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MTBC: Orion Synergies Could Double Adjusted EBITDA in 2019

By Brian Marckx, CFA



Q4 2018 Results:
MTBC, Inc. (MTBC) reported financial results for their fourth quarter 2018 and provided a business update. This was the second quarter with inclusion of Orion, the acquisition of which closed on July 1st. Financial performance immediately benefitted from the transaction, which included revenue setting record highs in Q3 and two of the three acquired business segments, namely Practice Management and the GPO, adding to profitability in that period.

Importantly, not only did the benefits of the acquisition continue through the final period of 2018 but management’s updated revenue and adjusted EBITDA guidance implies Orion’s contribution to profitability, and potentially to the topline as well, will grow. Orion is credited with revenue ($50.5M) beating management’s FY2018 guidance of $49M - $50M and adjusted EBITDA ($4.8M) coming in at the high end of their $4.0M - $5.0M estimate. Meanwhile, their initial 2019 guidance for revenue growth of at least 20%, which was announced in a January 2019 shareholder letter, has already been adjusted – to growth between 25% and 29%. Adjusted EBITDA is expected to come in between $8M and $10M – implying growth of 67% - 108%.

The 2019 guidance assumes organic growth from existing and new clients as well as potential ‘tuck-in’ deals (i.e. small transactions, which we refer to as ‘one-and-dones’). Driving much of the anticipated growth in adjusted EBITDA (and operating leverage) is significant expense reduction of Orion’s operating costs. MTBC indicated that they have already made substantial progress in this regard, noting that they rapidly shed costs of Orion’s RCM business by replacing (relatively expensive) third-party subcontractors with their own (Pakistan and Sri Lanka-based) employees, shuttering some of Orion’s offices and improved efficiencies by moving clients to their own platform. To-date, MTBC has reduced Orion’s RCM-related operating expenses by 52%.

Additional benefits of these cost-cutting measures are expected to be realized (on the income statement) in the coming quarters. MTBC’s 2019 guidance implies ~27% (midpoint of guidance) revenue growth but ~88% adjusted EBITDA growth – with the difference between the two growth rates largely reflective of synergies and efficiencies. This is an important point especially when considering MTBC generated adjusted EBITDA of $1.4M in Q4’18, revenue is expected to remain at approximately that same annualized run-rate through 2019 and operating expenses should fall considerably (from the Q4’18 run-rate).

While the 2019 guidance does not assume any meaningful acquisitions, it is clear that management remains on the look-out for another Orion or MediGain-type transaction. They exited 2018 with $14.5M in cash and $10M available under their untapped credit facility. Coupled with the fact that MTBC is now generating consistent positive cash flow, they have the resources to do another sizeable deal. And, as we have noted in the past, given their ability identify undervalued assets and to quickly integrate (and cut costs) without significant disruption to their ongoing operations or to those of the acquired company, a near-term transaction could result in upside to their current guidance.

Q4 Financials
Revenue, at $16.5M was up 99% yoy and down 3% from Q3. Orion-related assets contributed approximately $8.4M, representing 51% of total revenue including $5.0M from the RCM (38% of total), $3.2M (19% of total) from practice management and $178k (% of total) from their GPO.

Total revenue was about 3% better than our $16.1M estimate with almost all of the difference related to better than anticipated RCM sales ($13.2M A vs $12.7M E). Further disaggregating the RCM segment, our miss on the low side relates to MTBCs legacy RCM ($8.1M A vs $7.6M E), which was partially offset by estimating slightly high on Orion’s RCM ($5.0M A vs $5.1M E). MTBC noted that renewal rates of the RCM customers remains high with 89% renewing in 2018, largely unchanged from 2017 (90%). Renewal rates among RCM customers that also use the company’s HER were even better, with 91% renewing in 2018 (compared to 98% in 2017.

Meanwhile, we were relatively close in both the practice management ($3.2M A vs $3.2M E) and GPO ($178k A vs $201K E) segments. As a reminder, the practice management segment consists of managing three pediatric practices in five locations in Ohio and Illinois, whereby MTBC employs the medical personnel and administration and owns the assets used in the business in return for a management fee. Financial performance of the PM segment should remain fairly consistent. The low variability of revenue and earnings of that business is due to the long contract terms (i.e. 40-year contracts, with ~20 years remaining).

Both the GPO and PM business are already profitable and were accretive to MTBC’s results in 2H’18. The regular and predictable earnings of both segments are also attractive from a valuation standpoint, in our opinion. Cross-selling opportunities between the GPO and RCM customers could provide a very efficient complementary incremental revenue stream. Management has indicated that they have already had success with leveraging that opportunity, noting on the Q4’18 call that ~100 existing RCM clients are now customers of the GPO. And, as their comfort level grows in the physician practice management space, we would expect MTBC may be looking to opportunistically add additional practices.

Adjusted EBITDA…
Adjusted EBITDA was $1.4M and $4.8M in the three and twelve months ending 12/31/18, which compares to $1.5M and $2.3M in the prior-year periods. As noted, given that much of the benefits of Orion-related cost-cutting, efficiencies and synergies have yet to be realized, we think operating expenses fall from Q4’18 to Q1’19 and, again, from Q1 to Q2’19. Coupled with expectations of double-digit revenue growth, we now model adjusted EBITDA of $8.0M in 2019 (i.e. the low end of MTBC’s $8M - $10M guidance), upwardly adjusted from our previous estimate of $7.5M.

We have made adjustments to our model following reporting of Q4’18 results. We now look for FY’19 revenue and adjusted EBITDA of $64.1M and $8.0M, updated from $66.9M and $7.5M. Our FY’20 revenue and adjusted EBITDA are $70.2M and $11.0M.

See our valuation methodology at the beginning of this report. Updates to our model have moved our calculated fair-value from $9.5/share to $11.0/share.

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