Reasons why I think VHT may be a bad investment:
In preparation for the upcoming FY21 results I thought I would revisit Volpara Health Technologies (VHT) and given I currently don’t have any free capital for any new positions it would be a worthwhile exercise to review this holding in my portfolio. (I bought VHT in August 2020 mostly based on an analyst recommendation rather than my own research)
What does Volpara do?
Volpara Health Technologies Limited (VHT) is a MedTech SaaS company that was founded in 2009. Volpara’s clinical functions for screening clinics provide feedback on breast density, compression, dose and image quality. The Enterprise software management helps practices with productivity, compliance, reimbursement and patient tracking. VHT listed on the ASX in 2016 aligning with the commercialisation of VolparaEnterprise.
Since listing VHT has experienced a high rate of organic growth in the US, as the value in their breast density screening tools has been validated through published studies and industry reputation. Further to this the company has been adding to the value proposition of their software through two acquisitions.
MRS Systems was acquired in May 2019 which helped boost the FY20 market share target from 10% to 27% of women. Since the MRS acquisition overall market share in the US has remained around 27%, however Average Revenue Per User (ARPU) has increased around 5% per quarter which has helped increase overall Annual Recurring Revenue (ARR) growth.
Cancer risk company CRA Health was acquired in February 2021. The CRA acquisition adds around $6,200,000 of ARR plus potential additional high value contracts. (Contract for US$400,000 ARR was signed in March 21). The integration of the CRA platform allows for expansion of the risk assessment process and inbuilt integration with major genetics companies.
VHT is yet to return a profit, with a negative cash flow of around $10.3 million at the end of Q3FY21.The company is moving closer to being cash flow positive with the ongoing increase in revenue and steady continued reduction in negative cash outflows each quarter. (Q3FY21 -$3,070,000)
The Volpara board has a strong background in breast health, imaging and software companies which aligns well with the VHT business. The CEO Ralph Hingham who is one of the co-founders, has around a 6.5% holding in the company which can be a good indication of share-holder alignment.
As VHT is a SaaS company, Annual Recurring Revenue (ARR) can be used as an indication for valuation compared to other companies operating in the same segment. At Q3FY21 ARR was reported at NZ$20,700,000. Estimating a Q4 ARR of NZ$28,500,000 (5% growth + new CRA contracts). At the current share price of $1.44, The market cap is A$360 million which gives a Price to Sales of ~ 13.7 (After converting ARR to AUD). This indicates that VHT may be slightly undervalued compared with other SaaS companies.
Volpara also holds NZ$35,000,000 in cash after the CRA Health acquisition.
There are several opportunities that I can see that may present as catalysts for further future growth of the company.
The first is that the company typically signs 5 Year contracts. Many contracts that were signed since IPO will be coming up for renewal. This gives VHT an opportunity to re-sign these customers onto the new Volpara Breast Health Platform. Previous company reports indicate that these contracts are for ARPU of > $1.75 which is a 25% premium on current ARPU of $1.40. VHT has an ongoing long term target for ARPU of $10
The addition of the new CRA Health platform allows for integration of genetic risk factors to the platform. There is an opportunity for upsells across existing user base.
At FY20 94% of company revenue was generated from US contracts. Growth into European and Asian markets has been put on hold due to Covid impacts globally, however as vaccine roll-outs help medical systems return to normal, there is an opportunity for the company to refocus on these markets. Approximately 92 million breast screens are carried out globally each year, with ~39 million occurring in the U.S.
Volpara, although having a proven product, isn’t the only provider of integrated screening platforms. There are several competitors in the U.S that have a similar offering which integrate A.I and genetic risk. This means VHT need to maintain a high rate of R&D to continually improve their product suite to ensure growth and further uptake. They have noted in previous reports that the industry is quite sticky and hard to change users from existing platforms. This may be both a positive and a negative for the company and hints of this may be seen with the stagnation at 27% market share since 2020.
After my review of VHT, I am currently positive on the outlook for the company, with the several opportunities I mentioned earlier likely to contribute to near term growth. It will definitely be a case of wait and see with the further penetration into the U.S. The current valuation is pricing in strong continued growth, so my outlook will need to be reviewed if there are signs that this is slowing. I will continue to hold my position in VHT.
