After a promising set up, the post-4C price action has not been good.
Shares have now settled back into the range they broke out of, after rallying close to overhead resistance at $1 (the high was around 96c).
So back in the doghouse until there are material fundamental developments again (or the price starts moving ahead of those developments, as often tends to be the case especially in small cap land).
$M7T reported their 4C today and I attended the investor call.
My Analysis& Observations from the Investor Call
Overall, it was a soft Q for $M7T contract wins but quite strong from a CF perspective. Recent SP advance has been due to announcements made following the close of the reporting period of the Phase 1 of the Veterans Health Administration (VHA) contract (A$11.7m) and the Diagnostic Imaging Associates a$3.7m 5-year contract.
The chart below shows the lumpiness of $M7T’s contract wins and, I suspect, this morning’s 11% SP drop at time of writing is a response to that, after the kicker following the recent contract win announcements.
It is at this moment that I reflect just how funny the market is. On their own, the individual wins, or periods of few wins, say nothing about the fundamental value of this business. You have to zoom out and look at the bigger picture. (Ok, so I admit to maybe feeling a little $3DP-exit regret. We are all human. But perhaps that case illustrates the same point.)
Looking forward, this lumpy story will continue, because one month in to 1Q FY24, they’ve already contracted for $15.4m, making 1QFY24 already their second strongest 1Q and 3rd strongest Q ever. And there are still 60 days to close more contracts, with America now back to work after the summer holidays!
Mike stated that several of the contracts had seen volume-based revisions. The example he gave was that a customer who has a contract for 100,000 studies per year and hits 105,000 within the period, has to purchase a licence for a further 15%, to take their contract up to 115,000. In this way, organic growth within existing customers drives $M7T revenues. He noted, however, that not all customers are winning, and some of the recent contract revisions has been from customers experiencing reducing volumes.
Once more, they came close to achieving cash flow neutral for the year, citing a late receipt against the payment schedule of A$2.5m (received on 3 July) meaning they just missed the goal. (Our good friend Claude Walker had a go at Mike asking if they’d missed opportunities to report this earlier, which Mike batted back saying that the payment was expected on time, and was just a few days late. Storm in a teacup, I think, Claude.)
Again, zooming out I plot my usual CF trend analysis, with the trends calculated on the last 8Q.
You can see the favourable trend in OpCF by the clearly different slopes of the Receipts and Payments line. The trend on FCF is also positive, and now in cash generation territory. (Note that the acquisition investments in 2021 are now outside the trend window.)
Mike has once again set expectations for FY24 of 20% top line growth. He reported that the sales funnel provides 3X coverage of the target. He also commented that more of the pipeline was for two-product sales, whereas two years ago, the majority was for single products.
There was some discussion about prosects in Asia and Middle East, as these have been discussed previously over the last year with no recent newsflow. Mike confirmed that there were multiple prospects in HK, Singapore and Middle East and that he expected to see more of a contribution here in FY24 than in FY23.
On staffing, costs appear well controlled. Headcount has risen to 96 from 87 a year ago. That’s an increase of 13%, with the top line growing at 20%. In terms of further staff growth, Mike indicated that they are focused on delivering an excellent customer experience and will staff up ahead of demand, to ensure that staff working on deployments have the required product and system knowledge. He said the management are about to meet to finalise FY24 plans. My interpretation is this means that the recent contract wins and, in particular, the transformational VHA contract will require additional staffing.
The discussion yielded some important insights about the recently announced VHA contract, which has a first phase worth A$11.7m, and a second phase with a potential to increase the TCV to $59.6m, which far exceeds any contract won to date.
In the Q&A Mike indicated that $M7T (eUnity) and $PME (Visage) were starting to compete for contracts. He explained that Visage started out focused on the radiologists’ work flow, whereas eUnity focused on connecting radiologist and other healthcare professionals outside the walls of the centre with a zero-code solution. Over time, he commented, each has developed the functionality of their product to be able to do more and more of the competitor’s offering.
Mike re-iterated a comment made on previous calls that he saw tailwinds in the demand for solution in outpatient (ambulatory) imaging services for which $M7T’s products are advantaged. He cited market research which pointed to this moving from 40:60 (ambulatory:inpatient) to 60:40 (and maybe even 65:35). There are two drivers. First, the staff shortages of radiologists in hospitals is driving more hospitals to have images read externally. The second driver is insurers, as it is cheaper to have radiologist read images outside the hospital.
My Key Take Aways
This quarter was a soft result and, over the last two years, although revenue is growing above the 20% p.a. level (Mike would not be drawn on FY23 Revenue, so we’ll have to wait a few weeks), $M7T has been making slower progress on contract wins within FY23.
This explains today’s negative SP response, bringing the SP back to reality after the euphoria following the two recent contract wins at the start of FY24.
To Mike's credit, he focused the results call on the quarter which was unexciting.He didn't do anything to deflect from that. Inevitably, the Q&A focused much more on the recent contracts and the outlook, which is strong.
I am still on the fence regarding $M7T. For me, the thesis is holding together for three reasons:
· Continuing to grow revenue while managing costs;
· Positive benchmarking with other industry solutions (KLASS customer surveys);
· Periodic news flow on larger contracts (>$2.5m), with VHA a gamechanger.
At a multiple of EV/EBITDA (FY25) of 12x, $M7T is very good value within the sector. The lower multiple is a direct consequence of the more lumpy deal flow and cashflows. Over time, as $M7T grows, this should become less and less of a problem, and earnings quality will improve.
