Well well well, how the turntables...

Alicidion has changed it's stripes. They were hit with a brick wall on revenue growth and had to acquire Silverlink to be more competitive on future tenders. They did not time it well, to the contrary $55M acquisition for ~ $8M revenues the payback period would be greater than 3 years. They should have waited and bought the company at a discount. For Silverlink it was a win-win they were bought out at premium valuation.

The counter argument would be that management bought Silverlink for the 10 new NHS trust. $55M/10 = $5M per trust. If Miya precision and Patientrak solutions are upsold then they can make back the acquisition cost.

Despite clearly overpaying from a financial sense, management have proven to execute by winning large tenders like the $23M Leidos defense contract. There is serious expertise behind the business building and that is what makes me excited about the business.

The market has squashed growth stocks and now is the time to buy this company back. I still maintain my valuation despite the new contract win & acquisition.

As the stock experts call it -> "Buy the dip" :D

I would look at Nervecentre very carefully as they have 40 NHS trusts - Alcidion has 27. Nervecentre is estimated to generate revenue of £17.8M.

There are many other competitors to keep an eye out for: 

1. There are 26 indirect/direct competitors in the system efficiency space (EPR). Find the top 100 list of UK digital companies.  
2. Hark - They are at pilot stage with funding for research. Successful pilots at Imperial College Healthcare NHS Trust.  

So looking at the TAM of 140+ NHS trusts, you have to exclude 40 for Nervecentre. It does not make sense for a NHS trust to use Alcidion and Nervecentre. So ~100 trusts up for grabs if you are looking at only these 2 competitors. However, that is not true as I found many indirect competitors from just google searching. 

I know I am missing out some key players in UK and I think that is really the risk - We are in Australia while the TAM is in UK. Future prospects looks great in presentation deck, but how confident are you in Alcidion to outcompete everyone for future sites? 

Winning further NHS site will be extremely challenging. Despite this, Alcidion has a neat trick up their sleeves -> product expansion. Currently 2 NHS sites are using Miya, if you upsell Miya to the rest then that would drive up ARR. There's also the bottleneck of federal funding halting software purchases from NHS trusts. 

Bottom line, don't expect winner takes all. It is most likely winner takes most and expansion of revenues through new products. Analysts that understand the competitive nature of EMR/EPR sector in UK will have the edge in forecasting Alcidion's revenues. Sadly I would be not one of them :( It requires a lot of time and effort - which I don't have due to work committments. Hopefully I have given enough information for the community to out-work professional analysts. 

In their latest UK presentation deck, Alcidion gave more colour in where their customers are located in the value chain but without inside experience into the tender process, it would be really hard to know the competition. We do not know how many tenders they end up losing. Alcidion is not like Promedicus. We have to wait and see the execution, the market is priced for perfection as mentioned by @Noicewon11 :) 

My valuation of $0.37 considers revenue growth of 25% CAGR and now given the current valuation, I will be selling. The valuation assume a conservative scenario that have not materialise. Hence, risk-return for me is to sell down and buy back at lower valuations.

Please bear in mind, I have been wrong countless times, so take it with a grain of lithium :D Case in point; I sold Pointerra, Family Zone, Dropsuite and Vmoto during the last year pandemic selloff. All of which have gone up. If you held, you would be having enormous return. Same can be said for not buying Afterpay at $9. 

I would not be surprised to see Alcidion reach $500M valuation. For me, the risk-reward not in my favour. 

DYOR

Brace yourself folks. Trading halt announced today on a pending acquisition. I really hope it is Nervecentre, the question is how much to pay for the next acquisition? Alcidion has $12M in the bank and will be raising more for the upcomming acquisition. If it is more than $20M then the company is making a serious bet. We will know on 16th April.  

Here are list of competitors in the space, there should be more but these are the ones I have for now. Require more due dilligence on my part.

Competitors:  

Nervecentre - UK

Cerna - AUS

Telstra Health - AUS

Phreesia - USA

Nervecentre Presentation

Edit: Whoops, even though I despise hotcopper the jig is up it is ExtraMed. Here are more details: 

"Alcidion has bought a UK healthcare software company [ExtraMed]. 

The company was on the hunt for a $17.5 million capital injection on Wednesday to re-stock its acquisition kitty, after funding the $10 million ExtraMed deal with its existing cash reserves.

ExtraMed provides patient flow management software to the UK healthcare market, helping hospital staff better keep track of patients under their care.

