q3 2019-20 to capitalise on recent contract wins and etc
• Planned investor roadshows in Q3
• Continual investment in R&D to stay ahead of competitors, particularly with the mobile platform
• Continue to establish more reference sites as these sites and results would be what drives the uptake of Alcidion's product suite
• Out of hospital care (aged care and community care) is potentially another market for Alcidion

Capital raise

• A few new institutional investors have come on board in the recent raise
• Some of the raised funds have already been deployed

Having re-read the announcement and listened to the conference call. I really feel that Alcidion is ahead of my expectations, following the acquisition of MKM Health and etc.

Investment thesis

The thesis here for Alcidion is very simple:

Alcidion is emerging as a disruptive leader in an emerging platform and data analytics market with strong structural tailwinds, disrupting a $1.63 billion market (across Aust, NZ and UK), where network effects and relationships are at play. This leaves Alcidion well-placed to secure market share as hospitals look to technology to improve delivery of healthcare and transition to digital maturity - creating a long runway for growth.

Positive momentum on the revenue front

Two things stood out for me on the revenue front

1. Revenue growth

Total revenue already set to be recognised for the 1H FY20 totaled $15.4 million, already totaling 91% of the FY18 revenue of $16.9 million,with the stronger half yet to come.

This was a pleasing result and reflects a company that is continuing to grow. As previously mentioned, the revenue figures also incorporate contracts win that were not announced to the ASX as they did not meet the materiality threshold. An example of this is the 5-year $160,000 contract win with the Queen Victoria Hospital for Alcidion's Patientrack solution via a competitive tender. This is therefore something for investors to bear in mind in between the time lag between ASX announced contract wins/extensions - many things are still happening in the background.

2. Revenue profile

Alcidion is continuing to transition to a more recurring revenue profile. In my view, recurring revenue will continue to accelerate.


The transition to a more recurring revenue profile is important because it promotes:

• greater revenue visibility and predictability
• better customer retention (provided they are kept happy and satisfied with service)
• higher margins
• investor valuation

Over time, there is a huge recurring revenue opportunity for Alcidion from its existing three key markets given all of them have yet to commence their transition to digital maturity. Given time, there is the potential for Alcidion to hit the $15-$20 million recurring revenue profile from the first phase of the digital transition from the existing three key markets.

Successful execution to capitalise on the opportunity won't happen overnightBUT the massive market opportunity is right in front of Alcidion to position itself as a disruptive leader in healthcare technology space.

What could go wrong?

Shit sometimes happen but there are definitely some risks associated with the potential reward - aka Alcidion's risk-reward proposition.

The risks that come to my mind include:

• new competitors
• technological advancement (potentially due to lack of investment in R&D)
• cash burn without a corresponding acceleration in sales (declining return on investment)
• bad acquisitions (empire building as opposed well-considered acquisition that would deliver an appropriate return on equity)
• slower rate of growth that cannot be appropriately explained by seasonality or other valid reason
• investors' impatience (both retail and institutional). Growth won't happen overnight and in a straight line, but management has to be given every reasonable opportunity to deliver before investors consider bailing out
• poor customer retention
• potential unorderly sell down by any top20 shareholders (if their personal circumstances change)

Two key industry trends that would benefit Alcidion

1. Financial pressure are increasing

Both public and private health systems are facing revenue pressures, margins squeeze and lower budgets. It is inevitable that providers would seek to identify productivity gains and greater efficiencies - that is, provide more services using less resources.

The increased labour costs of doctors is also a real problems for hospitals. My experience with public hospitals is that they are employing more young doctors as some of the more experienced and older doctors move into the more lucrative private sector. However, public hospitals also have the operational need to reemploy those doctors/other doctors from the private sector back to the public system as consultants (e.g. 1 day a week) on private sector wages to guide the newer doctors. All these lead to increased cost pressures in the public system.

Looking at things from another perspective, the Miya platform can also help with succession planning as hospitals would be less dependent on certain key individuals. 

2. Increased emphasis to deliver better 'targeted' healthcare services

A 2018 study found that the average GP consultation time was just under 15 minutes in Australia, more than 20 minutes in the US, and around 10 minutes in the UK.

This quick around obviously would have an impact on patient outcomes (e.g. whether the right diagnosis is carried out or unintended adverse outcomes), workload pressure on doctors, nurses and the hospital system.

Obviously, Aldicion's product suite would not solve this problem on its own. But what it can do is to alleviate this pressure and provide the necessary information for doctors and nurses to isolate the problem and provide a more 'targeted' medical response. 

In my view, this is potentially a game-changer.

