Beleaguered $ALC reported their 4C this morning, with the investor call later this morning (I won't be able to attend so will have to catch up with the recording)
Their Highlights
- Q2 new TCV sales of $21.8M; $0.7M expected to be recognised in FY24
- Signed $23.3M South Tees contract extension for an additional 8 years (to 2033 with 2 years remaining on current contract) for Miya Precision Electronic Patient Record (EPR). Further options to extend out to 2038 and add further Alcidion modules which if taken would result in a total TCV of up to $54M over the next 15 years
- FY24 contracted revenue at end of Q2 of $35.5M, up 4% on pcp
- Sold & renewal revenue over the next 5 years (excluding FY24) of $126M
- Q2 cash receipts of $8.7M; up 28% on pcp, resulting in an operating cash outflow of $3.4M. Debtor balance at end of Q2 of $7.3M (PCP: $5.6M) which included $3.9M from a major customer which was collected in the first week of January 2024
- During Q2, raised $5.4M via Placement and SPP to ensure maximum flexibility and maintain a strong balance sheet to execute on market opportunities and drive revenue growth
- Cash balance of $7.9M and no debt at 31 December 2023, strengthened further following receipt of $3.9m in early January 2024
My Analysis
2023 was a horrible year for the company, and investors voted with their feet with the SP down almost 2/3rds and the SPP component of the capital raising towards the end of the year essentially shunned by investors.
My usual 4C Cashflow picture below tells the story - no discernible growth trends, a growth stock currently becalmed with the sails flapping in the breeze. I've added the TTM picture for operating CF over a longer timeframe, so you can more clearly see the adverse inflection over the last 12-18 months.
Within all the bad news there is the good news of the South Tees renewal - previosuly announced. We don't know the full terms of the deal in terms of margin; however, this is a high gross margin business, and such a long term contract with the potential to deliver average annual revenue of $3.6m over 15 years and act as a flagship reference case. The South Tees procurement team will have struck a good deal, you can be sure.
The blame on slow procurement is placed squarely on the customers, which I am not sure is totally justified. I have previously published a sample list of recent NHS deal announcements. Product and Sales Capability are two other factors in the mix, and there has to be question-marks on both.
Kate is turning her attention to managing costs, which she has to do. Taking direct control of the UK team by not replacing the MD is a significant step, and she'll have a tough year directly running a microcap operating on two sides of the globe. But that is the work to do, as it is a fight for survival now.
My thesis is broken, and I should exit. However, with the SP on about 1.2x expected FY24 sales there is every chance that some wind might be blown back into the sales. One or more material sales deals, which are as ever said to be in prospect, even a decent upsell to an existing customer would be positive catalysts. There is also the prospect of M&A - not a reason to hold on its own - but $ALC has to be on someone's shopping list at this level.
So, I am not going to shoot myself in the foot by exiting today. My position is small (RL now only 0.5%) and the damage is done. I'm a grumpy HOLD.
I agree with @NewbieHK and @Remorhaz that the $ALC result today was a postive.
I'll skip the usual summary of results and analysis and focus instead on an assessment of my usual CF trend analysis and take a look at contracted revenues. The common thought process I am bringing to all of my small caps that are approaching inflection is: "now that costs are under control and also now that we are seeing the organic growth engine exposed, is the revenue growth and operating leverage strong enough to make this an interesting investment?"
First some general observations:
- The selling of incremental modules approach appears to be working.
- The mix of renewals and new contracts is good.
- NZ appears to have reached a possible turning point. No point writing too much, as it is the size of an Aussie State, but worth a mention. Kate has commented before on the slow progress in NZ, because they have been impacted by the consolidation of District Health Boards into a consolidated structure. This kind of reorganisation plays havoc with IT procurement decisions because of all the energy that is consumed in the internal reorganisation. So I am sure they will be focused on trying to get a roll out of the module that is in place in one of the former DHBs. And after that more modules? Eventually, the new organisation will kick into action and start making decisions. (I have three members of my extended family working in the NZ health service, and the staffing pressures are as real there as in Aus and UK.)
- The key message of "we're saving clinicians time", be it doctors, nurses, or orderlies will resonate strongly with decision-makers, given the perennial staffing pressures in all markets.
- They are building strong "reference cases". This is important because public health services are not in competition with each other and openly share good practices, and coalesce around common solutuions. $ALC are doing a good job on social media with this, as others here have observed.