It services nine NHS trusts in the UK, and Alcidion already provides services to three of those trusts. As a result, the acquisition will boost Alcidion’s exposure to 27 NHS trusts, from 21.

Funds were told the purchase would boost Alcidion’s revenue by $3 million and earnings by $500,000.

New shares in the raising were being offered to funds at 32¢ each, which represented a 5.9 per cent discount to Alcidion’s last close, and a 2.3 per cent discount to the 10-day VWAP, according to terms sent to funds."

So what I don't understand is how much they are paying for ExtraMed? From my understanding, it's $10M acquisition netting $3M revenues for $500K EBITDA. They are paying 3x sales which is a bargain considering the revenue expansion opportunities with the rest of Alcidion's product suite. 

They plan to raise $17.5M? If so, that is a very smart thing to do at a very high valuation. I would participate depending on how the market view the acquisition.   

Here are my notes on what I felt was important: 

• Decent revenue growth. We already knew that in the previous quarterly reports. EBITDA loss, they are growing so it is expected and I am not concerned. 
• Reclassification of Gross Profit.
  • Alcidion would put corporate expenses (salary , product management, product development) under operating expenses. 
  •  Fees paid for resellers, cloud hosting, travel & accommodation for the sale would be under Gross Profit.
• 60% of non-recurring revenue is essential as that is product implementation cost. 85% gross margin on recurring revenues.  
• UK market works under a framework not tender process (This I did not know) 
  • Procurrement process is much faster under a framework and that's how South Tees signed up very quickly. 
• My internet connection went in and out so I could not hear their forecast for Operating Expenses. I think it was $22M annualised, but prefer if someone here took note on that. It tells me that Alcidion is expanding the sales force and product development. 
• For the UK market, the product with most demand would be Miya Precision but it depends on region. 
  • In Australia, patientrak is not used as there are many competitors in that space - like Cerna. 
• Miya Precision is what Kate defines "Orchestral data layer that sits on top of EMR". 
  • UK NHS Trusts are second guessing themselves with large EMR investments. 
  • The current procurrement process is software specific and lacks integration. Hence NHS are questioning why they are spending lot of capital buying new systems without integration. 
• NHS trust only procure more if the government give money. There is a NHS Digital Health fund.  
  • Matt Hancock announced 2nd round funding lead to South Tees buying Alcidion's product suite after (6-8 week product demonstration, usually it take 9 months). 
  • Timeline for the South Tees sales 
    • March 2020 - Negotiations with South Tees. Then covid hit, halting negotiations. 
    • (July 2020 - Septmeber 2020) - Renewed talks with South Tees leading to virtual product demonstration.  
    • September 2020 - Signed contract with South Tees under the NHS framework. No tender process required. 
• My question was on 2nd half sales pipeline + NHS trust negotiations and competitors in UK
  • Sales pipeline is strong, and I believe Alcidion will only give revenue guidance at the end of the financial year. 
  • They have engaged with multiple NHS trusts. Hopefully that leads to more contracts like South Tees. 
  • Alcidion view competitors differently. Competitors are focused on a particular aspect of the EMR value chain. Alcidion looks at the whole value chain and expand product offering such that customers provide services on top of the Alcidion layer. Alcidion is the design layer with a key focus on scalability. Cerna for instance solve one part of the value chain, but not everything. 
    • Product additions like NLP was developed using Alcidion's Miya Precision and delivered to NHS Dartford.
• Sales team target customers that have not developed EMR systems. It is an easier sell than convicing customers to shift away from a competitor. 
• Nervecentre is a UK competitor and doing very similar things to Alcidion. That is a company to keep an eye out after looking at their offering.
• If there is a reason why I am still bullish on the company. Alcidion secured 2 out of 223 NHS Trusts (Dartford + South Tees). Plenty of growth left with multiple NHS Trust currently in discussion. 
• Really interesting question on pricing 
  • The contracts signed by customers have a clause where Alcidion can increase price annually on the recurring revenue portion. 
  • For NHS trusts, the first one Alcidion signed was Dartford and it was introductory level pricing. They aim future NHS trusts reflect South Tees pricing, but Kate also said that they will price accordingly with new products added to the suite. Are Alcidion planning to increase revenue per customer long term? 