Imagine the doctor or nurse who only has a limited period of time with each patent not having to read through all the previous medical information to join the dots by having to stop, review hardcopy records and establish whether the current treatment would result in an adverse reaction due to a pre-existing condition. This is also assuming that the doctor has the capacity and expertise to join all the dots.

Imagine now having access to a device that has really joined all the dots at the swap of a finger.

Alcidion has got their fingers in so many different pies that they do not even need to get everything right or to dominate the market. Just securing a portion of the overall potential revenue market should provide a meaningful re-rate.

My investment thesis on Alcidion really comes down to:
 

• strong structural tailwinds (changes in funding arrangement and inevitable adoption of technology in the healthcare sector)
• intellectual property (artificial intelligence and algorithm)
• growing data repository (internal data feeds)
• total 'global' revenue opportunity (across different markets and geographical locations), and
• management and board (track record and integrity)

Below are just some random thoughts from my perspective, an ordinary retail investor like most here:

1.) In my view, Alcidion only needs to execute and successfully capitalise on a few opportunities within the total 'global' revenue opportunity that exists (ranging from hundreds of millions to blue sky thinking of billions). With the strong tailwinds, I do not think it is unreasonable or unrealistic to achieve revenue sales of $50 million or so within the next 5 years or so. With high operating leverage and reasonable gross margins, net profits of $30 million or so does not seem very far-stretched.

2.) At this very time, we need news before the share price can move up again. Until that happens, the share price would probably fluctuate within a range, being tightly controlled going by recent trading patterns too. I have no doubt that news will come soon, what I am hoping to see soon is a high-valued contract win. If this happens, I feel the market will re-rate Alcidion accordingly as I believe the market is still somewhat sceptical about the scalability, revenue and profitability potential yet. However, I am also not discounting an acquisition announcement.

3.) A common factor in the recent re-rates by the market to technology companies such PCK, TNY, NHL and etc is the data that these companies hold. One of the key challenges facing many technological companies in the artificial intelligence and algorithm is that they need data - lots and lots of data. You either have to acquire it and/or collect it over a long period of time.

What the market perhaps is not appreciating is that Alcidion potentially holds a much bigger data bank than many companies. In fact, a huge data repository . Latest corporate presentation states that Alcidion currently has approximately 79 million observations. The repository is continually growing as more data points are being internally fed in via Patientrack and etc. The rate at which this internal feeding is taking place will also grow as more contracts are won.

More data points will continually refine the algorithm and ultimately lead to better and more accurate artificial intelligence models. I would not be very surprised if Alcidion comes out with a Miya 2.0 to headline its aggressive push into our key markets.

4.) I also think there is a massive opportunity for Alcidion to incorporate their algorithms into wearables. There are now measurable links between biomarkers such as sleeping cycles, heart and breathing rates, blood pressure and how those data can be used for automated health event prediction, prevention and intervention.

My investment thesis on Alcidion, and what it offers to investors

(1) Offshore growth angle

Approximately 60% of Alcidion's revenues would come from offshore in FY19 (refer Vertitas report). I would expect this figure to increase due to the faster pace of technology uptake in other countries as Australia tends to be a follower.

Given most economist are forecasting interest rates to remain low or even go lower, this can only be good for our offshore earnings.

(2) Structural growth angle

NHS long term plan has mandated for the move to paperless patient records and highlighted the application of AI to improve patient outcome and productivity. NZ also has it digital health strategy.

Greater adoption of technology is no longer an option but a must have due to increased pressure on the health system, budget pressures and the renewed focus to get bigger bang for dollar. It is no longer a matter of if but when.

Alcidion has already executed some contracts in UK and I see more being executed.

(3) Near-term catalysts 

I believe the following catalysts are realistically possible:
- more cross-selling opportunities in different geographical, as evidenced by the two contracts executed for Alcidion's integrated product suite with Dartfordis and ACT Health 
- shorter procurement time due to the perceived lower risk as the client is not the first mover
- greater validation of Alcidion's integrated suite once the post implementation outcomes compared with pre implementation base case is collected from Dartfordis and ACT Health, analysed, validated and publicised and promoted together by Alcidion, Dartfordis and ACT Health
- further positive cashflow results
- more deals being executed
- announcements of joint ventures with partners in the Asia-Pacific region
- an institutional investor or 'big brother' coming on board to the share register

Unknown catalysts include:
- expansion to the North American market which I believe is still happening in the background but has taken a backseat to the UK
- announcement of collaboration with a multinational digital health company
- further M&A activity
- further reform to the healthcare delivery (e.g. mandated digital patient record keeping in Australia and penalties on hospital acquired complications)
- expansion to new markets such as the out-of-hospital care and primary and preventive health care sector

For some time, I have been thinking about what valuation multiple one might reasonably ascribe to a company like Alcidion in its current state, given its short track record of cash generation capacity but also considering its organic growth opportunities.