However, as the imaging software space becomes more competitive among the market leaders, it remains an open question whether $M7T can continue to win more of the larger deals. With a strong pipeline of 3x what is needed to grow top line at 20%, FY24 should help answer the question. The VHA deal is, however, a gamechanger. If $M7T can will more of these programmatic deals for large services, then it would certainly deserve a closer look (i.e., a bigger position).
For now, I continue to hold.
Disc: Held in RL (2.0%) and SM
Mach7 Technologies Limited (ASX:M7T), today announced it has signed a new five year licence agreement with DIA (Diagnostic Imaging Associates). Mach7 will provide its eUnity Diagnostic Viewer solution to DIA for general diagnostic interpretation and mammography diagnostic reading.
The contract expands the use of eUnity beyond an original 75,000 annual study agreement for mammography remote reading to a licence covering the full spectrum of eUnity’s diagnostic tools for 1.2 million studies annually, a 16-fold volume increase. The new contract has a TCV of A$3.7 million and will add A$0.64 million to ARR.
CEO and Managing Director of Mach7, Mike Lampron said “Market research continues to evidence a dynamic shift in where and how patients want to receive healthcare. This is amplified by the tightening of reimbursement rules by North American payers for non-emergency imaging due to the additional price tag placed on imaging by acute care providers. DIA represents a large, growing practice that is benefiting from the shift in diagnostic imaging from acute care to ambulatory settings and we are delighted to now provide its 70-strong radiologist practice with the full functionality of our zero-footprint eUnity Diagnostic Viewer.”
This is another medtech name that has been a laggard for a while, and is now gaining legs after the VHA contract announcement.
Technically, there has been good follow through, and the price has punched through a couple of resistance levels (which have held in the past couple of attempts) to sit at a new 52w high. Looks promising. Significant overhead resistance does exist around $1, and also at $1.20-25.
MACH7 (ASX:M7T) TO PARTICIPATE IN U.S. VETERANS HEALTH ADMINISTRATION’S NEXTGEN PACS ( Picture Archiving and Communication System) PROGRAM
The possible Total Contract Value of full Phase I implementation is A$11.7M and there is the potential to increase to A$59.6M with Phase II
I see this as an exciting step-up change in the type and size of client contracts being assigned to M7T.
Mach7 Technologies Limited , has today announced its participation in the U.S. Veterans Health Administration’s (VHA’s) National Teleradiology Program (NTP). As part of the contract, Mach7 will provide its VNA and eUnity Enterprise Diagnostic Viewer solutions which will help form the core of the NTP NextGen PACS architecture.
The VHA NTP is Veterans Affairs’ in-house teleradiology service which has been providing 24x7 service to VHA facilities for over a decade. The NTP currently supports 125 sites across all 18 Veterans Integrated Services Networks (VISNs) and is projected to interpret between 1.0 and 1.5 million studies annually.
The NTP seeks a best of breed, next generation PACS (“NextGen PACS”) that is designed, deployed, and optimised for its teleradiology workflow and reading environment. The system will also serve as a replacement PACS for VISNs as they transition off existing contracts.
The NextGen PACS program involves two major phases. Phase I will see Mach7’s VNA and eUnity viewer solutions form the core of NTP’s NextGen PACS. This phase has a potential TCV of A$11.7 million with a 12 month implementation/Professional Service fee period then a fee per study subscription license over a three year term. Phase II, which is contingent upon a number of success factors in Phase I, involves expansion into Veterans Affairs’ hospital network to support up to seven VISNs with migration, integration and software representing additional potential TCV of A$47.9 million over a five year term.
Mach7’s participation in the project is as one of several subcontractors to the prime vendor, Frontier Acquisitions, LLC
Lowering my M7T price target/ valuation based on 3rd qtr. FY23 Update as my previous growth assumptions were too ambitious.
However, Mach7 still expects to remain operating cash flow positive for FY23 as it has in the preceding three financial years.
I'm reasonably happy with the trends that are shown in this report and still have a positive outlook on the company's prospective future.
Q3 FY2023 Highlights
FY23 sales order target of A$36M exceeded; Q3 FY23 sales orders of A$11.3M (TCV1) up 156% on A$4.4M in Q3 FY22, bringing year to date sales orders to A$37.1M
Contracted Annual Recurring Revenue (CARR) of A$20.6M; (A$20.0M at 31 Dec 2022)
Annual Recurring Revenue (ARR) run rate of A$17.2M; (A$16.4M at 31 Dec 2022)
Adventist Health System final sales orders received and deployment phase commenced
Cash on hand A$19.4M; (A$20.6M at 31 Dec 2022 )
Sales orders for the third quarter of FY23 were A$11.3 million (TCV), up strongly on the A$4.4 million2 achieved in Q3 FY22.
• Annual Recurring Revenue (ARR)-type sales of A$6.2 million (or 55% of total sales orders) representing support & maintenance fees and subscription fees which will be recognised as revenue over the contract term when the customer achieves First Productive Use (FPU),
• Capital software sales of A$3.6 million (or 32% of total sales orders) which will be immediately recognised as revenue upon delivery in FY23, and
• Professional services sales of A$1.5 million (or 13% of total sales orders) to be recognised as revenue over time upon completion of services.
Sales orders from existing customers featured in Q3 FY23 with 95% (or A$10.7 million) of sales generated from healthcare organisations with which Mach7 already has a commercial relationship.
Existing customer, Adventist Health, signed sales orders for its remaining 15 (of 22) hospitals yet to deploy Mach7’s PACS. These latest orders have a value of A$7.1 million including scope expansion and comprise the bulk of the Expansion/Fulfilment sales orders
$M7T Signed up 22 hospital Adventist in Jan 2021 for a $7.9m contract, with $2.4m of inital order covering 7 hospitals.