Volpara’s latest US patent protects key features of Volpara Enterprise and Volpara Live! software
Volpara Acquires Breast Cancer Risk Assessment Company CRA Health, LLC
• CRA Health, LLC (“CRA”), based in Boston, MA, is an industry leader in breast cancer risk assessment spun out from Massachusetts General Hospital, a Harvard Medical School teaching hospital
• CRA is profitable, 1 with Annual Recurring Revenue (ARR) of over US$4.0M (NZ$6.2M2 ), Average Revenue Per User (ARPU) of ~US$1.70 and coverage of ~6% of US breast screenings
• CRA’s software is integrated with the major Electronic Health Record (EHR) and genetics companies
• Volpara is paying US$18.0M for CRA, with a further US$4.0M payable upon meeting of key performance and staff-retention targets
• Post-acquisition, Volpara will have ARR of ~US$17.5M (NZ$26.9M2 ) and at least one product in use in over 30% of US breast screenings
• Post-acquisition, Volpara will have ~NZ$35M cash
• Volpara is elevated as a leader in personalised breast care
Volpara's latest quarterly is encouraging revealing a 20% lift in 3rd quarter ARR (it's largest 3rd quarter sales results to date). That's quite impressive given the limited acess to hospitals and lack of trade shows due to covid.
Cash receipts were only a bit stronger though, coming in at NZ$4.6m vs NZ$4.5m in Q3 last year -- due in large part to a firmer USD.
The company remains very well capitalised, with over NZ$60m in cash on hand, and average revenue per customer was 5% higher than the proceeding quarter and about 20% higher than a year ago.
The business is still cash flow negative, although cash burn is improving, and at the lowest level since the acquisition of MRS in 2019.
With VHT's product covering 27% of the US market, they are increasingly becoming the provider of choice and have a long runway for growth.
Deal with BreastScreen Queensland announced today.
The deal includes a 5 year contract of VolparaEnterprise.
The initial stage will involve the roll-out of VolparaEnterprise to 11 BreastScreen Queensland services operating in Brisbane and elsewhere in the state.
Within the annonment it states that the terms and conditions of the contract with BreastScreen Queensland are confidential.
Appendix 4C – Q2FY21 Quarterly Cash Flow Report
Wellington, NZ, 8 October 2020: Volpara Health Technologies (“Volpara,” “the Group,” or “the Company”; ASX: VHT), a health technology software company whose integrated breast care platform assists in the delivery of personalised patient care, is pleased to provide investors with an update on Q2 trading.
Volpara has released it's 1st quarter cash flow report (as a NZ company its FY ends in March).
Cash receipts for the quarter were 112% higher from the same period last year, coming in at NZ$5m. A record result, and the 4th consecutive quarter where receipts were greater than NZ$4.5m.
The company has over NZ$67m of cash on hand -- enough to sustain the company at the current burn rate for around 4.5 years. Also worth noting that the cash burn is the lowest since MRS Systems was acquired in June last year, and better than what was expected.
Annual recurring revenue was up ~6% from the preceeding quater, and 30% higher for the year.
Annual revenue per user increased, and new contracts signed in Q1 are at a much higher rate (very encouraging!).
Overall, there's not much to complain about. Volpara is in a strong position and it's great to see such a solid improvement during the worst parts of the lockdowns.
This for me has always been more a question about price. As of today, shares are trading at roughly 19x ARR (!)
ASX announcement here
on Ausiz - James Rosenberg from E.L. & C. Baillieu suggests wait until it turns a profit before buying
OM have a "Hold" call on Volpara Health (VHT) with a $1.46 TP. VHT closed at $1.395 today.
Volpara reported a huge jump in revenues for the first half, up 97% to NZ$6.8 million. Likewise, subscription revenue was up 148% to NZ$5.2 million and the level of annual recurring revenue (ARR) was NZ$15.7 million, up from just NZ$4.8 million at the same time last year.
The after tax loss did however widen from NZ$5.1m to NZ$8m, thanks to a near doubling in operating expenses.
Of course, the June acquisition of MRS explains a lot of these moves, and has radically enhanced Volpara's market share and should help the company launch into adjascent areas.
The cash balance is strong at ~NZ$40m, which should sustain operations for about 5 years at the current burn rate.
I think there's a lot to like about Volpara, but i estmate shares to be trading on ~25x sales for the full year, which factors in a lot of optimism.
Announcement presentation can be seen here.