Things for further research

Nervecentre Website

NHS Framework guide

Q2 FY21

• $12.6M revenue added in Q2, up 163% on the prior quarter and $21.7M of revenues to be recognised in FY2021. This is an amazing achievement from the sales team and we are only halfway through FY21. 
• Strong cash reserves of $12.5M as at 31 December 2020, strengthened by further receipt of $3.0M in early January 2021. Alcidion is safe from a balance sheet perspective. 
• Some key contracts they signed this quarter
  • NextGate – expanded reseller partnership to include UK and Ireland
  • NT Health – program management services contract extension
  • ACT Health – contracts for further integration services
  • NSW Health – an extension to Child Data Hub (CDH) technical services contract
• The contract extension from existing customers is increasing the revenue per customer. Providing value-added services drives margins long term.
• Alcidion is making great progress in both fronts (UK NHS and Aus), will revalue the business. Great quarterly as they have proven that they can execute during difficult macro conditions. Plus, their products and services are essential post-pandemic.     

Regarding the South Tees extension, the added contract value is for using Microsoft Azure to host Alcidion’s Smart page clinical communication solution and business change management services. This is exactly what I have been thinking about during March this year when Satya Nadella said: "5 Years of digital transformation to be deployed into 2 months". This was not going to happen when companies and institution cut technology spending during the height of the crisis. 

NHS was one of the big talking points on Microsoft earnings call during the early part of the pandemic and I was worried that Microsoft would provide the technical solutions instead of Alcidion. However, I am proven wrong, Microsoft will provide the tech platform and Alcidion will build the capability. That's $2M to put hospital data into Microsoft Azure.

On a broader economic view, technology spending is happening again meaning we are at early stages of the recovery. The recession had a surprisingly fast rebound. Different countries will grow at different rates depending on how the vaccines get distributed across the globe.      

This is the largest Miya Precision contract they have signed to date. 

• $5.48M to be recognised in FY21 which brings total revenues to $20.2M with 7 months left to go in this financial year. 
• South Tees is the largest hospital trust in Tees Valley in the United Kingdom, with over 1,000 beds and employing approximately 9,000 clinical and operational staff and providing care for more than 1.5 million people. Not surprised that this contract win took a while to execute. 
• Alcidion is integrating to the heart of the NHS digital strategy. This is becoming an incredibly sticky product while forging strong relationships with the NHS. 
• The question you should consider is would the UK government still fund NHS. If they don't then the NHS do not have enough capital to procure technology solutions. I believe they will and they have during the pandemic. Alcidion is one of the first companies in line.      
• In terms of valuation from this contract alone: 
  • Current Revenue ~ $15M, market cap = $123M, share price = $0.125,
  • Future Revenue ~ $20M, market cap = $164M (based on 33% increase in revenue), share price = $0.165 
  • So a 33% jump in share price today is a possibility when market opens

Kate Quirke bought 1.5M shares worth $195k today at $0.13 share price. During the March pandemic sell-off, she bought at $0.10. In total, she now owns around 60M shares. The crazy thing is that she owns ordinary shares, not options. She is aligning herself with shareholders which is what every investor hopes in seeing.  

Sometimes the best thing to do is follow management and buy with them :) Kate would not buy shares if she thinks Alcidion is worth multiples of what is valued today. The market is very short term focused. 

