Yesterday Catasys reported their second quarter earnings. The report itself wasn’t overly impressive as, despite high year over year growth, numbers dropped slightly from the first quarter. This, however, was not unexpected by the market, as the Company has given plenty of information regarding its customer engagements, and the number of eligible members during the first half of 2017.
The bigger news disclosed by the Company came during their earnings call hosted by Catasys’ CEO Terren Peizer along with their President/COO Rick Anderson and CFO, Christopher Shirley. On this call, the case was laid out for phenomenal growth. The question is, can they achieve this growth?
We’ll try to answer that question here. But, before we dig into the numbers from the call, look first at the internal forecasts presented by Catasys in their most recent investor presentation, which is available on their website. These forecasts are the targets that investors hope the Company can achieve.
The figures in the graph above are the company’s internal projections for billings, which have historically translated nearly 100% into GAAP revenue on a slight time lag.
Based on the company’s billings of $4.3 million through the second quarter, if they achieve their estimates, Catasys will have close to $15M in billings in the second half of the year. This would represent close to a 400% increase in billings over the second quarters run rate. Is this truly possible? Here’s what the Company had to say about that.
“We are optimistic that we will begin seeing the considerable jump in enrollment in billings beginning in the third and fourth quarters. Overall, we feel very confident in our ability to deliver on our plan for the remainder of 2017” ~ CEO Terren Peizer
According to the CEO, it is. But, let’s break it down from a numbers standpoint. We know that the Company had 6,000 eligible members in Q4 of last year. “Eligible Members” are people who suffer from mental health disorders and are eligible for the OnTrak program.
Catasys has said that they expect to enroll 20% of eligible members into OnTrak over the course of a year as it takes time for recruitment. This would imply that, had the 6,000 eligible member number stayed static from Q4 onwards, they would have 1,200 enrollees. And, at $8,500 per enrollee, the 12 month billings would be $10,200,000.
However, we know that, due to issues with Humana (merger related on their side) and Aetna (data feed issues), they weren’t engaging with the full 6,000 eligible members for most of 2017. So, for the company to be on a run rate of $8.6M (first 6 months, doubled), which is not far off from $10.2M which is the presumed run rate at year end 2016, they must be executing to forecasts of signing 20% or more of the eligible members.
“We believe that by the time Labor Day arrives, we expected be conducting outreach to 24,000 members. This will be a significant increase from the 6,000 members we conducted outreach to in the fourth quarter of 2016.” ~ CEO Terren Peizer
24,000 is a huge uptick in eligible members in just a few months. If we consider 20% as the number they will sign over a year, that’s 4,800 OnTrak members or $40,800,000 in revenue. Now, the ramp to billings is not linear and immediate, but the eligible member count has started climbing since June, which is witnessed by billings being higher in Q2.
So, with 4 months left in the year after Labor Day, and eligible member outreach growing rapidly since June, I could see them getting 33% of this figure billed in the second half of 2017. Which makes the $19M in billings on the internal forecasts not out of the question. This is especially true when you consider that the eligible member count should increase greatly from 24,000 by year end based on already announced engagements.
Thus, on the surface, it appears that Catasys’ internal forecasts of $19M, $57M and $154M in billings for 2017-2019 are possible. It comes down to will the Company execute on this or not? As one caller on the conference call asked, “what gives you confidence?”
“It’s the fact that we have the eligible members in place and we’ve already started enrolling off of that much bigger base. that’s the primary reason for anticipating the continued increase and billing.” ~ Rick Anderson COO & president
At this time, Catasys appears to be a “show me” stock. The Company has divulged very positive internal forecasts. They have delineated the growth in eligible members and have stated on the record that the growth is happening right now. Based on all this, Catasys appears to be poised for an excellent run of operating results and the stock looks very interesting for both short and long-term investors. If and when they do “Show Me the Money!” I don’t believe the stock will still be trading at current prices.
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