How MTBC’s Continued Market Consolidation Makes Them the Next ATHN

By Kyle Coker

MTBC (NASDAQ) is poised to breakout on recent news. After trading down since its IPO in 2014 on less than 5,000 shares/day, MTBC skyrocketed in April of this year (April) on over 20 million in volume. After a volatile six months following this correction, MTBC’s is currently trading at $3.20 as of January18th’s close. The recent price movement suggests a late reaction to the news contained in this report, and is still trading at a severely depressed valuation

MTBC’s Fair Valuation

When revising projections based on news from the past couple of weeks, and without factoring in the addition of a major acquisition for 2018, MTBC’s revenue will be $36 million to $41 million, their expenses reduced by $3 million to $4 million, and profitability increased by $10 million with a projected adjusted EBITDA of $5 million to as high as $8 million for the year. Other industry players such as Athenahealth (ATHN) trade at 5 times revenue, so if MTBC even reaches a factor of half of that, their 2018 forward-looking valuation would yield a market cap of $90 million to $100 million.

With roughly 11.5 million shares outstanding, that would give MTBC a share price of $8.25 for 2018 (with $.40 to $.60 EPS). Looking at it a different way, MTBC’s share price trading at $8 to $9 per share, would only put MTBC trading at a 15x to 21x multiple of Forward EPS, which is not only conservative, but half of what the current markets for micro-cap healthcare/technology companies trade at with their current growth rate.

Report Summary

  • Largest shareholder, and former CEO purchases 30,000 shares at $2.93 on December 1, 2017.
  • MTBC Announces largest client acquisition in company history increasing their medical providers being served by 36%.
  • SeeThruEquity increases price target to $5.00.
  • MTBC reports two straight record earnings.
  • Short percentage of actual float roughly 30%.
  • Management and institutions own over 60% of the 11 million share float, leaving constructively a 3.5 million share float with 1 million shares short.

MTBC Announced Largest Client in Company History

On November 27, 2017, the company announced the signing of their largest client in company history. Before we dive into the new client, I’d like to look at MTBC’s previous largest client. On February 16, 2017, MTBC’s partnership with Pikeville Medical Center was released. This partnership added roughly 400 providers to MTBC’s business. Additionally, MTBC prior to its recent client signing provided services for roughly 2600 medical providers.

MTBC’s newest client acquisition’s name has not been released, but the release provided significant information on the outlook of this added business. The new client will add over 950 providers (or a 36% growth in providers for MTBC) and will begin impacting Q4 earnings. The client begin its transition to MTBC on November 21, 2017, and initial impact on revenue should be shown for the second half of the current quarter. EPS will likely see a minimal impact on Q4 because of the initial cost to MTBC in ramping up such a large client, and such costs will likely offset the added revenue in the current quarter. In a release the following day, on November 28, 2017, MTBC provided a release on this client’s impact on 2017 and 2018 guidance.

Ultimately, for similar services, MTBC receives 5% of billings for its services. While we don’t yet know for sure, it has been rumored that Fox Rehabilitation may be the client. Regardless of whether they are or aren’t the new client, Fox Rehabilitation provides a worthy comparison for a rehabilitation client with 950 providers. Last year, Fox Rehabilitation was reported as having $108 million in revenue. If we assume that MTBC’s services are provided for 5% of billings, and Fox Rehabilitation is substantially similar to (if not the actual client) the new client, this would yield roughly $5.4 million in added revenue. Fox Rehabilitation has also projected 7% growth, which provides further growth in revenue for MTBC moving forward if the client turns out to be Fox Rehabilitation.

According to the company, this client is expected to add at least 10% of 2017 revenue, or $3.2 million/year starting in 2018. The impact extrapolated from such numbers yields approximately $300,000 to $400,000 in new revenues to be reflected immediately in Q4’s earnings. As stated previously, the company has time and again shown that the long-term margin contribution of organic sales growth (non-acquisition growth) to be roughly 50%. Although Q4 costs will likely minimize initial reflection of this margin contribution, 2018’s numbers will quickly reflect this margin expansion, and should add around $1.5 million in positive cash flow to full-year 2018.

MTBC Reaffirmed 2017 Revenue Guidance

In MTBC’s 2017 Q3 earnings call, they did not reaffirm guidance on 2017 revenue, citing Athena Health’s (ATHN) similarly reported reason, because of the impact of hurricane’s on client’s operations. The MediGain acquisition added a substantial amount of business to the company, reflected in previous quarters, but also had exposure to the impacts of natural disasters that ravaged a substantial amount of Texas. The good news is, MTBC did not see an underlying reason for the drop in revenue outside of this, so this impact should not be felt long-term.

The acquisition of the recent large client allowed MTBC to reaffirm 2017 revenue guidance on the November 28th release. While in the 2017 Q3 earnings call, MTBC already felt confident in meeting 2017 revenue guidance of $31-$32 million, the new client’s impact should push MTBC’s revenue well into this range.  This release also stated that full year 2017 revenue would ultimately yield “year-over-year revenue growth of roughly 30%.” For 2018, MTBC is already guiding for record revenue, and expanding cash flow.