Today, further orders totalling $7.1m for remaining 15 hospitals are announced, indicating to me that the contract size has grown.
In any event, this is good news - an existing customer cotninuing to roll-out the full offering after having implemented in a first wave of hospitals.
Full text of announcement follows.
ADVENTIST’S FINAL DEPLOYMENT PHASE BEGINS
♦ Existing customer, Adventist Health System, orders Mach7 PACS1 for remaining 15 contracted hospitals
♦ Latest hospital orders have Total Contract Value (TCV) of A$7.1 million2
♦ Capital contract expected to contribute A$3.0 million to revenue in FY23
Mach7 Technologies Limited (“Mach7” or the “Company”) (ASX:M7T), a company specialising in innovative medical imaging software solutions, is pleased to announce that existing customer, Adventist Health System/West (“Adventist Health”), has signed sales orders for the remaining 15 contracted hospitals that are yet to deploy Mach7’s PACS. A contract regarding Adventist Health’s PACS replacement program for its 22 hospitals was announced in January 2021. The initial, overarching agreement was valued at over A$7.9 million and included A$2.4 million of sales orders for the first seven hospitals. The remaining order forms for 15 hospitals have now been received and have a value of A$7.1 million including scope expansion.
The Adventist Health PACS solution involves the Mach7 Enterprise Imaging Platform, eUnity Diagnostic Viewer, Mach7 Universal Worklist, Mach7 QC Module and Mach7 Clinical Portal. The capital contract covering the 15 Adventist Health hospitals is expected to contribute A$3.0 million to revenue in FY23. Headquartered in Roseville, California, Adventist Health is a faith-based, non-profit integrated health system serving more than 80 communities on the West Coast of the United States and in Hawaii. Founded on Seventh-day Adventist heritage and values, Adventist Health provides care in hospitals as well as in clinics, home care agencies, hospice agencies and joint-venture retirement centers in both rural and urban communities.
Mach7’s Chief Executive Officer, Mike Lampron said: “We have developed a strong and collaborative partnership with Adventist Health over the last few years and we are delighted that its enterprise imaging growth strategy will soon be fully realised. Our implementation and support teams have delivered high quality outcomes for the hospitals in the initial deployment phase, and this positive experience has helped accelerate the rollout program to cover the entire Adventist hospital network.”
Disc: Held RL (1.3%) SM (6.7%)
Medical imaging firm $M7T announced their 1H FY23 results today. As they publish 4C's I'll refer you to earlier 4C reports and @Hogajo's valuation of $1.50 (which is a north of where I stand, which is more like $1.00-$1.30).
So I'll get on to the insights from the discussion with CEO Mike Lampron, which was very helpful particularly because H2 will look different from H1.
Top line, is Mike re-affirmed guidance that they will exceed their target revenue of at least $36m, which is +20% on their FY22 target, albeit only +10% on their achieved FY22 sales of $32.8m. (Mike is looking even more comfortable on this than at the 4C call, so I'm expecting a result over $36m.)
The was a slightly embarrassing discussion about the de-booking of $1.7m of revenue from the previously preliminary announcement of $18.1m 1H to a revised $16.4m. Mike was very upfront sayng that the auditors considered part of the revenued recognised in the large, recent Akumin contract as a financing component, which needed to be recognised over the life of the contract. No contract value is lost, and there is no cash impact. Mike made clear that this was because they have not had to deal with a 10-year contract before. (Clearly, this is a blunder by the new CFO, but I was encoraged with the very clear explanation Mike gave. No doubt, the CFO will be sent on some training on revenue recognition in long term contracts!)
While Gross Margin % expanded from 96% in the PCP to 98%, Operating Expense increased by 27% - problematic, on the face of it, given now weaker revenue growth of +14%,
Here again, Mike was very clear. H1 had higher travel and sales & marketing costs (including the recent big Middle East healthcare IT conference), due to both the loading of trade shows in 1H and a number of internal team meetings (sales and engineering functions.) These costs will be much lower in H2, and Mike advised against estimating FY costs as 2 x 1H.
He noted that with employee costs being 75% of the cost structure, that inflation had impacted this, citing onerous healthcare plan increases of 10-15% as something they cannot control. Mike made clear that they have to look after their people!
Mike confirmed that the revenue pipeline is strong and being replenished, even given the record half of new contract signings.
M7T were recently ranked #2 again (seond year running) in the KLAS product rankings for the Universal Viewer Segment and #7 in the Vendor Neutral Archive (down from #5). He cited that these are important, because the rankings help to get them included on the RFP list when customers are going to market for new systems. Mike pointed out that the release of V12 of their software wont yet have impacted customer feedback on the surveys, so he is looking forward to the next round of results.
M7T typically sign 5-year contracts, and FY23 is not a big year for renewals, with <$2m revenue up for renewal. FY24 is another matter with c. $11m up for renewal. In the Q&A I asked about churn rate, and Mike responded that they are running at <2% per year. So that bodes well for FY24. In fact, one investor commented that, with such low churn, the market needs to rethink the quality of the 40% of revenue which is sold on a capital basis. Good point.
Mike continues to see strong tailwinds of customers wanting their imaging systems to work across vendor technologies and departmental silos. There is strong growth in 1) the ambulatory segment (where patients walk into mobile or local clinics for their scans), which then need to be accessed by their clinician AND 2) from clinicians who want to access images from outside the four walls of the hospital. He believes M7T is strongly positioned to serve this need.