Because of my nature, I always prefer to lean towards applying a ‘very conservative’ EV-Revenue multiple of 9 or 10. Although it is rough, it provides me with an adequate and reasonable guide to my assessment of the risk-reward proposition of Alcidion and margin of safety.

Obviously, if one has a higher risk tolerance and a more optimistic view of Alcidion’s prospects and financial performance, it may be perfectly reasonable to assign a higher multiple, noting that:

• Other comparable companies such as Uscom (>14) and Volpara (>20) both have double digit multiples.
• Market is currently ascribing very high multiples to SaaS companies such PME (>50), including a premium for off-shore earnings

At this stage, I am personally more concerned over Alcidion’s underlying operational performance and business strategy with profitability. Hence, my deliberate attempt to avoid using EBITDA valuation multiples to derive an indicative share price.

My valuation approach would obviously change and the implied multiple that I would use will increase as Alcidion grow and progress from an accelerating growth stage to the optimising profitability stage and finally to the securing sustainability stage.

And yes, I do realise that there is an inherent contradiction between what I have mentioned above. Applying a conservative valuation multiple but yet recognising that Alcidion is currently at am explosive accelerating growth stage. There is no right or wrong answer to this dilemma, and I have yet to resolve this.

I have had another play at modelling the impact of applying different EV-Revenue multiples and different revenue growth scenarios to derive the resulting implied share price. I have used the latest information from the preliminary final report for the year ended 30 June 2019 and Appendix 3B (which the previous modelling did not include as it was not yet issued).

As can be seen in the first figure, the current share price ($0.21) is about right if you apply a very conservative multiplier of 10. I acknowledge that it a crude piece of modelling but I have always found it personally useful to assess a company's risk-reward proposition.

To further expand my line of thinking, I can also use a mid-point of the very conservative and reasonable optimistic scenario (in its current accelerating growth stage), as follows:

• conservative - 10 (personal preference)
• optimistic - 15 (for reasons outlined in some of my previous posts)
• mid-point - 12.5

The second figure below shows the results a conservative implied share price of $0.26

Even the share price has risen quickly and above my estimated valuation of $0.145, I am resisting the temptation to sell because I am convinced that the share price will continue to re-rate higher because of the following:

• Alcidion continues to have an undemanding EV/Revenue multiple compared to many other medical technological companies
• Healthcare stocks will continue be in demand as some investors look to hedge by investing in a sector that is less vulnerable to an economic downturn
• The market appears to be willing to pay a premium for stocks with a recurring revenue and/or offshore earnings profiles
• Any further interest rate cuts will also benefit Alcidion due to its offshore earnings, which continues to grow as evident by the recent contract wins
• Operating leverage which is improving with each contract win. Remember Veritas had estimated an 80% gross margin associated with recurring revenues. That revenue stream continues to grow.
• With a high gross margin and a relatively high fixed cost structure (low variable cost and low forward capital expenditure requirements for new contracts), a small uplift in sales (revenues) can magnified into large cash flows. Veritas estimated that a 11% lift in revenue translate to a 242% growth in EBIT
• Increased focus on compliance which I personally partly attribute to the fallout from the Banking Royal Commission. I expect there would be an increased emphasis to ensure data is electronically captured and analysed to provide increased visibility of the quality of healthcare services provided is captured, for hospital audit/regulatory monitoring purpose
• Structural shifts in healthcare funding which would provide the impetus for change (e.g. hospitals being financially penalised for avoidable mistakes rather than being given more money to rectify the mistake)
• I believe that the upcoming 4C will show a positive uplift in operating cashflows. In the current market, any company that reports a result that show it has achieved breakeven, uplift, consecutive positive cashflow and etc, will see its share price re-rate higher
• My belief in the management when they tell me that Alcidion can self-fund itself into an international business without a capital raise or debt facility. Looking at things another way, this can also mean management has clear visibility and confidence in the clear pathway to cash flow generation and profitability

More importantly, I personally believe that there are a few near to medium term catalyst which may propel the share price higher, assuming no adverse developments and that the managements continues to execute its strategy. Those catalysts include (but not limited to):

