By Brian Marckx, CFA
READ THE FULL MTBC RESEARCH REPORT
Q3 2018 Results:
Medical Transcription Billing Corp (MTBC) reported financial results for their third quarter 2018 and provided a business update. This was the first quarter with inclusion of Orion, the acquisition of which closed on July 1st (i.e. start of Q3). Financial performance is already benefitting from the transaction with Q3 setting new record highs in revenue, revenue growth and consecutive quarters (i.e. 6) of positive adjusted EBITDA. The adjusted EBITDA of $865k (in-line with our estimate) is particularly encouraging given that benefits of synergistic efficiencies and cost-cutting are likely to be much more pronounced over the coming quarters as Orion’s operations are fully integrated.
Importantly, management continues to guide for FY2018 revenue and adjusted EBITDA of $49M - $50M and $4M - $5M, respectively. While we maintain our Q4’18 topline estimate of $16M, the ~$700k revenue beat in Q3 pushes our full-year number from $49.3M to $50.1M. Meanwhile, with Q3 adjusted EBITDA inline, our FY2018 estimate remains at $4.5M, or the midpoint of management’s guidance and approximately double the $2.3M in FY2017. As MTBC remains on the look-out for additional opportunistic bolt-on transactions, their guidance and our estimates should be considered subject to potential significant changes.
With more than $20M in available cash, resources are more than sufficient to add another Orion-like asset (which was acquired for $12.6M). Integration of their latest transaction is apparently going smoothly and efficiently – something that MTBC has a history of doing with large transactions (such as MediGain, acquired late-2016). As such, we think the company should have sufficient operational and oversight bandwidth, in addition to capital resources, to absorb another (relatively) mid-to-large size bolt-on (i.e. like-kind operations such as RCM or practice management) organization.
Revenue, at $17.1M was up 127% yoy and +96% from Q2. Both total revenue and the qoq growth are new record highs. Orion-related assets contributed approximately $9.4M, or ~55%, of total revenue including $5.6M from the RCM (33% of total), $3.3M (19%) from practice management and $477k (3%) from their GPO.
Revenue was well-ahead of our $16.3M estimate, with the majority of the $739k beat coming from our huge miss on GPO ($477k A vs $64k E) and a much less proportional difference on total RCM ($13.2M A vs $13.0 E). As a reminder, the GPO (group purchasing organization) serves ~4k physicians, allowing them to purchase vaccines at discounts of up to 20%. Our big miss on the GPO relates to using Orion’s most-recent (i.e. Q3 2007) public SEC financial statements as a guide to modeling our Q3 numbers (as we explained in our previous analyst reports). Back then, the GPO generated only ~$300k in annualized revenue. The Q3 actuals (and comments on the call) suggest that, today, it’s closer to $1M. We have adjusted our estimates accordingly (we also assume some meaningful typical seasonality in vaccines shipment-sales, mostly favoring the summer months). MTBC is also already expanding their GPO sourcing footprint – announcing in late-October that they added Pfizer to their list of pharmaceutical company vaccine suppliers. Their GPO now sources vaccines from three of the top five pharmaceutical suppliers (which, in addition to Pfizer, includes Merck and Sanofi).
As it relates to RCM (for discussion purposes we are aggregating all non-GPO and PM services, i.e. medical billing, ancillary services, clearinghouse, EDI, professional services, printing/mailing and EnrolmentPlus, into ‘RCM’), while we were inline with total RCM ($13.3 A vs $13.0M E), we missed low on Orion and high on legacy-MTBC (see model inset below), with the respective misses mostly offsetting each other. Legacy-MTBC RCM revenue has been somewhat variable q-to-q, reflecting some account attrition as well as some new account wins. Relative to Orion-related RCM, as has been the case with prior acquisitions, revenue in the period of close may have benefitted from catch-up collections.
Meanwhile, we were relatively close ($3.3M A vs $3.2M E) on results of the practice management segment. 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. The PM business, which we also modeled using Orion’s Q3 ’07 financials as a guide, looks to be operating at a similar revenue run-rate as it had roughly a decade earlier – which we think speaks to the low variability of revenue and earnings of that business afforded by 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 Q3. 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 leveraging that opportunity is a priority. And, as their comfort level grows in the physician practice management space, we would expect MTBC may be looking to opportunistically add additional practices.
View Exhibit I
Customers and practices…
Orion not only essentially doubled MTBC’s revenue run-rate, the acquisition also essentially doubled their customer count. MTBC exited Q3 with approximately 2,000 customers, including 1,800 medical practices and hospitals – which compares to 950 / 730 in Q2’18 and 970 / 740 in Q3’17.
We had previously reported a ‘medical billing revenue per customer’ metric as a rough gauge for revenue-generating efficiency. The addition of Orion and the related doubling of the customer base and less detailed aggregation of revenue per-service, means that we do not have enough information for historical comparison purposes. With additional history and, assuming no major acquisitions, we will consider re-introducing a like-kind metric into our reported analysis (our model is still powered by internal metrics).