With cash outflow of $5.3m in 1H, it was heartening to her Mike recommit to achieving Cash Flow breakeven for the full year. Again, he seemed quite confident on this. Drivers for a stronger second half will be i) catchup on receiveables from 1H, ii) new contract receipts and iii) lower expense burn. Again, being 8/12 months through the year, I wouldn't expect to see him so confidence if there wasn't substance to back it up.
Market has given $M7T a hard time today, varying between 5% and 10% down. It is an illiquid stock, so anyone who wanted to get off the bus today will have made their mark. And, in truth, the result isn't strong enough to have a lot of passengers waiting at the bus stop to get on.
My Key Take Aways
While I am not bothered by the volatility, I am on the fence with $M7T.
CEO Mike is very confident about a good result for FY23. However, those results would be the minimum outcome for me to stay onboard (1.4% RL and 7.4% SM). For now, M7T remains a speculative holding for me, and given the strength of the medical imaging market, I need to see stronger top line growth.
What keeps me onboard, is that Mike is very clear in his communication. There is no hiding of less favourable numbers. On the contrary, he focuses time during the presentation and Q&A to fully discuss areas of concern. All questions in the Q&A were answered fully and candidly. So even though he quite reasonablly sells the company when explaining the product, the strategy, and the market position, he doesn't come across as doing a sales job on the numbers. Big Green Flag.
Overall, a hold for me for now.
Major Contract Timeline
· January 2023 Akumin Total Contract Value of ~$16.7m 10 year term. Largest customer contract in Mach7’s history. Entire Enterprise Imaging Platform including its Vendor Neutral Archive (VNA), eUnity Diagnostic Viewer and Workflow Applications to provide a true cloud-based, enterprise-wide imaging and informatics solution. Headquartered in Florida, Akumin is a national leader in comprehensive outpatient radiology and oncology solutions and a partner of choice for U.S. hospitals, health systems and physician groups. Akumin provides fixed-site outpatient radiology and oncology services through a network of 234 owned and/or operated centers; a mobile division with 300 semi-trailers; as well as outpatient radiology and oncology solutions to approximately 1,000 hospitals and health systems across 48 states. https://www.asx.com.au/asxpdf/20230103/pdf/45kbnyvyzqn0p7.pdf
· December 2022 Nuvodia Total contract value of ~$2.5m over five year term. The agreement with Nuvodia involves Mach7’s entire Enterprise Imaging Platform including its Vendor Neutral Archive (VNA), eUnity Diagnostic Viewer and Workflow applications to provide a true enterprise wide PACS solution for healthcare providers. Headquartered in Spokane Washington, Nuvodia is a national IT and radiology service provider that creates, manages, and supports mission-critical IT environments. Nuvodia has a long history of providing enterprise-class technology solutions to independent radiology practices, outpatient imaging centres and community hospitals. https://www.asx.com.au/asxpdf/20221220/pdf/45k0b2820ws5jb.pdf
· November 2022 St Paul’s Hospital Hong Kong, $1.52m one year contract - agreement with St. Paul’s Hospital involves Mach7’s entire Enterprise Imaging Platform including its Vendor Neutral Archive (VNA), eUnity Diagnostic Viewer, Universal Worklist and additional workflow tools together with Support and Professional Services. St. Paul’s sister hospital, St. Teresa’s, is an existing Mach7 customer. https://www.asx.com.au/asxpdf/20221125/pdf/45j1ktvz2pdmx0.pdf
· June 2022 Cabell Huntington A$2.8m five year agreement. Renewal has converted from a five year capital term license to a subscription based volume license with potential upside based on volume expansion. https://www.asx.com.au/asxpdf/20220621/pdf/45b39s59v8888w.pdf
· September 2021 Trinity Health announced it has received purchase orders for its Mach7 Enterprise Imaging Platform, eUnity Diagnostic Viewer, eUnity Enterprise Viewer, and Mach7 Universal Worklist from Trinity Health (“Trinity”). These initial purchase orders have a combined value of $3.6 million for software and services which is expected to be recognised this financial year. Following the software being deployed in the live environment at Trinity, these orders will contribute a further $3.8 million in support fees over the next seven years, taking the total contract value of this initial order to $7.4 million. These orders follow the 7-year contract Mach7 signed with Trinity for the eUnity Enterprise Viewer, announced to ASX on 13 November 2020. https://www.asx.com.au/asxpdf/20210928/pdf/450yv2vghhvwpv.pdf
· August 2021 St. Luke’s, Boise, $443K for first year for eUnity universal viewing solution. The contract has the option for annual renewals of $389,000 per year for an additional five years. St. Luke’s Boise is Idaho’s largest health care provider and the flagship of St. Luke’s Health System. https://www.asx.com.au/asxpdf/20210803/pdf/44yyzmkcg69n54.pdf
· July 2021 Adovocate Aurora Health $4.3m initial five year support term. It has licensed its eUnity universal viewing solution to AAH. AAH now utilizing the full suite of Mach7 solutions. The contract provides for volume expansion pricing and the ability for AAH to extend the initial term at agreed pricing. https://www.asx.com.au/asxpdf/20210719/pdf/44ydzffjb15417.pdf