- Costs appear to be reasonably under control, with Kate setting clear expectations for FY24.
Now to the analyses.
1. CF Trend Analysis
Above is the usual CF analysis. I usually prefer to focus on FCF, but because of the acquisitions within the 8Q window I am going to focus on OpCF. (Although, you can see that absent the Silverlink earnout, $ALC is solidly in the exploitation phase with minimal capex.)
Previously, I have shown the trend lines over the entire dataset, but I am increasingly using the last 8Q, as above, because I think that is a better reflection of the impact of management efforts in the more recent capital constrained environment.
If you compare the above chart, with earlier editions, the good news is that the slope of the OpCF line is increasing significantly. Obviously, the very strong most recent Q helps a lot.
Given the high Q-on-Q volatility it would be wrong to say that the last 3Qs shows a positive trend. So, I won't say that! But the longer term trend is there. Again, I'm not going to show the FCF trend line, as the one-off Silverlink impact renders this meaningless.
2. Analysis of Contracted Sales and Revenue
In lieu of an explicit outlook, I've noticed that in each Q4 report, Kate gives a statement of how much of the contracted revenue is expected to be realised as revenue in the following FY.
So, in the graph below I compare that component of the CR (denoted as "CR(Q4-1)FY") with the revenue or the forecasted revenue from the FY (denoted as "Rev FY").
Above each blue bar (the CR), I plot the % of how much of the next year's revenue is already contracted.
You can see that over the last 3 years, it has been 69% (2021), 58% (2022) and 71% (2023), yielding and an average of 66%.
For FY24, I have used these %'s from the previous years with $33.7m of CR to be recognised as revenue in FY24 to project a range of forecast revenue outcomes for the FY24.
These revenue projections equate to FY23-FY24 revenue growth rates ranging from 19% in the low case to 45% in the high case, with a mean of 28% revenue growth.
This is where I have to write "past performance is no guarantee of future performance" and indeed, with a constant sales force going in to FY24, you might expect being at the lower end of the range to be more likely. It might even be lower (all things being equal) because a constant level of incremental sales represents a progressively declining % increase of each year's base.
However, if $ALC lies anywhere on that range, and provided costs can controlled as Kate has indicated, then we should expect FY24 to be both significantly cash generative at the OpCF and FCF levels.
(OK. I'll stop there and put my inner analyst back in the box).
My Key Takeaways
Overall, the $ALC analysis indicates that the company is passing through the CF inflection point. Given the very large Q-on-Q variations, it is important to take today's positive result in its wider context, and I think Kate's measured and qualified delivery did justice to that.
However, in the UK (and to a lesser extent in NZ), the health systems face particular head winds. In the UK the NHS is widely perceived to be in crisis. I have lived in the UK for 20 years and much of my business network and extended family live there today. At a personal level, I am aware of stories that show the system to be under stress, subject to industrial unrest and suffering from political interference. Kate made reference to these headwinds, and again to her great credit was very balanced in how she tells the story.
$ALC's continued progress despite these headwinds is encouraging. My only issue, is in the case of the UK, there is no end in sight.
I am considering increasing my position in $ALC. With the SP at 25 x EV/EBITDA(FY25), it is sitting between $M7T (12) and $VHT (38), and my current position size indicates a higher risk rating than it deserves. One to mull over, and I will likely wait until Monday, when $M7T reports. There's enough data now that it might even be time to build a DCF. Now there's a cheery thought.
Disc: Held in RL (0.9%)
Straw significantly edited as there were some errors in the earlier cash flow figures, now corrected.
Text also updated following the presentation Q&A and some observations added. Apologies for what is now a very messy straw ... but accuracy is important!
Figure 3 added to show the quarterly new sales from the presentation.
@Valueinvestor0909 has picked out the key issues.
Based on Q2 FY23 report we were all expecting at least $2m (edited from $3m) of the cash receipts (** see below comment) to be due to the late payments in the previous quarter. So the reported receipts of $10.446m are really only c. $8.5m (edited from $7m) from the quarter, so meh.
Also, Q3 Sales are unimpressive, - the graph wasn't in the 4C release, but is included in the presentation. (Edited out my earlier comment, throwing shade at Kate for not reporting this metric!) I've included it in Figure 3, below.
