Over the last two months, Catasys (CATS) shares traded lower, drifting down on light volume. As I detailed in depth a few weeks ago, this selloff was the result of investor’s expectations for a strong Q3 being about 3 months ahead of the actual inflection point in the Company’s business. These misaligned expectations caused the stock to trade downwards as the reality of another flat quarter dawned on the investors who were anticipating higher billings.
While I understand the frustration the sellers felt in seeing Eligible Lives go up without an increase in billings, had they simply taken the time to understand the model (I’m happy to share my billings model with anyone who asks), they would have known that Q3 wasn’t going to be the inflection point. Instead, due to a time lag in enrolling new members, billings were modeled to start increasing in Q4.
My anticipated acceleration in billings became a reality yesterday when, on last nights’ conference call, CEO Terren Peizer stated that as of today, “our enrollment is up 40% since the end of Q2.” This fact, and the additional commentary provided on the call, suggest to me that the selling in CATS is over and the shares could be poised for a substantial move higher.
I’d like to highlight several things that Peizer said on the call and discuss the importance of these statements.
- “Our enrollment is up 40% since the end of Q2” – My model, which frankly had guesswork as to the starting enrollees, shows that enrollment should have increased by 47% at this time over June’s figures. So, the Company is basically tracking on my enrollment figures, which is excellent news.
- “October…had a record billings month of $1.1 million” – Once again, looking at my model, I had a figure of only $725K for the month. My number is probably off from the (guessed at) number of enrollees graduating out of the program after a year, but this totally blows away anything I could have anticipated and sets the Company up for a Q4 far in advance of my $2.3M estimate. It also sets them up for sequential growth of 20% or more, a wonderful figure.
- “We are very confident that Catasys will reach a minimum of $20 million of billings in 2018 and end 2018 with a run rate of at least $25 million.” – This completely matches my baseline model, so I’m pleased with this figure. But, even more exciting is…
- “This guidance is based exclusively on what Catasys has achieved to-date and not on any of the upside potential that we see permeating throughout our business…with some of the largest healthcare companies in the country.” – Catasys has often talked about contracts in the works and potential Eligible Lives. However, they are now giving a baseline figure based on business that they currently have, which is great. This will make it very tough for the Company to miss guidance, especially since…
- “We have scheduled launches early next year with three national plans, which will all be incremental, expansions with Aetna and HCSE, all incremental.” – In other words, the potential to seriously surprise on the upside in billings exists and they could beat guidance by quite a margin. Which means, I’ll be very surprised if they exit 2018 with only a $25M run rate on billings.
All of this adds up to an earnings call that demonstrated to investors that enrollment and billings are now at an inflection point and growing rapidly. As addition, guidance was strong, and that’s just off a base-case scenario. If the Company gets their anticipated launches early next year, there could be a substantial upside to billings forecasts.
My level of confidence in CATS has never been higher. I believe that investors will see the Company execute on their potential and provide us with upside to their $20M billings number. I also believe that management shares this belief…a belief I get from one line that Terren slipped into the call, “I suspect you will see my interest increase.”
I’m long CATS shares personally and am looking to buy more. It appears that the CEO will be doing so alongside me.
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