· May 2021 University of Vermont Medical Centre $730k of subscription fee revenue over five years with potential upside if contractual minimum annual imaging procedure volumes are exceeded. UVM previously purchased a license to the Mach7 Enterprise Imaging Platform (EIP) in 2017. Today its added eUnity Viewer. https://www.asx.com.au/asxpdf/20210506/pdf/44w821tx99w9ts.pdf
· January 2021 Adventist Health A$7.9m Five year contract (support and maintenance). Mach7 initially contracted with Adventist in April 2020 to provide its eUnity Diagnostic Viewer and Mach7 Universal Worklist to Adventist Health Tulare, one of the hospitals in the Adventist Health network. Today, Mach7 (via its subsidiary) has signed a contract amendment with Adventist Health to provide its full PACS solution, including the Mach7 Enterprise Imaging Platform, eUnity Diagnostic Viewer, Mach7 Universal Worklist, Mach7 QC Module, and Mach7 Clinical Portal. The Mach7 PACS solution is part of the Adventist PACS replacement program which is being rolled out across all 22 of its hospitals. https://www.asx.com.au/asxpdf/20210125/pdf/44rzlqq2h0r1xx.pdf
· November 2020 Trinity Health (USA) A$5.26m, 7 year contract for eUnity Enterprise Viewer. Trinity is the fifth largest healthcare Integrated Delivery Network (IDN) in the USA. This contract will see Mach7s eUnity enterprise viewer being installed across 92 hospitals located across 22 states.https://www.asx.com.au/asxpdf/20201113/pdf/44ptt54wljtk24.pdf
· May 2020 Hamad Medical Centre in Qatar, $840k p.a. top provide continued support for its enterprise imaging platform. This renewal contract represents a 25% uplift (per year) to previous annual support agreements. Mach7’s Enterprise Imaging Platform currently manages more than 230 million images for HMC, which constitutes over 90% of Qatar’s clinical imaging requirements. https://www.asx.com.au/asxpdf/20200520/pdf/44hz7kmnwx8lg0.pdf
· May 2020 Hospital Authority Hong Kong A$4.8m for large purchase order for its software includes a license to the Mach7 enterprise imaging platform, licenses to its partner’s “eUnity” enterprise viewer, and additional Mach7 gateways. https://www.asx.com.au/asxpdf/20200514/pdf/44htj06xgqljnc.pdf
· August 2019 St. Teresa’s Hospital in Hong Kong. Estimated contract value of $950 across a 5 year term. St. Teresa’s Hospital, a private hospital located in Kowloon, Hong Kong. Provide Enterprise Imaging Platform, Universal Worklist, QC Workflow and migration engine to consolidate its existing siloed Picture Archiving Communication Systems (PACS) into a single system. https://www.asx.com.au/asxpdf/20190822/pdf/447r02gwbj6k7k.pdf
· July 2019 Advocate Aurora Health minimum contract value of A$5.7m across a 5 year term. An integrated healthcare network headquartered in Milwaukee, Wisconsin. Contracted to provided its Enterprise Imaging Platform to store and manage images across its healthcare network. Also purchased the migration engine to migrate ~3.5 petabytes of data. https://www.asx.com.au/asxpdf/20190709/pdf/446gznkmpbkl9s.pdf
· March 2019 Sentara Healthcare selects Mach7 for PACS Modernisation. With existing annual support fees, Mach7 will earn a minimum of $850K guaranteed annual subscription fees from Sentara. These subscription fees will increase where study volumes exceed the contracted minimums. https://www.asx.com.au/asxpdf/20190328/pdf/443v8tf9b006y0.pdf
· October 2018 Authority of Hong Kong Initial 5 year term with deal value of A$15m Optional further 5 year term. To provide its Enterprise Imaging Solution. The hospital Authority manages 43 public hospitals and institutions. https://www.asx.com.au/asxpdf/20181029/pdf/43zq2w9j8m3l2h.pdf
· August 2018 Hamad Medical Corporation expands business in Qatar. With new orders expects to recognise revenues from Qatar of at least $1.4m in current financial year. https://www.asx.com.au/asxpdf/20180823/pdf/43xlr3x6x22n58.pdf
· June 2018 Raleigh Radiology expected to generate revenues of at least $1m over the next 5 years. A 5-year term license that includes Mach7 VNA, Communication Workflow Engine, Clinical Studio and iModality. https://www.asx.com.au/asxpdf/20180629/pdf/43w4pd4zhvt3fy.pdf
· November 2017 Sentara Healthcare US$1.8m for data migration project. To manage a data migration of over 20 million imaging studies to Mach7’s Vendor Neutral Archive (VNA) storage solution. https://www.asx.com.au/asxpdf/20171117/pdf/43pb4mqwfc657h.pdf
· September 2017 University of Vermont Medical Centre Multiyear agreement, first year deal value US$1.2m with recurring annual support fees beyond. https://www.asx.com.au/asxpdf/20170922/pdf/43mk33wv081gh8.pdf
· June 2017 RAPA Us Based Radiology Associates, contract value minimum A$1.8m minimum 3 year software licence agreement. RAPA serves the Arkansas community supporting 18 hospitals. https://www.asx.com.au/asxpdf/20170626/pdf/43k5qf7fvw1wkq.pdf
· September 2016 Sidra Medical and Research Centre (Sidra) Doha, Qatar minimum contract value of A$2m plus ongoing annual support. https://www.asx.com.au/asxpdf/20160906/pdf/439zd3z4m5rb3c.pdf
· August 2016 MaineHealth minimum value of A$3.8m 7 year software licence. https://www.asx.com.au/asxpdf/20160818/pdf/439dwp51cdhnwk.pdf
· August 2016 Large U.S University Medical Centre US$800,000 5 year contract https://www.asx.com.au/asxpdf/20160802/pdf/4390yw5mck1v21.pdf
· May 2016 Premier US Radiology Group A$650K P.A. – software being rolled out to 25 sites following a successful pilot program. https://www.asx.com.au/asxpdf/20160506/pdf/43725qy154lg06.pdf
Capital Raises – Raised $71.3m since 2015, Market Cap today at $0.74 is $177.3m
· June 2020 Raises $34.8, Institutional $23.4m, $11.4m Retail at $0.68 per share
· December 2019 Raises $20m via an equity placement at $0.62 per share
· November 2018 Raises $3m via a private placement at $0.20 per share.