Operating Expenses and Adjusted EBITDA…
Operating expenses were $18.8M, or 110% of revenue, and included $806k of (Orion-related) integration and transaction costs as well as $227k of fx and other expenses. Stripping out those non-fundamental expenses, operating loss was approximately $751k. On rough q-to-q comparison basis and eliminating the $262k sequential increase in D&A, operating loss was ~$489k in Q3, compared to $73k of operating income in Q2. With integration still ongoing, we think operating expenses fall in Q4 relative to revenue and, based on MTBC’s history of successfully integrating large acquisitions (see our If MediGain Is An Appropriate Template…discussion below), expect to see substantially greater operating efficiency going into 2019.
Adjusted EBITDA was $865k in Q3 and $3.4M through the first nine months of the year, compared to $609k and $764k in the prior-year comparable periods. Similar to our expected improvement in operating income, we think adjusted EBITDA continues to grow. We are maintaining our FY’18 and FY’19 adjusted EBITDA estimates of $4.5M and $7.5M, respectively.
Refresher on Orion Acquisition…
MTBC paid $12.6M for the core operating assets of Orion HealthCorp – which implies a purchase price of just ~40% of annualized revenue. The acquisition was effective July 1st. Along with 300+ U.S.-based employees with offices in 10 states, Orion brings RCM-related accounts and expands MTBC’s capabilities to include long-term practice management services and a vaccine group purchasing organization. These bolt-on capabilities not only bring immediate incremental revenue and operating margin (as both the PM and GPO businesses are already profitable) but also opportunity to add-value via cross-selling to MTBC’s current customer base. In addition, Orion accelerates MTBC’s penetration into the hospital segment.
In terms of the incremental customer count, Orion brings additional hospital and independent healthcare practice customers, as well as niche hospital solutions (such as Medicaid). Orion not only essentially doubled MTBC’s revenue run-rate, the acquisition also essentially doubled their customer count. MTBC’s customer count increased from 950 in Q2’18 (including 730 medical practices and customers) to 2,000 (including 1,800 medical practices and hospitals) following close of the transaction.
The practice management segment currently consists of managing three pediatric practices in five locations in Ohio and Illinois. These PM services are provided under 40-year management services agreements (which extend through 2039). Under these PM agreements, MTBC employs the medical personnel and administration and owns the assets used in the business in return for a management fee. The PM segment is already profitable.
The group purchasing organization serves ~4k physicians, allowing them to purchase vaccines at discounts of up to 20%. In addition to Merck (MRK) and Sanofi (PFE), MTBC now also sources vaccines from Pfizer (PFE), contracting with the big pharma company in late October. Similar to the practice management businessl, MTBC’s GPO is already profitable.
If MediGain Is An Appropriate Template, Orion Should Be Long-Term Value Driver …
Management has compared Orion to MediGain - the assets of which MTBC purchased in September 2016 and which has proven to be an overwhelmingly successful acquisition. But management also indicated that Orion could even more successful than MediGain has already proven to be.
As a refresher, MediGain, a medical billing company, was in financial distress when acquired by MTBC in September 2016 for $7M. While operating expenses increased immediately after the acquisition, the assets were quickly integrated, costs were cut and MediGain generated incremental revenue to MTBC of $13.6M in 2017. Contribution from MediGain was also a major component of MTBC’s significantly improved financial results: revenue grew 30% ($24.5M in 2016 to $31.8M in 2017), operating loss fell by $3.4M ($7.9M to $4.5M) adjusted EBITDA improved by $2.9M and ended the year in the black at $2.3M and MTBC even generated $282k of cash from operations (compared to $889k used by operations in 2016).
MTBC bought MediGain for (what would prove to be) just of 50% of forward revenue – while a significant bargain as compared to the average industry take-out multiple of ~1x revenue, Orion may prove to be even cheaper. Current revenue guidance implies MTBC bought Orion for just 40% of revenue. Much of the success of this acquisition was credited to the quick integration and ability to minimize customer and revenue attrition through providing a better customer experience (i.e. MTBC was able to quickly improve billing processes and collections which helped stem defections).
The comparison to MediGain is particularly intriguing as not only was that acquisition 'successful' in the sense that MTBC more than recovered the purchase price (in fairly short-order), but also because it appears as if it will likely prove to have permanently and significantly expanded MTBC's RCM customer base as well as their overall capabilities. So, while some of MTBC's (mostly smaller) acquisitions have been 'one-and-dones' whereby, in return for little or nothing upfront and some revenue contingencies, they were able to wring the remaining life out of quickly-fleeting assets, MediGain looks to be a true long-term value driver.
We have made only minor adjustments to our model following reporting of Q3 results. We now look for FY’18 revenue and adjusted EBITDA of $50.1M and $4.5M, updated from $49.3M and $4.5M. Our FY’19 revenue and adjusted EBITDA are $66.9M and $7.5M, updated from $68.6M and $7.5M.
See our valuation methodology at the beginning of this report. Updates to our model have moved our calculated fair-value from $10.0/share to $9.5/share.
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