• PoC with NSW Health
• New contract wins with existing customers via cross-selling and new customers
• Opportunities from structural drivers playing out in the UK (NHS long term plan and complementary government incentives)
• Evidence from reference sites that would enable Alcidion to articulate a more compelling investment and business proposition
• Updates on the Calvary and NZ Health District fronts
• Opportunities from the recent NSW budget where $92.4 million was allocated to streamline patient care through digital technology projects,with $42.1 million for Digital Patient Records and $50.3 million for a Whole of System Digital Platform including more mobile digital healthcare and next-generation video conferencing for clinicians and patients. Remember Alcidion is already on the NSW Health's panel of service providers and won the recent Child Digital Health Record contract was won via a competitive select tender process
• Effects flowing through from the rebranding of the new Alcidion

Two key elements of the NSW Budget 2019-20 are:

(1) $10.1 billion over four years to invest in New South Wales’s health infrastructure to continue current works and commence upgrading and building a further 29 hospital and health facility projects.

(2) This infrastructure investment includes investing $92.4 million in streamlined patient care through digital technology projects, with $42.1 million for Digital Patient Records including linking NSW Ambulance and hospital medical records in ‘real time’ to support faster and safer transfer of care from NSW Ambulance to hospital emergency departments; as well as $50.3 million for a Whole of System Digital Platform including more mobile digital healthcare and next-generation video conferencing for clinicians and patients

----------------

I believe Alcidion will be in a very strong position to capitalise on any opportunities that may arise from the above spending announcements.

The primary reason being that the recent Child Digital Health Record contract won by Alcidion via a competitive select tender process. A small number of companies were deemed to have the capabilities, were invited to respond to that tender, and Alcidion won the contract.

For that reason, it can be deduced that:

(1) Alcidion is on the NSW Health procurement panel - a nice position to be in for future opportunities and procurement lead time

(2) Alcidion is being recognised for their capabilities. Particularly so, given that it has won several contracts via competitive process against, in some cases, bigger companies both locally and overseas.

My line of thinking is that if Alcidion is good for the Child Digital Health Record tender then surely it is good enough to win a decent slice of the $42.1 million for Digital Patient Records, assuming it plays its cards right and continue to execute successfully.

I am confident that Q4 will again be cash flow positive (as previously reiterated by the management with the real question being how much cash has flowed into Alcidion's coffers) for the following reasons:

(1) Some proportion of revenues from new contract wins in both Q3 and Q4 would be recognised and flow through to Alcidion's financial position. For example, the $2 million deal with Dartford and Gravesham NHS Trust in the UK was announced near the end of March and would not practically allow for any milestone revenue to be recognised under the new accounting standard AASB 15 from 1 July 2018.

In my view, Q3 and Q4 are the relevant period to judge the 'new Alcidion' as the first half was more about integration of MKM Health into the 'old Alcidion'. It is therefore important to consider this if anyone is intending to do a straight comparison between FY18 and FY19 because the full picture won't be shown.

(2) Putting aside management's reiteration that no capital raise is required, I have also queried the company over whether or not a debt facility is required to to provide an alternative source of capital to finance growth and more appropriately tenor-match the medium term and recurring revenue profile of PaaS contracts?

The company has responded that, at this stage, they do not foresee a need for a debt facility.

This is particularly important to my line of thinking because it can mean either: 

(a) management has no clear visibility over their financial position/cash flow position, or

(b) management has clear visibility and confidence in the clear pathway to cash flow generation and profitability, and that it can self-fund itself into an international business (focusing on the three key markets of Australia, New Zealand and United Kingdom).

Given management has consistently delivered what they said they would do, I am inclined to put my trust in management and lean towards position (b) at this stage.

It is also important to recognise that our current market is pricing in a premium for companies with an export focus or offshore operations. These are not just weak Aussie dollar plays; rather the large addressable markets that are available to those companies. 

What I like most about the Alcidion investment proposition is the potentially significant international opportunity -- because if the company can expand profitably on a global scale, then it will be worth many multiples of what it is today. 

While it is a little premature to call, but I consider that the Alcidion market capitalisation will sustained itself above the $100 million threshold. Most well-known small cap fund managers have a mandate which allow them to only invest in companies whose market capitalisation is above this threshold.

Assuming the Alcidion investment proposition passes their due diligence, we may start to se positions being taken in the near future. 

To date, I am aware that two institutional investors on the Alcidion's share register - Cyan Investment Management (via the C3G Fund) and Equitable Investors (via their Dragonfly Fund). I also think that there are at least two other institutional investors who participated in the previous sell-down by BlueSky.

Recent price action where the trading was well controlled also suggests to me that positions are being taken. 

Given the majority of shares are held by the co-founders and management, any increase in the number of shares held by institutional investors (assuming they are sticky and management continues to execute) would reduce the retail free float.