· November 2017 Raises $2m via an equity placement to Oceanica Capital Partners at an issue price of $0.175 per share.
· November 2016 Raises $9m via Institutional placement at $0.04 per share
· May 2016 Raises $2.5m via Institutional placement at $0.06 per share
· October 2015 Mach 7 enter into binding merger agreement with3D Medical Limited (3D Medical Raised Capital to buy M7T haven’t included numbers for simplicity)
· June 2020 Client Outlook Group CA$38.5m (~A$40.8) is a leading provider of enterprise image viewing technology “eUnity”. Provides Mach7 with a full departmental clinical diagnostic Picture Archive Communication System (PACS) solution offering. https://www.asx.com.au/asxpdf/20200610/pdf/44jjd0sw17tkzj.pdf
@mikebrisy thanks for the information and also the correction to my numbers for FY23 of ~32 not ~36m.
It has been on my watch list for a while and I decided to take a small 0.5% stake in my real life portfolio. I wanted to take a position earlier. However, there was significant noise out there comparing this to PME so I took a step back to look at the opportunity for M7T should they be able to execute without being blinded by the dream of a 100x opportunity.
When reviewing company info and data the sentence below from the Aug results summary caught my eye.
”The ARR run rate now covers approximately 65% of the Company’s annual operating costs”.
I find this an indication of the potential profitability the company can look forward to should they continue to win contracts and an insight into how management are developing the business.
I had a top up order at 55c from a couple of weeks ago. That's been left hanging now.
Good to see a significant contract. Onwards and upwards!
@NewbieHK My view on the macro hasn't changed much in 4 months and I want to reply by starting that I'm not a fan of Revenue multiples for valuation.
In the case of M7T I resorted to a revenue multiple so that I could calculate some sector comparables with $PME and $VHT as two bookends within which the value of $M7T should reasonably lie.
As of today, based on FY23 consensus numbers the Revenue to Market Cap multiples are:
Revenue growth FY22 to FC FY23 are:
So, in answer to your question, I am still comfortable holding a valuation of 10x revenue on a comparables basis.
Moving to an FY23 revenue FC valuation basis of $32.5m, the value per share would increase to $1.36.
I'm not updating my valuation because it is flakey as it is and I'd rather see what the results for FY23 reveal, when I will do an update.
$M7T is a speculative holding for me, but contracts like today's are definitely de-risking the proposition. If we say another large contract in the next 6 months, I'll definitely consider increasing my position.
From a macro perspective, M7T it not burning cash and healthcare sector should do relatively well in a recession. so I see only upside risk to the share price if they continue to execute.
Disc: Held in RL and SM
@mikebrisy thanks for the update. I saw your previous valuation 4m ago of 10x revenue $1.14. Do you think this valuation is still realistic based on the changing investment valuation environment? Todays bump to 67c has it priced at around 4.5x revenue (FY23 ~36m).
Mike Lampron, CEO presented last week on the Share Cafe Webinar Micro/Small Cap Hidden Gem Webinar.
The Mach7 segment runs from 20:00 mins to 34:00 mins.
Covers ground from recent FY22 presentation (refer to my recent Straw) in case you missed the Investor Call.
Mach7 is growing streadily across 15 countries. CEO Mike indicated that 2023 is looking like 20% sales /revenue growth. It was cash generative last year.
Mach7 appeared for the first time in the Best in KLAS 2022 Awards, ranking as #2 Universal Viewer (Imaging) and #3 Vendor Neutral Archive. The following report on the 2022 KLAS awards is interesting, as it shows how important the equipment makers are in the imaging software space, and also lists some of the other players to follow.
Three institutional shareholders account for 36% of shares, although as noted by other StrawPeople, insider holdings are low.
Disc. Held in RL and SM
See my straw for rationale
10 x FY22 Revenue = $271M
Shares on issue = 238m
Value per share = $1.14
(Note: Brokers as at 29/8/22 are $1.20 and $1.34, rated BUY
Mach7 Technologies reported their annual results today.
A few words of introduction, as M7T is largely below the radar screen in ASX small-cap world. Headquartered in VT, USA, it was one of many small companies listing on the ASX pre-GFC. So, it is not really an Aussie company at all, and it derives no revenue in Australia.
The CEO is Mike Lampron, an experienced medical imaging software industry executive. Chairman David Chambers was Pro Medicus CEO from 2007 to 2010.
Up front, one of my major concerns is lack of insider shareholding, at only 5%. However, Directors have been buying over the last year, so that’s a positive. I dont really understand the share register, and need to do some work on that.
$M7T is a recent addition to my portfolio (RL and SM). Having done my PhD in imaging decades ago, when I had to write much of my own image processing code (!), I have always understood the great potential for software, integration, and SaaS in this space. I could just never bring myself to pay the $PME SP over recent years, and have been in constant regret. So, $M7T has, in a small way, allowed me to scratch that itch.
In this straw, I want to focus on the recent results, having attended the call this morning. I will start a separate forum for discussion as I am keen for any insights from fellow StrawPeople on M7T. (Maybe @Strawman could put it forward for discussion at Baby Giants?)
The first few slides of the presentation give a really good description of the company for those interested.
1. THE HIGHLIGHTS
It was worth noting that these were the first results that allowed an organic y-o-y comparison, given that the Client Outlook acquisition closed on 14 July 2020, so was almost entirely included in FY21 results.
