SomnoMed still on track.
Good traction in North America and Europe, with revenue there up 12% and 15% respectively for the quarter (quite a bit better too when you factor in FX movements).
Cash flow from operations breakeven, compared to -$2.2m in the pcp.
The reiterated guidance represents >50% growth in EBITDA for FY23 and has been consistent since the issue of last year's results.
Rest Assure validation has now been completed and regulatory filings have begun. It's been some time in the making, but they're getting very close to commercialisation of this new product now. It's hoped this will help overcome some of the prescription and reimbursement hurdles, and gives them a real point of difference.
Shares are presently on <0.9x sales, which is rather low given the top line growth. Then again, the EV/EBITDA ratio is 37 so from a valuation perspective a lot is riding on the success of Rest Assure. So far it's all upfront cost and added expenditure, but if it sees any traction and they can get anywhere close to their stated targets (FY26 rev of $150m in revenue and 10% operating margin) there's good value here.
Disc. Held.
Shares in Somnomed are down 6% after releasing results (see here), now at a 3 year low.
You'd think the results were a disaster!
All regions saw double digit growth, with a record result in Europe. Also improved gross margin and EBITDA positive, which is trending above guidance. This is despite a big investment into sales and marketing and R&D.
Still, it's only been about 7 orders worth $17k that has driven the price action on the ASX today, but the shares just cant seem to catch a bid!
Management did say that they had a challenging end to Q2 in the US, which is facing increased competition from lower cost providers, plus a few supply chain issues. And they've secured more debt to help fund their growth initiatives (although given the share price that's a better funding option than issuing new shares). But I dare say that's why the market has reacted as it has.
They are guiding for FY revenue growth of 15-20% (last year was 16%). EBITDA is expected to remain positive at $2m, compared to $1.3m last year. That'd put shares on a P/S of roughly 1x, but an EBITDA multiple of 43x.
If you expect sales momentum to more or less continue, and some operating leverage to emerge, it seems good value. For context, management reiterated the FY26 aspirational goal of $150m in revenue and 10% operating margin. If they did that, you'd only need shares to trade on an EBITDA multiple of about 9x at that point to get a 15% average annual capital gain.
Held.
[EDIT -- changing future EBITDA multiple assumption]
The market is hard to impress.
FY22 revenue was up 16% to $72.6m (up 17% in constant currency, and ahead of guidance for 15% growth). The second half, as seen below, was especially strong and represents a record result.
North America was the standout, showing 33% revenue growth for the year and 42% growth in the second half. They really seemed to have recovered from their strategic stumble and are returning to very solid growth.
EBITDA was $1.3m versus guidance for breakeven. In FY21 EBITDA was $3.9m, but they said at the time that EBITDA would be flat for FY22 due to increased investment in growth (primarily in Rest Assure). To wit, Somnomed grew sales & marketing expenses by 27%, and corporate and head office expenses (mainly R&D) by 40%.
Importantly, Gross margin steady at 70% and the investment in growth seems to be paying off. The CEO said he expected 20% revenue growth for FY23. They are also targeting EBITDA of $2m (50% growth).
Looking further ahead, Somnomed is targeting FY26 revenue of $150m -- about 20% compound growth between now and then -- with an EBITDA margin of 10%.
A lot depends on how well Rest Assure goes -- which still has some hurdles to pass before commercialisation. But following our conversation with CEO earlier this year, i think there's good reason to be optimistic here.
Shares are presently on a P/S of 1.5x or an EV/EBITDA of 76 (although that's a very variable figure given how close they are to break even). Taking the company at it's word, and assuming EBITDA of $15m in FY26, and applying a multiple of 15 (which is fairly conservative, i think), you get a target price of $2.71. That's $1.85 per share when discounted back at 10%.
Makes the current market price of $1.30 seem pretty cheap.....if they can deliver to expectations.
Still, quite a decent margin of safety.
Full results presentation here.
Disc. Held IRL & on SM
Looks like a decent result for Somnomed, with a 10% lift in third quarter revenue, or a 14% lift on a year to date basis. In fact, third quarter sales were over 20% higher when you strip out a Covid related allowance from the previous corresponding period is removed.
The US, which accounts for roughly 1/3 of revenue, saw an especially pleasing result:
The company also reaffirmed guidance for full year revenue growth of at least 15% and breakeven EBITDA. The business remains well capitalised with $14.8m in cash on hand, and a net cash position of $8m.
The business was cash flow negative for the quarter, and reported -$5.5m in free cash flow, due to investment into the Rest Assure product and also the timing of insurance, legal and audit fees, as well as a $500k increase in working capital (inventory) to allow for supply chain disruptions.