See Thru Equity Updates Price Target

See Thru Equity, a leading investment research firm for micro-cap companies, provided an October 25, 2017 valuation update on MTBC. In this update, See Thru Equity increased their price target from $4.00 (established in August, 2017) to $5.00. They projected 2018 revenue of $36.2 million and adjusted EBITDA of $4.2 million. However, these numbers did not include the recent large client MTBC just signed. Adding MTBC’s 2018 guidance for this new client with the prior See Thru Equity projections would yield $39-$40 million in revenue and $5-$5.5 million in adjusted EBITDA for 2018. Using See Thru Equity’s conservative multiplier of 2.2x 2018E revenues and 18.6x 2018E EBITDA would yield a $5.75-$6.00 anticipated price target from See Thru Equity adjusted for recent news. I believe this valuation to be conservative, as ATHN is currently trading at over 4.2x revenue and other similar private and public companies in this sector are valued at a range of 2.2x – 8.4x earnings.

MTBC’s Search for a New Acquisition

This week, MTBC announced (and closed within 24 hours) a private offering of $3.9 million of preferred stock. This capital is to be used as dry powder for their next acquisition, so we anticipate that this news is due by early 2018 Q1.

MTBC’s management have repeatedly stated that MTBC is currently looking for an acquisition of a company with yearly revenue of $15 million to $20 million. While MTBC is always looking to acquire additional clients through acquiring their current service providers, MTBC had previously been restrained by their debt obligations to Prudential and Opus Bank. Since these credit restraints have now been resolved, MTBC has targeted a time between now and early 2018 to make a major acquisition.

It is important to note that their prior acquisition targets have been priced at 70% of revenues historically and MTBC has targeted and consistently reached 30% EBITDA from these acquisitions within 6 months to 1 year due to MTBC’s ability to reduce costs and integrate the acquisitions’ business with their own effectively. MTBC has stated that they will not even consider financing an acquisition through common stock dilution until the common stock trades at levels above its IPO price of $5.00.

MTBC’s Widespread Adoption of its talkEHR Platform

MTBC recently announced that they, “have already signed new talkEHR clients representing 30 unique specialties, spanning across 42 states plus Guam and Puerto Rico” within the first 30 days of the talkEHR launch. While a quick rollout was planned, no one (including myself) could have anticipated such widespread adoption. I will discuss later why organic growth has such a positive impact on earnings versus acquisitions, I’d like to first discuss how MTBC plans on growing its existing business with talkEHR.

talkEHR is MTBC’s alternative to Practice Fusion, which is known to be the most widely used EHR source for billing clients. MTBC’s goal for talkEHR is not only to offer the most competitively priced EHR software to new clients, but to use talkEHR as a bridge to bring new clients over to MTBC’s full range of practice management and billing solutions. The adoption of this software to such a vast amount of clients in such a short period of time not only shows the promise of acquiring new clients, but also the transition of new talkEHR clients to MTBC’s full service of products.

Top 10 Insurer Chooses MTBC’s Enrollment Plus SaaS Solution

On October 4th, MTBC announced that a major player in the insurance industry chose MTBC for their enrollment software. While the size of the contract has yet to be announced, enrollment software update contracts have been recently awarded by other companies for anywhere between $1.5 million and $6 million. The difference here is that MTBC did not have a prior contract in which it is expanding on, so the value over the life of this deal could eventually be worth significantly more or less.

What we do know is that this SaaS platform had not previously been a large source (if any at all) of revenue for MTBC, and thus has not been factored into the growth model that analysts have previously provided. The announcement truly has two takeaways: (1) MTBC is expanding its product line and customer base; and (2) MTBC signed a huge client for widespread use of its proprietary software. While the bottom line impact of this contract may take some time to fully determine, the question should be “how big” instead of “is it big.”

Conclusion

  • MTBC through the first nine months had already reached its 1-year record for organic sales growth. Based off this consistent trend, 2018 will once again exceed 30% revenue growth.
  • Guidance management has provided on their newest client acquisition indicates that MTBC’s revenue will increase by between $3-5 million a year moving forward on this client alone.
  • Full year 2017 revenue has been reaffirmed and the impact of the new client will impact earnings as soon as the current quarter. Contribution to cash flow from new clients will be positively reflected starting in Q1 of 2018.
  • See Thru Equity increased its price target to $5, but has not yet reviewed MTBC’s newest client’s impact on such target. Using See Thru Equity’s valuation model, it is likely that with the new client, MTBC’s valuation from See Thru Equity is now closer to $6.50 based on the near 50% margins attributable to organic client acquisitions as opposed to the 30% earnings contributions due to acquiring clients through consolidating with other companies.

The author of this report has been long in MTBC since the second quarter of 2017. Neither the author of the article nor Tailwinds Research has any present or past business relationship with the companies mentioned in this report. This report represents the opinions of the author and is not intended to be used as investment advice; the report is simply intended to provide readers with a snapshot of the recent company developments, and is not to be used as a substitute for an individual’s own due diligence. Companies of MTBC’s size tend to have higher volatility and investors should first speak to their investment advisors before making any investment decision.

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