2. INSIGHTS FROM THE RESULTS CALL
$M7T are agnostic as to whether customers choose a capital or subscription-based model. The detailed structure of both models was illustrated, as investors had previously requested clarification. They are observing a trend towards subscription, with 58% of FY22 sales orders being subscription, up from 49% in FY21.
Strong Customer Renewals / Churn Low
Existing customer renewals of $8.0m accounted for 24% of total sales showing that customers are sticking with the platform. Importantly, Mike reported that many of these legacy contracts had been signed at historically low rates, and that it was encouraging that customers saw sufficient value that they accepted the higher rates applying today. Churn was reported to be very low, at <1% of revenue and <2% of customer numbers. With a typical 5-year contract cycle, 8-10 renewals are expected in FY23.
Slide 18 also highlighted significant contract wins during the year, including existing cusomters who are expanding their adoption of Mach7’s modular product suite.
Growth Outlook - Targeting $36m FY23 Sales Orders
Mike emphasised that the targeted +20% growth in sales orders from $30m in $36m should be considered a floor to what would be delivered, given that in FY22 sales exceeded the target to stand at $33.2m and that since the end of June 22, the sales pipeline has already expanded by 30%! Even though it is a oft target that should be readily exceeded, it is good for management to have the confidence to speak externally about their short term targets.
Sales growth was put down to the good performance of an experienced sales team, noting that a new VP Global Sales has been in place for a year and has made several changes to staff to build the sales team.
Mike also commented that the pipeline contained a wide distribution of sales sizes from <$2m right up to larger deals of $5m-$10m (Mt note: more akin to what we are seeing $PME signing).
Industry trends driving growth
Mike noted that from $M7T’s perspective, hospital investment programs have returned to pre-COVID19 BAU. He noted that in the USA, hospital chains are on the move again with M&A, and that this would be a growth driver as their larger customers implemented their systems in acquired hospitals.
Now solidly cash generative, closing cash of $26m and no debt, one of the analysts on the call asked if a share buyback was being considered by the Board. Mike responded that the Board wanted to keep a strong balance sheet and that they wanted to maintain the capacity for further bolt-on acquisitions, if the right target was found. In addition, they want to maintain a strong balance sheet to be able to continue to invest in the platform.
3. MY KEY TAKEAWAYS
This was a year of solid progress for $M7T, and it is great to be able to review a clean set of results based on strong organic growth. While costs increased driven by staff churn following the acquisition in 2020 (something to monitor), the company moved significantly forward in FCF generation. If they can achieve the 30% targeted sales growth in FY23, then we should be able to get a good handle on the quality of operating leverage for the company into the future.
I don’t have a sufficient understanding of $PME to understand how $M7Ts offering lines up against it. This is something for the “to do” list. But with over 6,000 hospitals in the USA and 15,000 in Europe, and many, many more specialist imaging centres and clinicians that use imaging software, $M7T estimate the global market to be $2.bn. So, it sounds like there is an opportunity for several quality firms to grow for some time.
For almost two years, $M7T has been subject to patent infringement litigation. The litigation was recently dismissed by the District Court of Delaware, but the dismissal has been appealed. There was no reference to this on the call today, and I can’t find any reference to it in the annual report, so they don’t appear to be burning material legal fees on the defence.
As with nearly all tech, the SP has taken a beating this year, sitting this morning at $0.67 down from a high of $1.59 in Feb 2021. However, not only does M7T have good positive OpCF at $6.4m, up from $1.5m in FY22, they also generated just under $6m in FCF.
The current value is undemanding at <6 x revenue, particularly given that M7T now appears to be solidly cash generative.
Prior to today, broker estimates are $1.20 and $1.34 (mean of $1.27). At $1.27 this would represent a valuation of 11 x revenue.
(Comparables: Other imaging stocks $PME is 47x at one extreme and $VHT at 4.72x at the other).
There is a world of difference between $VHT (which can’t make money) and $M7T (which can). So , I will put a SM valuation of 10x revenue, as a placeholder.
My Holdings and Future Strategy
Prior to this morning I held a 1.4% holding IRL, which I have now increased to stand at 2%. That is an upper limit for me for a company with this risk profile. I need to do more work to understand the company, its history, management, and the Board. However, it looks to be a good quality, global, medical software.
Disc: Held RL and SM
M7T is a company I've had on my watchlist for some time when I was looking around for MedTech companies (Maybe trying too hard to find another PME). My thoughts as to why there might be an opportunity here is Covid has interrupted their ability to sell & rollout their system.
Who are M7T
M7T is an imaging platform (eUnity) that allows doctors to access all medical images (vendor neutral) for the patient on a single platform. From here the doctor can diagnose, workflow, share & index the medical images through their eUnity viewer. The clients data can be stored on the cloud or locally & is available via an online browser (no installation).
M7T currently have over 150 customers across 15 countries (Including - Aus, Canada, China, France, HongKong, Singapore, US & UK).
Acquisition of Client Outlook - This was the platform they used for distribution, the acquisition will bring down their COGs & improve Gross Margin.
Sales +95% to 25.6M (85% of this is yet to be recognised as revenue)
ARR + 80% to CARR $15.8M
30% CAGR since FY14
$40M in pipeline with 32% already won, 30% expected, 21% delayed due to covid & 17% lost
M7T are currently transitioning from a capital licence model to a subscription model (SAAS). In FY20 2% of sales were SAAS, this has now increased to 20%
Operates at a 97% gross margin
Revenue up 13% on a currency basis
In the example given in the investor presentation they broke down the revenue streams for the subscription model vs the capital licence model. The capital licence model has a large upfront cost as well as annual support, where the subscription model has a subscription fee as well as a service fee. In this example the subscription model brought in 10.9% more revenue over the 5-year life.