Rest Assure was apparently well received when displayed at the World Sleep conference in Rome and patents were lodged in all commercial jurisdictions. Commercialisation is still a ways off, with the company needing to first lodge regulatory filings, which it expects to do in FY23.
Based on guidance, Somnomed is on roughly 2.3x forward sales.
SomnoMed reported positive operating cash flow for the 3 months to Dec 31, 2021 at $2.2m.
With 0.9m in investing cash flows, it generated $1.3m in free cash flow and has $17.5m of cash at hand.
4C is here
For the half, the company was essentially break even on an operating cash flow basis, and due to higher investment in Q1 reported -2.6m in FCF for the past 6 months.
A part of that cash was likely related to the development of the world's first "technology enabled oral appliance" which was announced today (a mouthpiece that wirelessly collects patient data for compliance and treatment effectiveness purposes -- an area the company identified as a key limitation for the uptake of oral devices). More info will be released in late February, but hopefully this will help improve adoption.
For context, the past 2 years of cash flows are as follows (negative quarters impacted by COVID)
You can clearly see the increased investment being made. Hopefully this proves worthwhile over time.
Somnomed (ASX:SOM) develops and manufactures medical devices for the treatment of Obstructive Sleep Apnea (OSA). Unlike Resmed and others that use CPAP (Continuous Positive Airway Pressure), Somnomed have a mouthguard like device that is based on COAT (Continuous Open Airway Therapy). The advantage being that it is more comfortable, makes no noise and requires no power. It's also much cheaper.
So instead of sleeping with this on your head:
You have this:
Each appliance is custom made and the treatment has been proven to be very effective. It's not quite as good as CPAP therapy, but given 50% of people using CPAP quit within a year due to the discomfort, it's arguably more effective overall.
Somnomed operates in 28 countries and has helped over 650,000 patients. The majority of sales come from North America and Europe (32% and 61%, respectively), with APAC making up the remainder.
OSA is a huge problem globally, with an estimated 900+ million sufferers. Untreated, it can lead to increased risk of stroke, heart attack, depression and diabetes. (if your partner values a good night's sleep, it'll also likely undermine your relationship...)
At present, only 8-10% of OSA treatments use COAT-based solutions. As such, the growth potential is meaningful -- the question is whether it can be effectively exploited by Somnomed...
The real challenge is to overcome the default recommendations of CPAP therapies by sleep physicians and better establish the COAT treatment as a viable alternative with recognised advantages. Interestingly, COVID has impacted the availability of CPAP machines in places like North America (I assume because manufacturing was diverted to ventilators?), and this could provide an opportunity to help promote Somnomed's solutions.
It's worth noting that Somnnomed is a relatively small company, with a current market capitalisation of ~$180m (at time of writing). It's also very thinly traded -- over the last year the average daily value traded is less than $100k. It's not uncommon to see less than $10k traded in a day and the buy/sell spread can be significant.
The company listed all the way back in 2004, and since then has grown revenues from (essentially) zero to $62m in FY21. That being said, revenues took a bit of a hit over the last few years and although reporting a modest net profit between 2010-2016 has been mostly a loss making operation. It is therefore no surprise that they have been a prolific issuer of shares. In fact, the share count has grown by ~28% over the past 5 years alone.
Nevertheless, in the recent full year we've seen some evidence of a return to sales momentum:
In the most recent quarter, revenue was up 16% in constant currency terms.
The risk here is that this is going to forever remain a "gunna" company. Always on the cusp of delivering attractive and growing cash flows, but never quite getting there. The company continues to invest heavily into R&D, and although that will dampen profitability it is necessary for long term success. So that's cool, but it'd be great if the company can stop relying on capital raisings. On a free cash flow basis, they look like they are right at that inflection point.
Somnomed has $17m in cash with approximately $2.3m in long term debt.
Overall, the company appears to be well placed in a large market with a unique and compelling product set -- one that may finally be seeing increased adoption.
The CEO is Neil Verdal-Austin who has been at the company for 13 years; 10 years as the CFO and the last 3 as CEO. He has 1.7m shares.
The biggest shareholder on the board is TDM Growth partners, a private investment firm that took a substantial stake in the business in 2012 and has a couple directors on the board. it owns 26% of Somnomed.
The company is presently trading on 3x sales, and has guided for 15% revenue growth in FY22, with an EBITDA at breakeven as the business invests further in growth.
These are all early thoughts. I'll continue to investigate and would welcome any insights from others.
disc: not held