Yesterday, Catasys (CATS) reported Q1 results. The figures reported by CATS were very solid and should be well received by investors. For, while Q4 seems to have been the point in time when their business started really accelerating, Q1 provides further confirmation of this. Additionally, the April numbers revealed on the call indicate that things are going to ramp significantly faster going forward.
Catasys reports quarterly billings as the metric which they believe investors should follow to see how their business is tracking. For Q1, billings were $3M, representing what appears to be only a modest increase over Q4 numbers of $2.8M. Don’t be fooled by this; the $3M hits their internal forecast and is up 20% sequentially when you back out a biannual savings sharing payment from one customer, HAMP.
This means that Q1, if you factor out this HAMP payment, is the second consecutive 20% growth quarter, an impressive figure. However, CATS continues to guide towards billings of $20M for the year. In order to achieve this number, they will need to grow 33% sequentially for the next three quarters. The Company is extremely confident in reaching this forecast, so we can look forward to growth accelerating when next they report.
As we mentioned, this is already happening from the April numbers that were released on the call. Billings in that most recent month were $2.3M, which is obviously a significantly higher pace than the $1M averaged in Q1. In my opinion, the tipping point appears to have been reached. More importantly, here’s what CEO Terren Peizer said on the call…
“As we move on in the year and gain greater visibility in that there are no surprises. And then factoring all these upsides, you are going to start seeing a hockey stick in these numbers. And in our guidance should go up commensurately.”
I added the emphasis, but the point is obvious. Not only is the $20M in the bag for this year, but you’ll get increased guidance later in the year.
What is driving this? Two things. First, it takes a year to ramp up to full 20% enrollment when they sign a new contract, so we’re seeing the non-linear ramp up effects of their outreach.
Secondly, they have been signing new contracts fairly constantly. These are both new customers and expansions with existing customers. Here’s what Terren said about this on the call.
“In January of this year, Catasys signed an agreement with Cigna, making us the only company in our space to be contracted with six of the eight largest health plans in the country. In addition to Cigna, those would be Aetna, Sentient, HCSE, Humana, and United Health Care. We launched the Cigna program in Tennessee and expanded OnTrak program with HCSE to Blue Cross Blue Shield at Illinois in January of 2018. The HCSE expansion followed our successful launch of Blue Cross Blue Shield of Oklahoma in August.
“In March, we announced the program expansion with HAMP, Health Alliance Medical Plan, adding anxiety and depressions for eligible commercial and Medicare members in Illinois. In the same month we launched enrollment of the OnTrak solution for member suffering from substance use disorders with Humana in 16 states. Finally, we see considerable room for programmatic expansion and enrollment enhancements to our relationship with Aetna.”
The list of customers is impressive. These are huge companies. Importantly, Catasys has only scratched the surface with these companies and the room for expansion is significant. To date the results of OnTrak have been excellent. Thus, continued expansion is very likely.
The outreach pool of potential OnTrak clients will reach 36,000 by June according to management. At Tailwinds, we expect the outreach pool could exceed 50,000 by year-end and increase by another 50% in 2019. The numbers could get huge really quickly.
It’s important to note that with increased enrollment comes higher initial spending on these programs. Catasys will need financing for this growth. This was brought up and answered emphatically on the call; CATS will be able to obtain non-dilutive financing and should be announcing this soon. In the CEO’s words (emphasis added again)…
“We are capable of borrowing from banks and lenders and actually excess to capital is far exceeds what our capital needs are. So I do not anticipate – I do anticipate being able to share in the not too distant future, what our actual financing is and I believe that our investors and shareholders alike will be extraordinarily happy with it.”
The bottom line on CATS is that we’re seeing the hockey stick inflection in real time. Billings will ramp to $20M for the year, with a minimum of $25M exit run rate. Both these numbers will likely go higher by year-end. Which is only the beginning; it’s quite possible we see a re-doubling in 2019.
At $85M market cap, CATS is not getting credit for the huge sales ramp, the massive market they are attacking, nor the very wide and growing moat around their business. CATS entered 2018 as a favorite stock to own for the year. It’s done well so far, but it’s only just begun.Tailwinds' Disclaimers & Disclosures: For a full list of disclaimers and disclosures, please visit http://