Although M7T is operationally cash flow positive they returned back to an EBITDA loss of $1.8M this FY. This could be explained by the increased SAAS sales where revenue is realised later in the life of the customer. Revenue was also potentially deferred by “staffing issues” I suspect due to covid. Hospitals may also have delayed installation to conserve capital (hence the large order book).
M7T have stated that they will return to EBITDA positive in FY22 and may provide guidance later in the FY
Still have plenty of cash on hand with current assets 3x that of current liabilities
Over the past 3 years M7T has historically traded at a valuation of 10x EV/Sales. Current market cap is $227M. The company has stated that the FY22 book stands at $23.1M to date with 11 months left to increase this revenue, I think the company could achieve significant growth this year.
I’d like to learn a more about this company before I put a dollar value to it but there’s enough here for me to learn more.
Small inside ownership (Approx 6%)
Large jump in operating expenses this FY (I suspect from the acquisition but I’m speculating)
Large jump in depreciation & amortization (I’d need to find out where this came from & how they depreciate their assets over time)
Strong Sales Growth and Sales Momentum from Mach7
Disc; I Hold
Adventist Health Significantly Expands its Enterprise Imaging Strategy with Mach7
? Adventist Health System licenses Mach7 PACS solution
? Total new contract value A$7.9 million
? The expanded relationship will see Mach7 solutions deployed across 22 hospitals
Profitable NPAT Result, Cashflow Positive & Triple Digit Revenue Growth
Mach7 Announces FY 2020 Results
Melbourne, Australia; 27 August 2020: Mach7 Technologies Limited (ASX:M7T), a company specialising in innovative data management solutions for healthcare providers, today released its full year results for the year ended 30 June 2020 (FY20). This update provides information on what the Company considers to be key financial metrics.
Business Further De-risked
The Company has reported strong revenue growth and its first (since listing) profitable and free cashflow positive result. Together with its cash reserves of $15+ million after the acquisition of Client Outlook, Mach7 has become increasingly less reliant on investor funding, and has demonstrated the scalability of the business.
FY20 Revenue Growth 102%
The Company has reported revenues of $18.9 million, growth of 102% over prior year revenue of $9.3 million. Each category of revenue achieved strong double-digit growth, with the majority being attributable to software license fees. Software license fee revenue is representative of new customers licensing the platform, and existing customer re-licensing at the expiry of their contract term. Software license fees for FY2020 included license fees earned from prestigious US-based Advocate Aurora Healthcare and Hospital Authority HK who purchased two-fifths (2/5) of their contracted licensing volume during this year.
Pleasingly, the Group’s recurring annual revenue of $6M also achieved strong (35%) annual growth. The Group’s recurring revenue is representative of customers going “live” on the Mach7 Platform and commencing their support or subscription agreement. Notably, Advocate Aurora, Sampson Regional Medical Centre, Adventist Health Tulare (“Tulare”), Colorado Imaging Associates, P.C. (“CIA”), Children’s of Alabama, Sentara Healthcare (subscription) and University of Vermont all achieved go-live during FY20.
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[I don't hold M7T shares, but this is an impressive set of results. The M7T share price is up by around 4% today so far on the back of these numbers.]
That link will take you directly to a .PDF file, so you'll need Adobe Acrobat Reader installed to read the file.
TC's Recommendation: Buy
"We reiterate our buy recommendation with a higher level of conviction in the investment thesis: Validation of Mach7’s software in large hospital networks should spur increasing demand. With $9.4m in new business for 1H FY20, the thesis appears to be playing out well. After upgrading our FY20 numbers to reflect stronger than expected cash flow and extending the forecast to FY23, our base case fair value estimate rises to $1.07 (30-Aug: $0.77) which implies a 12-month price target of $1.17. Our forecasts assume additional contract wins at large institutions (similar in deal size to Advocate Aurora) over the next 12 months. The major downside risk is in delays to contract wins. Management report the pipeline is strong with opportunities at various stages of advancement."
Taylor Collison have a "Speculative Buy" call on M7T and a 77c valuation.
Mach7 Technologies (M7T): On the cusp of a material uptick in market share growth
We initiate coverage with a speculative BUY recommendation. Further upside exists for M7T in accelerating market share growth. The driver is rising recognition of M7T’s medical imaging IT software as a viable (even preferable) alternative to software from larger suppliers (IBM, GE etc). Until recently, M7T’s growth was hindered by diversion of IT capex towards the rollout of electronic medical records (EMRs). With the rollout complete, EMRs are highlighting a need for better interoperability of health IT systems. M7T possesses one of the strongest software suites in this area compared to competitors. Healthcare executive surveys and recent largescale contract wins provide support for this thesis. Additionally, the new large-scale rollouts give comfort to risk-averse healthcare CIOs who are watching the projects closely to verify M7T is capable of delivering successfully. Feedback thus far is positive. The near-term catalyst is announcement of new contract wins – particularly at large healthcare enterprises where M7T’s potential is significant.
We value M7T at $0.77 using a DCF model with moderate assumptions and supplement this estimate with a comparable company analysis. Another win on the scale of Hong Kong (or larger) would result in a material increase in our valuation range. Sensitivity analysis of 3-year market share and terminal growth rates outline possible scenarios (page 16). Management estimates that stripping out all early-stage growth and software development costs gives an EBITDA margin of 70%. Considering July 23’s CARR figure of $8.5M, our FY20 and FY21 EBITDA forecasts of $1.2M and $5.5M appear achievable.
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Disclosure: I don't hold.