Mach7 updated the market with another solid result. Revenue up 95% to ~ $25M with ARR doubling from $6M to $13.4M ($2.4M to recognise in FY22).

Mach7 is transparent in the win rate of FY20 $40M sales pipeline:

• Won 32% ~ $13M.
• Lost 17% ~ $7M 
• Expect to win 30% ~ $12M 
• Delayed tenders 21% ~ $8M 

The main issue with the business is revenue fluctuation by the nature of the capital license business model. Mach7 has a recurring revenue component but it is < 70% of total revenues. Investors hope the Client Outlook integration provides Mach7 leverage to expand the pipeline and improve gross margins. 

They have over 150 customers across 15 countries which is really impressive for a small-cap company. 

2 sales models - Good thing they broke down the business model. 

1. "Capital License" or Capex model where fixed revenues are paid upfront and annual support subscription applied for the lifetime of the contract. 
2. "Subscription License" or SaaS model with no upfront revenues but monthly recurring revenues. Every new customer win added on to the top line.  

They are guiding for EBITDA profitability FY22 which is really surprising considering the growing R&D operating expense.

The market size for PACS & radiology is massive at $2.5B which means a lot of healthcare software needs upgrading. Even Promedicus with $50M revenues is a drop in the ocean when compared to the large incumbents (Phillips, GE, Mckesson) with legacy systems. It is good news for both Mach7 and Promedicus as they have time to prove their product to customers and grow. The niche they are occupying will not be disrupted by the large players, as they are too widespread and slow-moving. If anything, we could see them acquire Promedicus and Mach 7.   

Q3FY21 results came yesterday and it did not disappoint

• Cash receipts of $8.2M as most of Client outlook revenues are recognised this quarter compared to previous quarter.
• Positive operating cashflow from operations. In other words capital raises would be for acquisitions not for running the business. 
• Cash on hand $18M which is a handy buffer. I believe they still have to complete the acquisition of Client Outlook. Will recheck my notes, it was $40M so it was quite expensive from a balance sheet perspective. To determine whether Client Outlook is a good acquisition is to check how quickly Goodwill decreases every half year. If Goodwill stays the same they have overpaid and my early suspicions would be right. 
• They generated $12.84M of new sales this quarter. That is quite astounding as last year (FY20 ~ $10M). One quarter outperformed last financial year. 
• They are winning more orders with exisiting customers. Case in point Adventist Health System West: 
  • Winning Adventist lead to 8 new orders. 
    • 7 of them is a data migration deployment. Where the hospital group is migrating away from legacy system. 
    • 1 of them is a full PACS deployment. 
  • There are 22 sites, Mach 7 has started on 1 site. The likelihood of deployment to all sites is very high. Very sticky customers after long tender process. 
• The company is renewing contracts, increasing revenue per customer with more customer deployments. It’s just a question of how much can they extract per customer and how many new customers can they win?

A record Q2 cash receipts of $4.25M with operational synergies being realised with Client Outlook. Staff costs are flattening out and they are getting cost synergies.  

What I liked about the update was this "Company expects to receive cash from its larger new customers in Q3, boding well for continued healthy cash flow from operations." This will come from Trinity and others. Usually, Q2 is where cash receipts are slowest, but they grew it. Q3 will be even better for the business.  

"This quarter includes 6 new customers and 14 expansion and/or renewals from existing customers". The 14 renewals are key as it drives ARR, you don't want to lose existing customers while you grow.  

Looking into the future, this is the most telling sentiment across the industry. "At this year’s Radiological Society of North America (RSNA) tradeshow, which was hosted virtually due to the pandemic, several growing trends were evident. Especially notable and relevant to Mach7 was an increased emphasis on viewer technology; consolidating diagnostic viewers across portfolios, providing a more complete user interface that minimizes distractions for physicians, and the ability to address Teleradiology requirements have all become a growing industry focus." The canary is in the coal mine, Hospitals will need this technology. It is mandatory and there are no "ifs" and "buts" during the procurement stage. You can say the same with Alcidion, NHS Trust's was hesitant and now Alcidion's Miya Precision and Patientrak are a lifesaver to them. There will be no hesitation going forward, it will be "how much and for how long?"

So my biggest concern was persistent delays during the procurement process from hospitals, but this will not be the case even if the pandemic persist till 2022. The hospitals have come to the conclusion, that if another shutdown were to happen, they need tools to do remote diagnosis. Hence investment into viewer technologies is mandatory. They are not pushing back investment while the pandemic is going on.  

Now, this leads to market share battles. Mach7 will be competing with Promedicus for key sites. What I think will happen is that Promedicus will win the majority of the larger hospitals and Mach7 win the small-mid hospitals.

I can't see Mach7 catchup with Promedicus but both companies deserve to be in the portfolio. Plus Promedicus pays a dividend for the "value investors" among the community. Value investing should change its motto to "Backing market leaders and holding on to it". 

The eUnity acquisition has resulted in a contract win and it is a large health care delivery system. Trinity Health generates $19B in revenues, employs ~ 130K staff across 92 hospitals in 22 states in the USA.