Q4 FY20 results 

• Yesterday, Alcidion announced their Q4FY20 results. Growth was flat in the final quarter despite signing/renewing numerous customers. 
  • NHS Fife – 5-year Patientrack extension across entire board
  • NHS Lanarkshire – 5-year agreement to implement Patientrack across board
  • Sydney LHD – initial 12-month contract for Miya Precision to support COVID-19 virtual care
  • Murrumbidgee LHD – 12-month contract for full Miya Precision platform including MEMRe
  • ACT Health – 2-year extension to long term integration support contract
• From the update, it was apparent that COVID-19 is an important catalyst for UK sales growth post pandemic. In UK their products are used by the NHS where contracts range from $1M - $2M over a 5 year timeframe. To grow sales, Alcidion is forced to either sign more NHS districts or increase the price of existing contracts. Currently, Alcidion does not have pricing power with the NHS. However, they can expand within NHS to grow over time. The link below contain all NHS England trusts currently in operation. I count 226 total addressable market for NHS England customers. https://www.nhs.uk/servicedirectories/pages/nhstrustlisting.aspx
  • Doing rough maths, they currently have around 20 NHS customers, my belief is that they can capture 30% of the England market in 10 years. This equates to 60 customers in total, giving ~ $18M ARR, assuming ($1.5M contract for 5 years). 
  • Depending on how many new customers sign up post pandemic, NHS is a large market opportunity. 
  • Looking at current customers like NHS Fife, we have seen them renew their contracts. This shows that customers like Alcidion products in particular Miya and Patienttrack during COVID-19. It is very good to see exisiting customers utilise the products extensively. Post pandemic, we could see sales uptick across NHS trusts. 
• The pandemic shows that Alcidion is a resilient business where the products and services are used extensively during the health crisis. Prior to Covid; Alcidion management conducted multiple visits to the UK, spend on marketing & trade shows to promote their products and convice hospitals to go digital. The pandemic forced Alcidion's customers to go digital and now they rely on Alcidion to manage ciritical processes and high volumes of patient data. Post crisis, I hope management either increase the sales pipeline or increase prices to drive revenues.
  • As a shareholder, pricing power makes the most sense as it lower CAC and increase margins.
    • However, it could also increase churn. The NHS is a public entity with their budget determined by the UK government. If more spending on NHS is announced, Alcidion should increase price to increase margins. 
• I have left out the Australian business as the quarterly & half yearly reports explain their progress in detail. Miya & Patientrack used in Australia are very sticky like UK. To me, Australia was always meant to be a testing market, with most of the growth coming from international markets like UK. Thus, virtual remote hospitals trials are tested in Australia before launching in UK.    
• The market "value" the company at ~ $150M, which is a fair valuation considering revenue growth is less than 20% p.a. However post COVID-19, Alcidion could win deals very quickly by converting customers from their growing pipeline. I see plenty of upside in the long-term, not in the short-term.          
• In terms of my prior valuation, I assumed 25% growth from 2020-2025 which gives ~ $50M in 2025. Despite the slow revenue growth in this Financial year, in subsequent years, I expect more investment into healthcare by governments. Alcidion will be one of the winners and it could lead to more customers using Miya and Patientrack. I maintain my valuation of $378M company which correspond to $0.38 share price.           

Here's a valuation that follows similarly to Painchek's; 

There's 4 assumptions;

- Revenue Growth

- Profitabilty 

- Reinvestment

- Cost of Capital 

In my story, I believe that revenues can grow at 25% compounded annual growth for the next 5 years followed by growing slowly at 15% from then onwards. This ultimately ends up being $120M in 10 years time. This is a big assumption as I am assuming that they can achieve revenues that is around 20% of FY19 Ramsay Healthcare in 10 years time. This is the number that I am still unsure about, as their average contract size is around $2M. Either they can increase exisiting contract size or get new larger contracts. China or USA is still untapped and I believe that's where they have to go in the near future to justify $120M. I assume in 10 years, they will be at the mature stage and can grow at a steady state.  

I expect Operating margins to be high, hence the profitability aspect of the story is that margins to remain healthy at 40%. Currently, it's at 35%. My justification for 40% is due to the nature of the contracts; they are long, revenues are diversified and the size per contract can change prior renewal. 

I expect Alcidion to reinvest at a normal rate, hence the sales to cap ratio of 3. This implies that for every $1 investment, the company to get $3 of revenue. I think it is a reasonable assumption considering their acquisition of Patient-track and MKM had 5x their annual revenue. Soo I trust their track record for sensible investments.

Cost of capital is a tricky one and ultimately define the valuation for me. I came to the conclusion that a cost of capital at 7.85% is a reasonable assumption. It is a complicated formula but in simple terms I took the weighted average of Market value of (Equity and Debt) with cost of equity and cost of debt. Market value of equity is a fancy word for Market cap. Market Value of debt is (Book value of debt (you can find in balance sheet) divide by (1+ pre tax cost of debt) ^ (average maturity of debt)). The 7.85% is the risk I place on future cashflows. I could have attach a premium on an external event like Coronavirus, if I believe the virus would impact cashflows. But, I think Alcidion has the unique advantage of customers relying on their products/services at a time like this. My big assumption with this, is that the cost of capital to go down to 6%. That means that they would not borrow more and focus their time on executing larger contracts. 

Using the calcs, I came up with $0.38. This is using Damodaran's spreadsheet.

Luckily anyone can play around using his spreadsheets. Here's how he goes about valuing tech firms like Uber. Very insightful way of valuing young companies when P/E and DDM goes to the trash can.   

https://aswathdamodaran.blogspot.com/2019/04/ubers-coming-out-party-personal.html