Taking a step back, I've updated my usual 4C Cashflow plot (Figure 1). And because $ALC is lumpy from Q to Q, I have plotted the same data in a trailing 12 months (TTM) format.
Basically, $ALC is running hard to stand still - there being no significant trend now in OpCF since the Silverlink acquisition.
I'm hanging on because Kate appears to be controlling costs well, and the UK implementations are providing reference sites. It should be expected for these implementations to take time, given the long sales cycle. So I am holding for now, but I think another year or so, and the strategy needs to start delivering operating cash flow growth.
** Comment:
During the Q&A today, one investor asked about the "late $5.6m receipt", to which the CFO (correctly) replied that the questionner was mistaken. He then clarified that there was a late payment of $2m in Q2 and, because some payments in Q3 were also received late, that Q3 receipts could be considered "normal" (swings and roundabouts argument). This confused me, because if this is true, why did they make a song and dance about it in Q2. Doesn't it just mean that a portion of payments falling due towards the end of the Q will always risk falling into the next Q?
CFO was adamant that Q4 will be the strongest receipts of the year. This is also in the release, so that indicates to me that >$13m Q4 receipt is in the bag. Given that the cost base is stable and investments are dialed right back, this means they will likely have a final Q that is OpCF and FCF positive.... provided they get paid ;-)
Key Takeaway
Management are trying very hard to get the most out of each quarterly report, for example, to achieve the (now abandoned) promise of being EBITDA positive this year. Personally, I think they are trying too hard to put a positive gloss on their communications. Now I don't believe Kate and her team would mis-state the facts, but they need to be careful with the spin, as it is easy to trip yourself up over time. For example, it is fine to talk about NHS staff shortages and strikes. But we all watch the news, and that is a characteristic of the market they are playing in. It is a fair headwind countering the tailwind of the drive to digitally emable the NHS.
I am observing a pattern in several tech holdings that, when sales and receipts in the quarter fall off the growth trend, there is a tendancy to talk about timing of payments, slow sales cycles, delays in renewals, and the strength/growth/record nature of the pipeline. (Examples from $3DP, $EVS and $ALC). As investors, we only have to wait 13 weeks to see if the story plays out so, thank goodness for the 4C and quarterly reporting! Equally, it is important to recognise that 13 weeks is a short period of time and the lumpiness from quarter to quarter can be very significant, as Figure 1 shows. It is as important not to over-react to one bad quarter as it is to over-react to one good quarter. Whatever the fair value of $ALC, I don't believe that today's result warrants a 10% markdown. Of course, using a cricket analogy, for every over that you don't hit the target run rate, it means more boundaries are needed in subsequent overs to stay on target overall.
Figure 1
Figure 2
Figure 3
Disc: Held IRL and SM
@composerI don't see your straw as unduly negative or down-ramping at all.
I've been too busy this week (with commitments outside of investment management) to post my own straw, but I watched the recording of the results and presentation and came away with very mixed feelings. For me the biggest concern was that I sensed that Kate herself was ill at ease in discussing the results, which weren't great from a cashflow perspective. I attach my standard analysis below. The numbers support your general tone.
For now, I am going to continue to hold my small RL position in $ALC. But (just as with $3DP and $EVS discussed in other straws over the last week), $ALC is not making the progress necessary for me to increase my allocation, which clearly in the success case I am aiming to do.
Disc: Held in RL and SM
$ALC reported their 4C today.
Reported Highlights:
- Cash receipts of $12.0M, an increase of 83% on the prior corresponding period (pcp)
- Q1 new TCV sales of $1.8M, with $1.3M recognisable in the current year
- Total contracted revenue at end of Q1 of $29.0M, up 69% on pcp
- On constant currency basis total contracted revenue was $29.3M
- Further $2.6M of scheduled renewal revenue expected to be recognised in FY23
- Q1 negative operating cashflow of $0.5M, significant improvement versus negative $3.4M pcp
- Cash balance of $16.2M at 30 September 2022, with no debt
Release contains the usual annual comparions briken down by Q,
Below is my usual 4C trend analysis for another view.
The Qs OpCF is weaker due to lower receipts. FCF only slightly lower, due to lower investment costs as a result not having M&A costs this Q offsetting the weaker receipts.
Kate notes that Q1 historically contains larger operating cash payments.
Overall, a reasonable update with evidence of good cost control.
Disc: Held in RL (1.1%) and SM (6%)