The total value of the contract is $5.26M for 7 years. So the first year is the deployment fee and the 6 remaining years is the support and maintenance fees. Mach7 considers this a material contract after the eUnity acquisition. Assuming that the deployment fee generates $1M, the remaining 6 years would contribute ~ $710k per year.  

We have seen over the years that large customers tend to start with small contracts but end up paying for more services over time. We saw this with Sentara Healthcare and Advocate Aurora. This happens in the later years of the contract. 

The market up 8% implies that they are valuing the contract at ~$14M. I don't know if that is valued correctly but it is what the market thinks. It definitely should not be less than $5.26M.         

Q4 FY20 Results

• The freecashflow was the main focus this quarter. The purple bar showing FY20 freecashflow of $4.5M is a great achievement by management. Mach 7 by itself did well to grow this quarter. 
• In the cashflow statement the investment into Client Outlook have not materialised "in respect of working capital and other financial assets/liabilities that will be made on or before 30 September 2020". Mach7 have $48M in cash, of which $40.8M will go towards the acqusition. I feel, Mach 7 have slightly overpaid for the acquisition, however if both Mach 7 and Client Outlook end up winning their target tenders it would be a genius move. In a way, Mach7 is using the lockdown to integrate with Client Outlook and then compete for large end-to-end tenders. They aim to come out stronger and be more agressive with sales pipeline post acquisition.    
• "Mach7 has hired U.S. advisory firm Exactus Advisors to assist Mach7 with planning and the execution of the integration of Client Outlook." This was the only thorny point in the quarterly. Having a 3rd party advisor for integration means higher execution risk. Fingers crossed it works out, but definetly a potential red flag. Fortunately, Mach7 aims to update the market on the integration progress. Hence, shareholders are kept in the loop. 
• In regard to Covid, "It is still expected that travel and vendor visits to hospitals will remain a challenge for the next six (6) months". Hence they cautioned the market that "the full impact of COVID-19 is still unclear in relation to its impact on current deal timing. It is expected that there will remain some residual effect during the 1st half of this fiscal year." Covid force tradeshows to be conducted online and like in previous quarterly, hospitals did not have difficulty with workflows moving outside the hospital and into cloud. 
• Client Outlook won the Univerisity of Michigan contract valued at $175k p.a.
• Mach 7 successfully deployed their Enterprise Imaging Platform across the entire Advocate Aurora Health's (AAH) network. The Mach7 system is currently taking in 500,000 orders and Admission Data & Transfer (ADT) messages per day. Prior to this, AAH  purchased Mach7’s Migration Engine to migrate ~3.5 petabytes of existing data. AAH is one of the 10 largest not-for-profit integrated health systems in the United States, encompassing 28 hospitals, 500 outpatient locations, and 68 Walgreen’s clinics across the states of Wisconsin and Illinois. There is an excellent opportunity for Mach 7 to cross sell Client Outlook's eUnity. AAH is eager to fully digitise their hospitals. 
• Mach 7 also successfully deployed their VNA solution to Children of Alabama (CoA). "The solution will provide extensive cost savings by centralizing their radiology images into a single archive." Another customer that could be potentially cross-sold Client Outlook products. 
• Overall, the company is on track to maintain their customers and aim to come out of the pandemic with Client Outlook added on. Acquisitions are always risky, and this is no exception. It was expensive, but maybe they can integrate well to drive down cost and hopefully existing customers adopt Client Outlook's products.      

Interesting turn of events, with Mach7 buying Client outlook for $40M. Client Outlook has eUnity that competes with Promedicus' Visage. Both products are front-end and Visage had acquired market share faster. The combined Mach7 technology (front-end and back-end) aims to take market share from Promedicus. Competing for tenders with the combined (front and back end) is a very serious threat to Promedicus. 

Hence, my thinking is that if Mach7 starts winning tenders that Promedicus would have got, then Promedicus would have to acquire Mach7. Either Promedicus build back-end themselves or acquire future market leaders. In the acquisition route, they should do it early such that they pay a lower price. 

Just my thoughts on what could be a really interesting battle for market share :) 

Mach7 Tech produced an impressive 1H result yesterday with both metrics operating cashflow and NPAT being positive. The surprising part was that NPAT was positive which was a shock to me and the market. 

"Mach7 signed customer contracts valued at $9.4 million for the half year. Revenue growth of 158% to $9.1 million was reflective of these new customer contracts signed during the half year". what I found amazing was that it does not include any sizeable revenues from its contract with Hospital Authority of Hong Kong (one of their largest customers).. 

They have managed to add "46 new opportunities, valued at >$40 million, added to the pipeline in H1 2020" The more impressive feat is that 9 RFPs valued at $32.5M is expected to be awarded this year.. They have hit the cashflow milestone with $2.4M FCFFand have $23M cash reserved in the bank. Most of it came from the $20M institutional placement during the quarter. They now have funds for acquisition but they have to be smart of what business to acquire. It would probably have to be a comapny specialising in EMHR that have mission critical systems integrated to multiple hospitals.   

Excellent result by management and they have delivered on their targets from March 2019. Let's hope more of the same for the end of the year :)